Structured Settlement - What Is It & How It Works

How Does a Structured Settlement Work?

Structured settlements have become increasingly popular since Congress passed the Periodic Payment Settlement Act in the 1980s. (1) When the injured party agrees to a structured settlement, the defendant must fund the annuity account.

The annuity guarantees payments will be paid to the injured party on a regular schedule. A structured settlement agreement will be drawn up and this agreement details the series of payments that will be paid out to the individual and how much they will receive with each payment.

Worker’s Comp

Worker’s Compensation laws were put in place to protect injured workers and their employers. These laws require employers to carry insurance, so claims can be paid, should a worker become injured on the job. When an injured worker is awarded a worker’s compensation settlement, they may receive a lump sum payment or may be offered a structured settlement.

A worker’s compensation structured settlement is meant to partially replace the wages the worker would be earning during their recovery period. It can also be used to replace the wages the worker would have earned throughout their lifetime; in the event they became permanently disabled on the job.

In most cases, the injured worker is given a smaller lump sum payment at first and then a structured settlement agreement is drawn up that allows the worker to continue receiving payments until they are fully recovered or through a specified period of time. There are a few different benefits to choosing a structured settlement over a lump sum amount and it is imperative injured workers survey their options before making a final decision on their payout.

Get the Help of a Lawyer

Before signing any worker’s compensation structured settlement agreement, injured workers need to make sure they carefully read the agreement and have their lawyer review it. Once the document is signed, it is legally binding and the injured party will have no further legal recourse.

A lawyer will make sure the structured settlement is fair and will give the injured party the financial security they need. The lawyer can help negotiate the terms of the structured settlement, so changes can be made according to the needs of the injured party.

Negotiating the Structured Settlement

Most every part of a structured settlement can be negotiated with the employer and their insurance company. If the injured worker is not happy with the terms of the agreement or wants to make changes, they or their lawyer can meet with the employer and negotiate the terms to better satisfy their needs.

With a structured settlement, injured workers can receive lifetime payments and even pass their payments on to their heirs, should they become deceased before the payout terms have been met.

Medical Malpractice

While the vast majority of doctors are skilled and do a great job in treating patients, there are some who are negligent. If you have been injured due to the malpractice of a doctor, you may be able to file suit and receive a structured settlement. Next of kin may also file these cases if their loved one dies due to a doctor’s negligence.

What is a Medical Malpractice Structured Settlement?

A medical malpractice structured settlement is a form of compensation given to an individual who has been harmed due to the negligence of a doctor. The structured settlement is put in place to pay the injured party of a certain period of time.

The settlement provides the individual with a reliable source of income that can help pay bills and help with other financial situations while off from work.

If an individual has sustained medical harm from a doctor, or died while under medical care or treatment, they have a right to file a malpractice suit. You must be able to prove your malpractice claim. You actually have two options. You can negotiate with the doctor’s insurance company to receive a settlement. Another option is to file a lawsuit and have a judge settle whether or not the doctor is at fault.

Other actions that can go under the malpractice umbrella:

Surgical procedures that were not needed
Surgical errors
Discharge from a hospital early
No regard for patient’s medical history
Inability to identify symptoms
Prescribing the wrong medication or giving the wrong amount
Misreading lab reports

Before you file a medical malpractice claim, do the following:

Talk to a Doctor – While it may be uncomfortable for you, you should talk to the physician in question. See if you can find out what went wrong and whether or not it can be fixed. There are times when both parties can come to a mutual conclusion. However, if you honestly believe you have been harmed, you should proceed to the next step.
Find a Lawyer – Enlist the help of a good medical malpractice attorney. Under no circumstances should you attempt to handle a medical malpractice claim on your own. A lawyer has the experience that is needed to handle your claim. They can give you all the information you need regarding medical malpractice structured settlements. And more than anything else, they can help you get the compensation you deserve. There will likely be many malpractice lawyers in your area. Get a free consultation to find out which is the most suitable.
Statute of Limitations – This is something some people fail to take into consideration. Statute of limitations regarding medical malpractice vary from state to state. If you feel that you are a victim of malpractice, you should find out about your rights as quickly as possible. Once the statute of limitations has run out, you will no longer have the opportunity to file a claim.

Wrongful Death

A wrongful death claim is filed when the victim’s death was caused by the direct actions or negligence of another party. As with any civil lawsuit, a wrongful death case will often end with a settlement agreement or a compensation award. When a large sum of money is awarded, the amount is sometimes paid out as a structured settlement.

It is essential plaintiffs carefully review the structured settlement agreement before they sign, so they can be sure their wishes are carried out and they will know exactly what to expect from the process.

When a wrongful death occurs, the surviving family members, such as the spouse and children, often find it difficult to make ends meet after the loss of income occurs. Choosing a structured settlement means payments will be coming in for years and these can be used to maintain the standard of living the family was accustomed to before the death of their loved one occurred. The awarded settlement payments can even be passed on to an heir, should the plaintiff become deceased before their final payment is paid out.

Structured settlements cannot bring back a deceased loved one, but they can offer financial stability and peace of mind. If given the option of choosing a lump sum payment or a structured settlement, plaintiffs need to make sure they carefully review their options, so they can make the best choice for their needs.

Individuals who are pursuing a wrongful death lawsuit should speak with their lawyer and learn about their options, should they be awarded a settlement or win their lawsuit. This type of settlement can be customized to meet the needs of the plaintiff.

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Structured settlement brokerage companies have been around for decades, allowing annuity holders to get a lump sum payment. Years ago, some unscrupulous companies would take advantage of annuity holders which is why the Periodic Payment Settlement Act was brought into law.

This act requires individuals to obtain court approval as part of the transaction. The court gets involved to make sure the sale is fair and the brokerage company purchasing the payments is not taking advantage of the individual.

Benefits of Structured Settlements

A structured settlement can provide a greater level of financial stability for long-term injuries or disability.
The structured settlement payments are tax-free.
Structured settlement annuity accounts gain interest which can give the injured worker more money in the long run.
The settlement helps to replace the worker’s lost income.
The payments can be set up to be passed on to a survivor after the death of the worker.

Those who choose a structured settlement can often receive more than they would with a lump sum payment because their annuity gains interest over the life of the account. Before signing any annuity agreement, individuals need to make sure they carefully read the entire document to ensure they know what to expect.

Although many injured plaintiffs want an immediate settlement amount, structured payments can be beneficial in the long run. With structured settlements, individuals can continue to receive payments for an extended period of time, for greater financial security.

How are Structured Settlements Taxed?

Those who have a structured settlement often wonder about the impact their payments will have on their taxes and how their payments will need to be reported to the IRS.

Due to the Periodic Payment Settlement Act that was signed into law by President Reagan in 1982, nearly all structured settlements are entirely free from taxation. The reason structured settlements are not taxed is that the federal government does not view structured payments as income, but rather restorative payments to right a wrong.

There are some instances where a structured settlement could be taxed and they include the following.

Divorce settlements
Backpay settlements
Lottery payments
Punitive damage payments
Liquidation damage payments

In the above structured settlement scenarios, the payments would be treated in the same way as income.

Tips for Reporting to the IRS

It is wise for individuals to work with a certified personal accountant when preparing their taxes. Although most structured settlements regarding personal injury are not taxed at all, there can be some instances where taxation could be required.

It is essential individuals inform their CPA of the type of structured settlement payments they are receiving, so the right steps can be taken to ensure any owed taxes are paid. If the structured settlement payments are exempt from taxation, they will not need to be reported as income when filing a tax return. Some individuals will find part of their structured settlement may be subject to taxes if they chose to receive a portion of their settlement as a lump sum payment.

It is important to note, any changes that are made to modify the payments or terms of the structured settlement could lead to all future payments being subject to taxation. Making any changes to the terms should be done so with careful thought.

As with all tax matters, it is imperative individuals consider the tax ramifications before making any decisions or changes regarding their structured settlement. Counseling with a CPA can help individuals to better understand how their structured settlement payments will be taxed. Working with these professionals can help individuals to avoid any unwanted tax implications regarding their settlement.

What Happens If A Beneficiary Takes Over?

If the individual receiving the structured settlement payments passes away, the payments may be transferred to a beneficiary if the owner of the structured settlement made sure to include a death benefit that allows for the transfer of funds.

Taxes for the beneficiary’s takeover of the annuity are much the same as they would be for the original owner. The transfer will not incite taxation unless the stipulations of the structured settlement contract have been changed.

What Should Be Known About Structured Settlements for Minors?

While the vast majority of minor and adult structured settlements are set up in the same manner, there is one cardinal difference. Minors have very little, if any, say on how their structured settlement is set up or how it is spent, until they are eighteen.Once the minor turns 18, they will be able to take over control of their structured settlement. Until they turn 18, the minor’s parents or guardian remain in control of the structured settlement and must spend the money according to the specifications ordered by the judge.

The Judge Stipulates How the Money Will Be Spent

A judge will oversee how the structured settlement is spent, so the parents or guardian are held to specific guidelines that prevent them from spending the money irresponsibly or for purchases that do not benefit the child.

The main goal of a structured settlement is to ensure the minor has money for their future. If a lump sum were paid out while the individual was a minor, the funds could potentially be spent before the child turns 18 and is able to make their own financial decisions.

What Can a Structured Settlement Do for a Minor?

When a minor is awarded a structured settlement, this money can be used to secure their future and ensure their financial needs will be taken care of for a long period of time. A structured settlement plan can be designed to help a minor with the following expenses as they grow older.

College tuition payments

To purchase a car

To Purchase a home

Cost of living adjustments

Structured Settlement Laws: Periodic Payment Settlement Act

Over the years, laws have been put into place to protect the rights and best interests of structured settlement recipients. The Periodic Payment Settlement Act was put into law in 1982 as a means of protecting individuals and encouraging them to accept structured settlements for their financial security.

What Is the Periodic Payment Settlement Act?

The Periodic Payment Settlement Act was signed into law by President Reagan in 1982. While there are a few different benefits to this act being made law, one of the biggest is it allows individuals to receive their structured payments tax-free. The structured payments do not have to be included in the gross income report for income tax preparation.

It is important structured settlement recipients understand there is a stipulation in this act that could prevent the tax-free status from applying to an individual. The act states individuals cannot defer, accelerate, or decrease their structured payments or the tax-free status becomes null and void.

Additional Laws Were Put Into Place

In the nineties, advertisements began rising up that offered structured settlement recipients the option of receiving a lump sum instead of monthly payments. When unscrupulous factoring companies began taking advantage of individuals, a new act was signed into law to stop this illegal activity.

The Structured Settlement Protection Act was passed in 2002. The main reason the law was put into place was to protect 9/11 victims and prevent them from being taken advantage of with their settlements.

This law offered several protections that were put into place for structured settlement recipients, including the following.

The individual is required to receive counseling about the benefits and drawbacks, so they can make a sound decision.
The individual is granted the right to cancel the process within a specific time frame.
The individual must be given full disclosure on any charges and fees that result from the sale.
The sale of any structured settlement must first be approved in court.
If the sale is not approved by the court, a 40% tax excise is charged for the transfer.

These Laws Protect Structured Settlement Recipients

While these laws may seem intrusive to the recipient, they were put in place to offer protection. A structured settlement is meant to provide financial security for an individual’s future and these laws were put into place to ensure the awarded money is not squandered or misused.

Those who have received a structured settlement award need to be aware of these two acts and how they offer protection and guidelines for how the awarded money is accessed and used. With knowledge of these acts, structured settlement recipients can be informed and remain proactive in protecting their money.

Structured Settlement Protection Act

When it comes to the sale of structured settlement payments, there are laws that have been put into place to protect individuals. Each state has adopted its own Structured Settlement Protection laws and the Federal Structured Settlement Protection Act was signed into law in 2002. Understanding the laws that govern these transactions will help individuals to protect their rights and ensure the transaction they pursue is a favorable one.

Protection at the State Level

As mentioned above, each state has its own laws that have been put into place to protect structured settlement payment holders from being taken advantage of. Although each state has different laws in place, there are some commonalities across the country.

When a company agrees to purchase a structured settlement, they are required by law to provide information on the difference in value between the sale price and the value of the payments if the agreement is left intact.
A judge must approve the transfer of payments and will work to make sure the transaction will be beneficial for the individual.
A disclosure statement must be provided that clearly summarizes the terms of the transaction the individual has agreed to.
A cooling-off period is granted to the individual to give them time to cancel if they change their mind.
The entire transaction must abide by all applicable state and federal laws.

Some states will require individuals to seek out an independent professional advisor to ensure they fully understand the implications of this transaction. Other states may only suggest the individual complete this counseling.

The Federal Structured Settlement Protection Act of 2002

The Federal Structured Settlement Protection Act was signed into law in 2002. This act helped to ensure all state laws and regulations were standardized in their main components.

This act was put into place to further cement the protection of the individual and to ensure the process was fair. The following are the two main areas this act addressed in supporting the laws in each state.

All transactions must be court-approved and in compliance with all state laws and regulations.
If a structured settlement transfer does not comply with the laws, a 40% excise tax will be required.

These acts were placed for protecting individuals from unscrupulous buyers who simply want to profit at the expense of desperate individuals.

Individuals need to carefully study the laws and regulations and research their own state’s Structured Settlement Protection Act to ensure they are compliant. These laws can help to protect the individual and ensure the transaction they seek is a fair one that will benefit their financial needs.