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Structured Settlements
Insurance Fraud Attorney, Russell L. Forkey, Esq.
Recently, we were retained to assist the owner of an annuity that she had received as part of a structured settlement arising from the settlement of a personal injury action. Our involvement was limited to assisting this individual in dealing with a funding company that had found a buyer for the first installment due under the structured settlement, which was not scheduled to be paid for two more years. As a result of our involvement in that matter, we felt that it would be appropriate to provide some general information on what a structured settlement is and how it is funded. Also, we thought that it would be important to provide some information for the reader to consider if they decided to deal with one of these funding companies, which assist the owner of an annuity to convert some or all of the annuity payments into immediate cash.
However, please keep in mind that this information is being provided for educational purposes only. Thus it is not designed to be complete in all material respects. Moreover, it should not be relied upon as legal or investment advice. If you have any questions relative to this post, you should contact an experienced professional.
What is a Structured Settlement?
A structured settlement is simply a mechanism that allows plaintiffs to have a portion of their personal injury or wrongful death settlement paid out in future tax-free periodic payments. The design of the payments is limited only to the imagination — giving the plaintiff complete flexibility in securing their financial future.
Historically, damages from a personal injury or wrongful death lawsuit were paid in a single lump sum at the time of the settlement. This kind of payment placed plaintiffs and their families in the position of having to manage a large sum of money, which is often intended to provide for a lifetime of medical and income needs. Structured settlements were devised to alleviate the difficulty of this situation and to provide long-term financial security for families.
Structured settlements have numerous advantages.
- TAX-FREE — IRS Code 104(a)(2) stipulates that periodic payments in the form of a structured settlement are completely tax-free.
- GUARANTEED RATE OF RETURN — Structured settlements grow at a guaranteed fixed rate of return unaffected by the volatility of the market. The rate of return exceeds most other fixed-income investment options. Coupled with its tax-free status structured settlements often outperform investment options offered within the equity market.
- GUARANTEED FUTURE PAYMENTS — In the form of future periodic payments structured settlements promote fiscal responsibility and investment discipline. The fixed nature of structured settlements provides the assurance that the plaintiff’s future needs will be secured over a specific period or a lifetime.
- MINIMAL RISK — Structured Settlements are funded through multi-billion dollar life insurance companies.
- NO FEES — Unlike typical investments, structured settlements contain no management fees.
All of these factors should be discussed with the attorney representing you in the personal injury or wrongful death matter. It should be part of their overall legal duty to you.
Funding Companies
If the structured settlement that the client enters into only provides for the periodic payment of money to the plaintiff at predetermined intervals, circumstances may arise where the plaintiff needs immediate cash. One of the options that these funding companies offer is that they will find a buyer for one or more of the periodic distributions at a discount. From this discount the company will take its fee. The funding company will, as part of its responsibilities find the buyer and handle all of the paper work and other matters relating to the transaction. While this sounds great, it is important to bear in mind that the funding company does not represent your interests, it represents its own interest. Therefore, we strongly urge you to retain qualified counsel to review the documents that you will need to execute to complete this transaction as this is the only way that your interests will be protected.