What Is a Structured Settlement and How Do You Get One?
A structured settlement is an important financial planning tool available to parties in litigation that provides core income stability with tax advantages. Having a stable core is essential to financial vitality. It's more comfortable to live off income as opposed to eroding assets. It also makes it easier to budget.
A structured settlement is a negotiated, customized stream of periodic payments, an "income river", tailored to a particular plaintiff’s needs. When the settlement of a claim or lawsuit involves personal physical injury or physical sickness, wrongful death or workers compensation, claims are settled using a qualified funding asset ( a single premium structured settlement annuity or a trust fund which invests only in obligations of the United States Government).
All types of legal settlements can be structured, with tax consequences varying by the type of damages.
Sections of the Internal Revenue Code That Impact Structured Settlements
By agreeing to a structured settlement, plaintiffs can receive future periodic payments free of income taxes on the plaintiffs, provided their claim qualifies under Sections 104(a)(1) and 104(a)(2) of the Internal Revenue Code.
A structured settlement definition appears in the Internal Revenue Code at §5891(C) (1), as "an arrangement"—
(A) which is established by (1) suit or agreement for periodic payment of damages excludable from gross income of the recipient under §104(a)(2), or (ii) agreement for periodic payment of damages under any workers’ compensation law excludable from gross income of the recipient under §104(a)(1), and
(B) under which the periodic payments are (i) of the character described in subparagraphs (A) and (B) of §130(c)(2), and (ii) payable by a person who is a party to the suit or agreement or the workers’ compensation claim or by a person who has assumed the liability for such periodic payments under a qualified assignment in accordance with §130...
Structured settlements are available in all 50 states. Structured Settlement annuities are only placed by or in conjunction with brokers and consultants who hold active life insurance licenses (annuities, which are issued by life insurance companies, are grouped into this category for regulatory purposes) and are authorized by the insurers that issue the structured settlement annuities. In New York State, individuals or companies holding life broker licenses may also act as structured settlement consultants, but may not be appointed by the annuity issuer. Such brokers and consultants are generally paid a one-time commission or share of the commission, by the annuity issuer(s), or co-broker, for placing the structured settlement annuity or other funding asset.
4structures.com ® LLC hopes that you find this website helpful in learning how a structured settlement may be used effectively on your client’s case as part of an overall settlement plan or financial transition plan. Simply call 888-325-8640 or send an email if you like and we will be ready to answer your questions about structured settlements, Treasury Funded Structured Settlements, settlement planning or other Sudden Money and litigation recovery issues.
Alternate Uses of the Term “Structured Settlement”
While the term "structured settlement" is formally and traditionally applied to settlement for payment of damages involving physical injury, physical sickness or workers compensation (where damages or claims are excludable from gross income to the extent set forth above), the colloquial usage may include a similar approach involving taxable damages using a non qualified assignment
or periodic payment reinsurance.
Note that the structured settlement definition at IRC 5891(c)(1), became effective January 2002, is preceded by the words "for the purposes of this section" (expressly to do with the imposition of an excise tax on structured settlement factoring transactions). Despite thislimitation the use of the definition is often expanded by settlement planners, structured settlement brokers, settlement purchasers and industry commentators. Structured settlements had been in existence for over 20 years prior to the enactment of the Victims of Terrorism Tax Relief Act of 2001, which created IRC 5891 ostensibly to curb factoring company abusive business practices and to provide a regulatory framework for exceptions to the excise tax.