What is the Definition of Structured Settlements?
It may seem counterintuitive, but it's actually not that rare for individuals who win large court settlements or the lottery to end up bankrupt a few years later. This is usually because these individuals are not keen on money management and fritter away their awards without establishing a long term income plan. Courts in the 1970s began regularly offering cash settlements in structured formats as an alternative.
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Features
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A structured settlement is the opposite of a lump sum payment. It breaks up the total award into regular payments over a long period of time. In most cases, the structured settlement works like an annuity, providing a fixed income amount for the lifetime of the payee or for some prearranged duration. The party obliged to pay usually purchases an annuity, the income of which offsets their obligation, or transfers the debt to a third party who engages in a similar arrangement.
Function
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As opposed to a lump sum, a structured settlement is a far easier and more agreeable resolution for the defendant, who has to pay. Advocates of structured settlements also believe the format protects the party receiving the settlement, both from the temptation to waste the money or spend it foolishly, and from predatory borrowers who may be attracted by the large lump sum.
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Benefits
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The proceeds from a court-awarded structured settlement are entirely tax free at both the state and federal levels. This is a significant advantage over the lump sum format since any investment income or capital gains realized on the lump sum over time would be subject to taxation at normal rates. The winning attorneys, however, will also be forced to either accept a reduced amount in fees or take their payment in installments as well.
Significance
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In some cases the defendant will a choice to receive a lump sum, but in many, the court will simply award a structured settlement. This has become a preferred means of resolving civil disputes because its advantages to both parties make a truly equitable resolution more possible. Cases that can be resolved in this way, out of court, free up the resources of the court for other matters.
Effects
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Companies that are obligated to pay out a structured settlement will often move to take the liability of their books by having it transferred to a third party assignment company. If this is the case, the transfer will usually conform to Internal Revenue Code Section 130 so to render nontaxable the funds received by the assignment company in exchange for the obligation.
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- Photo Credit David Benbennick (GNU 1.2 & CCAS 2.0)
