For many years, plaintiffs who won compensatory damages from a defendant received large lump-sum settlements. While the payouts helped recipients pay for medical expenses and other costs related to the legal settlement, many lacked the financial know-how required to skillfully manage large awards.
The Periodic Payment Settlement Act, passed by Congress in 1982, encouraged the use of structured settlements in physical injury cases, and provided legal incentives for their use by amending the federal tax code. It also stated that payments be offered in installments over time and exempt from federal, state and local income taxes.
Types of Structured Settlements
The federal government enacted the PPSA to protect claimants from quickly spending large sums of money they received from legal settlements. The most common types of settlements include personal injury cases, wrongful death cases and workers' compensation claims.
A plaintiff wins a large jury award or settles a claim for a large sum, and the amount is structured into monthly or annual payments over time. Those payments help recipient pay for medical expenses or other costs.
A common way to compensate the family of someone whose death was the subject of a wrongful death claim.
Pays workers who get injured on the job while they recover from their injuries.
Pros & Cons
Structured settlements are ideally suited for many different types of cases. However, once the terms are in place, they cannot be changed. Because of these inflexible contracts, some recipients choose to sell their payments for a lump-sum payout.
- In the event of the recipient's premature death, the contract's designated beneficiaries can continue to receive any future guaranteed tax-free payments.
- Payments can be scheduled for almost any length of time and can begin immediately or be deferred for as many years as requested. They can include future lump-sum payouts or benefit increases.
- Unlike stocks, bonds and mutual funds, structured settlements are not dependent on fluctuations of financial markets. Payments are guaranteed by the insurance company that issued the annuity.
- The accrual of interest or capital gains earned on the money is exempt from federal, state and local income taxes, providing greater savings.
- There isn't much flexibility. Once terms are finalized, there's little you can do to alter them if they do not meet your needs. You cannot renegotiate the terms if your financial situation changes.
- Funds are not immediately accessible in case of an emergency, and recipient cannot invest the lump-sum payout in other investments that carry high rates of return.
- Tapping into your structured settlement without selling payments will cost you money. You will pay surrender charges and IRS penalties if you withdraw funds before age 59½.
- You lose your lump-sum payment option when you buy an immediate annuity or if you annuitize your deferred annuity contract.
Prior to the use of structured settlements as a way to pay the financial awards of accident and personal injury lawsuits involving minors, defendants would deliver large lump sums of money to an injured child's parents or guardians in the name of the child.
However, many of those adults enjoyed unlimited discretionary use of the minor's settlement funds, and spent the money irresponsibly on purchases unrelated to their court-prescribed purposes. Timed payouts were developed as an alternative to ensure that minors had money for essential long-term necessities, like food, clothing and shelter, and for any continuing medical care.Read more about Structured Settlements & Minors
Laws & Policies
Federal & StateWhile the federal law safeguards the rights of structured settlement recipients throughout the country, each state has its own laws that vary slightly from those approved by Congress.Read More
Protection ActEnacted shortly after victims of the 9/11 disaster started receiving financial awards to compensate them and their families. It ensures they receive counseling and instruction before selling their payments.Read More
Periodic Payment ActPresident Ronald Reagan signed the act in 1982, providing the use of structured settlements to seriously injured victims and their families for long-term, tax-free financial security.Read More
Qualified vs. Unqualified
The traditional structured settlement for physical injury or sickness claims must meet certain requirements, including that the settlement amount has to be placed in an annuity, periodic payments are fixed and determinable as to amount and time of payment, claimant cannot modify the periodic payments, and those payments must be payable to the recipient or liability insurer, among other factors.
This type of settlement is used when claims for damages fall outside the usual scope of physical injury, sickness or wrongful death. They are often used for claims involving racial discrimination, sexual harassment, wrongful termination, or violation of the Americans with Disabilities Act of 1990 or the Employee Retirement Income and Securities Act of 1974. The tax benefits differ among the types of transactions.
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