Structured settlements provide periodic payments to injury victims as part of a legal settlement. Instead of receiving a lump sum payment, the plaintiff agrees to receive a series of tax-free payments over a specified time, often funded through a structured settlement annuity. Structured settlements have become increasingly popular since their introduction in the 1970s, as they offer a stable and secure source of income for individuals who have suffered serious injuries.
History and Purpose of Structured Settlements
Structured settlements started in the United States following the enactment of the Periodic Payment Settlement Act of 1982. This legislation encouraged structured settlements by providing tax benefits to injury victims. The primary purpose of structured settlements is to ensure that an injury victim has a reliable stream of income to cover their ongoing medical expenses, lost wages, and other damages resulting from the incident. Personal injury lawyers often recommend structured settlements as part of comprehensive settlement planning.
Federal Tax Laws and Structured Settlements
Structured settlements are subject to various federal tax laws that treat injury victims favorably. The Periodic Payment Settlement Act of 1982 laid the groundwork for structured settlements by amending the Internal Revenue Code. Under this law, structured settlement payments are exempt from federal and state income taxes as long as specific requirements are met.
Several sections of the Internal Revenue Code relate specifically to structured settlements:
Structured Settlement Protection Acts (SSPAs) As Per Different States
In addition to federal tax laws, most states have enacted Structured Settlement Protection Acts (SSPAs) to safeguard injury victims’ rights and ensure the integrity of structured settlements. These laws typically REQUIRE COURT APPROVAL for any transfer or sale of structured settlement payment rights, helping to prevent third parties from exploiting injury victims.
Mechanics of Establishing a Structured Settlement
Parties Involved in a Structured Settlement
Several parties are involved in the process of establishing a structured settlement:
Process of Setting Up a Structured Settlement
The process of setting up a structured settlement involves several steps:
Required Documentation for Structured Settlements
When someone agrees to a structured settlement, there are a few important legal documents involved. The first is the settlement agreement, which is a legal contract that explains all the details of the structured settlement. This agreement should clearly state:
If the person receiving the settlement is a minor (under 18 years old) or someone who can’t make legal decisions for themselves, a judge must review the settlement agreement to make sure it is fair before approving it.
Another important document is the qualified assignment and release agreement. This document officially transfers the responsibility for making the settlement payments from the defendant to the qualified assignee. It should clearly explain who is involved in this transfer and what the terms are.
Finally, there’s the annuity contract, which is provided by the life insurance company promising to make regular payments to the person receiving the settlement. It’s crucial to choose a financially strong and reputable life insurance company to ensure the payments will continue as planned. Sometimes, the annuity contract will include a “guaranty” from the life insurance company’s parent company or another company, providing an extra layer of protection in case of financial issues.
Structured Settlement Payout Options and Customization
Structured settlements offer several common payout options:
Flexibility in Designing Payment Streams
One of the main advantages of structured settlements is the ability to customize the payment streams to meet the plaintiff’s unique needs. For example, payments can be scheduled to increase over time to account for inflation, or they can be timed to coincide with anticipated future expenses, such as college tuition or major medical procedures.
Importance of Tailoring the Settlement to Plaintiff’s Needs
It is essential to work closely with a structured settlement consultant to design a payment plan that aligns with the plaintiff’s short-term and long-term financial needs. One must consider factors such as age, health, family situation, and lifestyle when creating the payout schedule.
Advantages and Disadvantages of Structured Settlements
Can I Sell Structured Settlement Payments
In some cases, structured settlement recipients may seek to sell their future payments to a structured settlement purchase company in exchange for a lump sum of cash. Common reasons for selling payments include unexpected financial emergencies, major life changes, or a desire to invest in a business or purchase a home.
Court Approval Process for Transfers
As per the Structured Settlement Protection Act, to sell structured settlement payments, the payee must obtain court approval through a structured settlement transfer petition. This process is designed to protect the seller’s best interests and ensure they understand the financial implications of the proposed transfer. The responsible administrative authority will review the terms of the transfer agreement, the payee’s reasons for pursuing the sale, any transfer expenses, and whether the sale is in their best interest.
Discount Rates and Factors Affecting Payment Amount
When selling structured settlement payments, recipients typically receive less than the total present value of their future payments. This is because the structured settlement purchase company applies a discount rate to account for the time value of money and the risk associated with the transaction. Factors that can affect the discount rate and the amount received include:
Importance of Obtaining Professional Advice
Before deciding to sell structured settlement payments, it is important for the prospective payee to seek professional advice from a financial advisor or attorney specializing in structured settlement transfers. They can assess the potential risks and benefits of the transaction and ensure that the seller’s rights are protected throughout the process. Some states may require the payee to furnish a surety bond or cash bond as part of the transfer process.
Types of Cases Suitable for Structured Settlements
Structured settlements are commonly used in various types of legal cases, including:
Personal Injury: Structured settlements are frequently used in cases involving severe injuries, such as brain trauma, spinal cord damage, or amputations. Personal injury lawyers often recommend structured settlements in these cases.
Workers’ Compensation: When employees are injured on the job, structured settlements can provide long-term financial support to cover medical expenses and lost wages.
Medical Malpractice: Structured settlements can help victims of medical negligence cope with ongoing medical needs and disabilities resulting from the malpractice.
Wrongful Death: In cases where a person’s death is caused by another party’s negligence or wrongdoing, structured settlements can provide financial security for the deceased’s family members.
Other case types: Structured settlements may also be used in product liability cases, environmental disasters, and cases involving the sexual abuse of minors.
Role of Structured Settlement Professionals
Structured Settlement Consultants and Brokers
Structured settlement consultants and brokers play a crucial role in helping plaintiffs navigate the complex process of establishing a structured settlement. They work with the plaintiff and their attorney to design a customized payment plan that meets the plaintiff’s long-term financial needs and goals.
Plaintiff and Defense Attorneys
Both plaintiff and defense attorneys should be well-versed in structured settlements to effectively represent their clients’ interests. Plaintiff attorneys, such as personal injury lawyers, should advise their clients on the benefits and drawbacks of structured settlements, while defense attorneys should be prepared to negotiate the terms of the structured settlement agreement as part of the overall resolution of the case.
Judges and Mediators
Judges and mediators often play an important role in approving structured settlements, particularly in cases involving minors or legally incompetent individuals. They must ensure that the settlement terms are fair and in the best interest of the plaintiff.
Conclusion
Structured settlements provide long-term financial security to injury victims and their families. When considering a structured settlement, work with experienced professionals, including personal injury lawyers, structured settlement brokers, and settlement planning experts, to design a payment plan that aligns with your circumstances and goals. With careful planning and expert guidance, structured settlements can provide a stable foundation for rebuilding lives after a serious injury or loss.
