Understanding how structured settlements work requires an understanding how settlements are negotiated. Structured settlements are established subject to an agreement (or so-called “meeting of the minds”) on a schedule of payments that match the Claimant’s or Plaintiff’s needs, the life insurance carriers that will issue the structured annuities to fund the payment streams, or in some cases Treasury Funded Structured Settlements, an alternative “qualified funding asset” permissible under IRC 130(d)
Defendant/Insurer or Qualified Settlement Fund trustee
- by contractual agreement, promises to pay future periodic payments to the Plaintiff/Claimant with all or a portion of the negotiated personal injury damages in exchange for a release.
- agrees to release the claim in exchange for the promise by the Defendant/Insurer or QSF Trustee to make one or more future benefit payments to claimant in addition to immediate cash items (for attorney fees, liens)
Defendant/Insurer or Qualified Settlement Fund trustee - makes an assignment of its obligation to pay future periodic payments to a third-party ("assignee"), with the Plaintiff's consent.
The assignee assumes this obligation.
The plaintiff agrees to look to the assignee as the obligor for the promised future periodic payments.
The assignee receives funds from the Defendant/Insurer or QSF Trustee and uses these funds to purchase an annuity contract, or alternative permissible "qualified funding asset", in an amount sufficient to fund the periodic payment obligation it has assumed. The assignee owns the "qualified funding asset" and may either make payments itself, or may direct that the annuity issuer make the payments. If an alternative permissible "qualified funding asset" is used, there may be a segregated trust for each claimant that holds the alternative permissible "qualified funding asset".
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In some instances, particularly where the damages do not qualify for the income tax exemptions under IRC Sections 104(a)(1) and 104(a)(2), one can consider solving the problem via the use of anon-qualified assignment
All parties involved reach agreement as to the supporting documentation necessary for the completion of the settlement. In most cases, the documents will consist of the Settlement Agreement and Release, any required court orders or probate approvals, proof of birth (if payments are life contingent) and a qualified assignment agreement.
It's important to note that the structured settlements are one component of a greater settlement planning process and that depending on the facts of a particular case, a multiple disciplinary, multiple product solution may be appropriate.