| About Structured Settlements |
At Bridge Settlement we look at the entire picture. To help educate you, we have provided answers to the following questions:
| Why choose “Structured Settlements” over Lump Sum Payments? |
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Large monetary judgments have become the most talked about aspect of America's legal system. These awards catch the media's attention. They are the stuff of well known movies ("Regarding Henry","The Verdict"). They have also become a highly charged "hot button" political issue.
However, this attention overlooks a crucial point: Is the plaintiff really best served by receiving a large, lump sum award or verdict? This question is particularly relevant when an individual is a minor or a mentally or physically incapacitated adult, and requires expensive long term care.
The reality is that many plaintiffs, especially the young and those unfamiliar with money management, are ill equipped to handle the problems of large cash payments. Family members, existing friends, and unsavory "new friends" can attach themselves to the newly enriched plaintiff with devastating consequences.
| What are the Benefits of Structured Settlements? |
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There are some important benefits to the claimant in structuring the settlement:
- The claimant receives compensation when it is needed. Instead of receiving a lump sum that has to be invested at risk, and managed for a fee, the recovery is paid out over time with no attendant fees. This better correlates the settlement with the actual need for funds.
- The lump sum payment from a physical injury claim is tax-free. However, if the injured person invests that lump sum for the future, he is subject to taxes on any money the investment earns, he is subject to market risk, and he will probably pay fees to a broker or banker or other investment professional. On the other hand, by structuring the settlement, any investment proceeds earned by the structured settlement annuity are tax-free, the payments are guaranteed so there is no market risk, and there are no investment fees.
- The claimant receives payment from two of the safest types of funding assets available: life insurance annuities or US Treasuries.
| When Should Someone Consider a Structured Settlement? |
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Structured settlements can be ideally suited for cases involving the following situations:
- Temporarily or permanently disabled persons;
- Cases involving minors or incompetents;
- Wrongful death cases where the surviving spouse and/or children need monthly or annual income;
- Severe injury cases, especially with long-term needs for medical care, living expenses, and support of family.
| What Advantages are There to the Injured Person? |
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There are several benefits to the injured person, including:
- Structured settlements in physical injury cases provide an assured payment stream that is fully tax-free. (Check with your tax advisor for details and confirmation)
- Injured persons avoid the risk of mismanagement (See also "Why Choose Structured Settlements Over Lump Sum Payments?"). Insurance industry statistics show that about 25% to 30% of all accident victims completely dissipate their judgments or settlements within two months of recovery, and 90% of them spend it all within five years. (Source: The Rutter Group, Ltd. from Flahavan, Rea, Kelly & Tener, "California Practice Guide: Personal Injury" (TRG 1992) Ch. 4.)
- Recipients avoid the expense and worry of financial loss. Structured settlements provide a secure, low risk source of compensation and the convenience of regular payments tailored to fit the injured person's specific needs.
- The injured person may receive more compensation over time than a lump sum settlement provides.
- Structures can offer rates of return that are competitive with other financial vehicles.
- Structures provide an efficient means of resolving claims and avoiding the expense and delay of a trial.
- With a structure, the injured person can receive payments for his or her entire life and avoid the possibility of outliving a lump sum award.
| What are the Advantages to the Defendant/Insurer? |
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Structured settlements benefit defendants and insurers through:
- Earlier and more creative settlements, including assistance by structured settlement brokers with negotiations, life care planning evaluation, and settlement documents;
- Reduced litigation and claim management costs;
- Avoidance of the risk and expense of a jury trial;
- The ability to assign future liability through a "Qualified Assignment."
| What is a "Qualified Assignment?" |
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The defendant (or his/her liability insurance company) may transfer the cost of future damage payments to a third party by means of a "qualified assignment" to a financially secure and experienced institution. The assignment provides the injured person with strong financial security, and the defendant can close its books on the case. This assignment is referred to as "qualified" because, if done properly, it qualifies for favorable tax treatment. In return for an initial payment, the assignee then takes care of making the specified damage payments to the injured person over time. This process relieves the defendant of further responsibility for the payments and transfers the administration and record keeping responsibilities. The assignment company specializes in these activities and may offer additional financial security to the claimant.
| Are There Alternative Uses for Structured Settlement Periodic Payments? |
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Although the concept of periodic payments has usually been applied to personal injury claims, there are other situations where payout obligations can be made on a periodic basis.
Property Loss Claims
Periodic payments may be an excellent means of satisfying the claims of homeowner groups or others seeking reimbursement for construction defects. Instead of receiving a single lump sum, payments are made over time to match more closely the time when repair costs are incurred.
Environmental Claims and Pollution Liability
Outside of personal injury claims, this is one of the greatest potential areas for the growth and use of periodic payments. From the Superfund-designated sites to the thousands of potential municipal and local sites, there is a need for clean-up funding.
When determination has been made that liability for pollution exists, and the terms for clean up are established and quantified, future costs can be funded with an annuity or similar agreement offered by a life insurance company. In this way, the potentially responsible party can pay for its future obligations on a more economically efficient basis. It can also give the life insurance company the administrative responsibilities of making the payments.
Employment Claims
Structuring the lump sum payout of early retirement benefits is a form of tax management that allows the recipient to keep more of the money and spend less on taxes. Discrimination, harassment, and other kinds of employment claims are also good candidates for structured settlements. However, because there is not physical injury, the proceeds of an award will be taxable.
NOTE: The tax treatment of these alternative uses of structures is not the same as for the physical injury cases. A qualified tax expert should be consulted before any decisions or annuity purchases are made.
What are some of the Federal Tax Rules that make
Structured Settlements Beneficial? |
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In The Periodic Payment Settlement Act of 1982 (P.L. No. 97-473), Congress adopted specific tax rules to encourage the use of structured settlements to resolve physical injury tort actions.
First, Section 104(a)(2) of the Internal Revenue Code was amended to clarify that the full amount of the periodic payments constitutes damages, which are tax-free to the victim unlike the investment earnings on a lump sum, which are fully taxable.
Second, Congress adopted IRS Code section 130 to provide a mechanism under which badly injured tort victims suffering harm well into the future could receive the stream of damage payments from a financially secure and experienced institution through the "qualified assignment" process described above.
In order to protect the public, Congress specified in Section 130 the requirements to establish a qualified assignment:
- The assignee assumes the liability from a party to the suit or agreement;
- The payments are fixed and determinable;
- The payments cannot be accelerated, deferred, increased or decreased, or otherwise changed after the agreement is reached;
- The assignee's obligation is no greater than the obligation of the assignor;
- The periodic payments are excludable from the recipient's gross income under Section 104(a)(2);
- The injury must be a physical sickness or injury;
- A qualified funding asset (an annuity or U.S. Government obligation) must be used to fund the periodic damage payments.
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