Structured settlement

Structured Settlements

A structured settlement is a financial or insurance arrangement, generally including periodic payments, that a claimant accepts to resolve a personal injury tort claim or to compromise a statutory periodic payment obligation. Structured settlements were first utilized in Canada and the United States during the 1970s as an alternative to lump sum settlements. Structured settlements are now part of the statutory tort law of several Common Law countries including: Australia, Canada, England and the United States. Although some international uniformity exists, each of these countries has its own definitions, rules and standards for structured settlements. Structured settlements generally include income tax and spendthrift requirements as well as benefits. Structured settlement payments are sometimes referred to as “periodic payments”. A structured settlement incorporated into a trial judgment is called a “periodic payment judgment”.

The United States has enacted structured settlement laws and regulations at both the federal and state levels. Federal structured settlement laws include Internal Revenue Sections 104 (a); 130; 468B; and 5891. State structured settlement laws include structured settlement protection statutes and periodic payment of judgment statutes. Medicaid and Medicare laws and regulations also impact structured settlements. To preserve a claimant’s Medicare and Medicaid benefits, structured settlement payments can be incorporated into “Medicare Set Aside Arrangements” and “Special Needs Trusts”.

Definitions

The United States defines “structured settlement” for Federal income taxation purposes in Internal Revenue Code Section 5891 (c) (1) as an "arrangement" that meets the following requirements:

• A structured settlement must be established by:
  • A suit or agreement for periodic payment of damages excludable from gross income under Internal Revenue Code Section 104(a)(2); or
  • An agreement for the periodic payment of compensation under any workers’ compensation law excludable under Internal Revenue Code Section 104(a)(1); and
• The periodic payments must be of the character described in subparagraphs (A) and (B) of Internal Revenue Code Section 130(c)(2) and must be payable by a person who:
  • Is a party to the suit or agreement or to a workers compensation claims; or
  • By a person who has assumed the liability for such periodic payments under a Qualified Assignment in accordance with Internal Revenue Code Section 130.

If a structured settlement meets these requirements and others set forth in the United States Internal Revenue Code (IRC):

• The claimant receives the settlement proceeds, including the future periodic payments, free from federal income tax. Since the enactment of Internal Revenue Code Section 5891 in 2001 and related state structured settlement protection statutes, many structured settlement recipients are now able to transfer their payment rights for cash subsequent to a tort settlement without any tax penalty.
• Defendants and their insurers receive a full release. They generally transfer money plus responsibility for payment of structured settlements to a third party assignee.
• The third party assignee is responsible and remains liable for purchasing structured settlement funding assets and for distribution of the periodic payments pursuant to court order or settlement documentation. However, the third party assignee does not incur any net income tax as a result of the transfer, the purchase of the funding asset or the distribution of the periodic payments.

External links

www.nssta.com