Structured Settlements
Structured settlements are often paid through annuities that are held and administered by insurance companies.
Whether a structured settlement can be inherited depends on whether the annuity contract specifies ‘life contingent payments’ or ‘guaranteed payments.’
• Life contingent payments last only as long as the person who was awarded the settlement is alive. If the person who was awarded the settlement dies, the insurance company does not send future payments to their beneficiaries.
• Guaranteed payments are disbursed according to the schedule in the annuity contract no matter what. The person who was awarded the settlement can designate a beneficiary to receive the payments if they die before the payout is finished.
If you are the named beneficiary of a loved one’s structured settlement, and they have passed away, you will have to submit a claim to the annuity issuer so the rest of the agreed payments can be disbursed to you. The money from a qualified structured settlement will continue to be exempt from income taxes even after it has been inherited. In addition, a structured settlement can have a ‘commutation rider’ included in its contract. This means when the settlement is inherited, all or some of the future payments are converted into a lump sum of cash for the beneficiary. A commutation rider can make inheritance much simpler. Without a commutation rider, a beneficiary has to go through the process of selling future payments in order to get cash sooner than scheduled.
How a structured settlement is handled during a divorce depends on the approach your state takes to asset division.
States divide assets according to either ‘equitable distribution’ or ‘community property.’
• If you live in a state with equitable distribution, and you received the settlement before you were married, it is likely you will keep the settlement.
• According to community property, on the other hand, anything either spouse owned before and during the marriage is considered property of the union and can be subject to division.
In any state, the division of assets doesn’t mean the settlement check itself gets divided. Typically, the spouse who doesn’t keep the settlement will get a different asset to balance out the overall division of assets. If you have a settlement and are facing divorce, you may want to hire a lawyer or mediator with experience handling complex assets.
No. There are several options when it comes to selling your structured settlement payments, including selling some of your payments or all of them. Each person’s situation is unique, and regardless of how much of your settlement you want to sell, a judge has to approve the sale. You should discuss your options with your accountant or attorney before choosing how much to sell.
Before the industry was regulated, some factoring companies took advantage of people who were not informed of the nuances of selling their structured settlements. To prevent this from happening, the United States government passed several laws — such as the Federal Periodic Payment Settlement Act of 1982 —that mandate court approval for the sale process. Mandating court approval ensures the sale is in the consumer’s best interest and a factoring company is not taking advantage of the person’s ignorance. Court approval laws are still being updated in 2022 to provide further protection.
