What is a Structured Settlement?
In short, a structured settlement is simply a customized payment stream. That’s the short version. However, there are different variants of customized streams, and there are insurance and tax regulations involved as well. Rather than try to reinvent the wheel, we’ve simply brought together some expert definitions professionals within the field. Listed below are what we feel are the best answers to the question, “What is a structured settlement?”
“Sometimes when a plaintiff settles a case for a large sum of money, the defendant, the plaintiff’s attorney, or a financial planner consulted in association with the settlement, will propose paying the settlement in installments over time rather than in a single lump sum. When a settlement is paid in this manner it is called a “structured settlement”. Often the structured settlement will be created through the purchase of one or more annuities, which guarantee the future payments.
A structured settlement can provide for payment in pretty much any schedule the parties choose. For example, the settlement may be paid in annual installments over a number of years, or it may be paid in periodic lump sums every few years.”
“A structured settlement is a financial or insurance arrangement, defined by Internal Revenue Code as periodic payments; 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 after a settlement for children affected by Thalidomide. Structured settlements are widely used in product liability or injury cases (such as the birth defects from Thalidomide). Benefits of a structured settlement can be to reduce legal and other costs by avoiding trial.  Structured settlement cases became more popular in the United States during the 1970s as an alternative to lump sum settlements. The increased popularity was also due to several rulings by the IRS, an increase in personal injury awards, and higher interest rates. The IRS rulings changed policies such that if the requirements were met then claimants could have federal income tax waived. Higher interest rates resulted in lower present values, hence annuity premiums, for deferred payments versus a lump sum.
Structured settlements have become part of the statutory tort law of several common law countries including Australia, Canada, England and the United States. Structured settlements may include income tax and spendthrift requirements as well as benefits and are considered to be an asset-backed security. Often the periodic payment will be created through the purchase of one or more annuities, which guarantee the future payments. Structured settlement payments are sometimes called “periodic payments” and when incorporated into a trial judgment is called a ‘periodic payment judgment.’”
For purposes of this section—
(1) Structured settlement
The term “structured settlement” means an arrangement—
(A) which is established by—
(i) suit or agreement for the periodic payment of damages excludable from the gross income of the recipient under section 104 (a)(2), or
(ii) agreement for the periodic payment of compensation under any workers’ compensation law excludable from the gross income of the recipient under section 104 (a)(1), and
(B) under which the periodic payments are—
(i) of the character described in subparagraphs (A) and (B) of section 130 (c)(2), and
(ii) payable by a person who is a party to the suit or agreement or to the workers’ compensation claim or by a person who has assumed the liability for such periodic payments under a qualified assignment in accordance with section 130.”
“Structured Settlements are used to effectively resolve physical injury claims by combining immediate cash and periodic payments in a way that helps to meet the injured party’s financial needs.
Under a structured settlement, the injured party doesn’t receive compensation for his or her injuries in one lump sum. Rather, he or she receives a stream of payments, tax-free, and tailored to meet future medical expenses and basic living needs.
A structured settlement may be agreed to privately (for example, in a pre-trial settlement) or it may be required by a court order, which often happens in judgments involving minors.”