Structured Settlements
A structured settlement is an insurance or financial agreement, inclusive of periodic payments, that a claimant will accept in order to resolve a tort claim for personal injury or in order to compromise on a statutory obligation of periodic payment. First utilised in the United States and Canada, structured settlements came out in the 1970s as an alternate measure to lump sum settlements. They are now a part of statutory tort laws of many common law nations like England, Australia, Canada and the United States. Thou there exists some uniformity, each of these nations have their own definitions, standards and rules for this type of settlements. Structured settlements include spendthrift requirements and benefit as well as income tax. They are also called ‘periodic payments’. They can be used in a trial judgement and in this case it is known as ‘periodic payment judgement’.
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The legal structure of a structured settlement is like this: The claimant settles an unlawful act suit with the insurance carrier or the defendant itself. This agreement usually provides in exchange for the lawsuit’s dismissal by the claimant, a series of payments periodically over a period of time. The insurer is then obligated to a long term payment to the claimant. In order to fund this new obligation, any of two approaches are taken. Either the insurer buys an annuity or it gives its obligation to a third party which in turn buys an annuity. In the first scenario, the insurer keeps his obligation and with the annuity he buys he offsets the obligation with a corresponding asset. The annuity’s payment stream matches the amounts and timing exactly as it is agreed to through the settlement. The insurer then signs the payee for the annuity as the claimant so the payments are issued directly to them. Hence the claimant is the annuitant. In the second scenario the insurer does not want his obligation so it transfers this obligation to a third party by way of a legal device known as the qualified assignment. The third party or the assignment company gets a sufficient amount from the insurer to enable buying itself an annuity to make the payments. If the claimant is willing to accept the transfer the insurer or defendant is no longer liable to make payments. Usually the assignment company is affiliated with the life insurance company that sells the annuity.
An assignment is qualified if it fulfils the criteria in the Internal Revenue Code Section 130. Qualification is necessary because the amount received to accept the obligation without qualification would turn into income for purposes of federal taxes. If an assignment is qualified according to Internal Revenue Code Section 130 the received amount gets excluded from the assignment company’s income. This provision of the Internal Revenue Code was brought about to encourage the assigned cases that if they were not qualified then the assignment companies would end up owing federal income tax and then would have almost no source to make payments from.
