The Importance of Public Policy for Structured Settlements

What is public policy and why is it important for structured settlements?

One definition of public policy is “the broad area of government laws, regulations, court decisions, and local ordinances as enacted by federal, state, and local governments.” That comprehensive definition encompasses all federal and state laws, regulations and court decisions that have impacted structured settlements since at least 1975.

However, when advocates and stakeholders discuss structured settlement public policy, they generally do so with a more narrow and focused perspective. They are concerned, for example, with maintaining or extending the tax exclusion in IRC § 104(a)(2). Or they might wish to justify direct payments of structured settlement annuities into ABLE accounts without disqualification of means-tested government benefits.

For these purposes, a more appropriate definition of public policy might actually be: “the principles, often unwritten, upon which social laws are based.

Do such principles exist for structured settlements? And, if so, what are they and where does one find them?

One obvious potential source for public policy supporting structured settlements is the Congressional history of IRC § 104(a)(2) and 130.

Since 1981, the Congressional Record appears consistently focused on two related justifications for these structured settlement tax preferences, according to research published in this 2010 paper by Jeremy Babener, the current Chairman of the Society of Settlement Planners’ (SSP) Legal Committee.

As stated by Senator Max Baucus in 1998: “[O]ur focus in enacting these tax rules in sections 104(a)(2) and 130 of the Internal Revenue Code was to encourage and govern the use of structured settlements in order to provide long-term financial security to seriously-injured victims and their families and to insulate them from pressures to squander their awards.”

What other principles exist upon which structured settlement laws are based?

Outside of the Internal Revenue Code, one of the most important historical examples of periodic payment legislation is the Uniform Periodic Payment of Judgments Act. The purposes of the Uniform Act (in effect, its public policy principles), as set forth in a Prefatory Note, are:

 “to compensate tort victims suffering bodily injury fully and fairly by requiring that certain awards for future economic damages be paid periodically as the losses accrue and thereby:

  • alleviate some of the problems inherent in calculating damage awards by eliminating the need to have the trier of fact discount future damage awards to present value;
  • effectuate more accurate awards of damages for actual losses by paying health care costs for the actual life of the tort victim;
  • assure that payments of economic damages more nearly serve the purposes for which they are awarded;
  • reduce the burden on relatives of personal injury victims and public assistance costs created by the premature dissipation of lump-sum payments;
  • implement the income tax policies in the United States Internal Revenue Code and corresponding state and commonwealth tax laws by providing the same favorable income tax consequences to judgment creditors as are provided to claimants who enter into structured settlements; and
  • make the tort-liability insurance system more efficient so as to keep liability insurance available and affordable.”

However, the Uniform Act comes with two caveats:

  • Although drafted and approved by the National Conference of Commissioners on Uniform State Laws in 1990, the Uniform Act is not currently operational in any state. Its impact has been as precedent for other legislation.
  • Judgments differ in many respects from settlements. However, Section 19(b) of the Uniform Act sets forth that a Settlement Agreement may provide that one or more sections of the Uniform Act may apply.

The market for structured settlements has changed significantly since 1982, when the Periodic Payment Settlement Act was enacted, and 1990, when the Uniform Commissioners drafted the Uniform Act. Some of the public policy principles identified above are still relevant. Others may not be.

To a certain degree, market evolution and market growth requires utilizing and/or repackaging the past. However, market success also requires studying the present and imagining the future. For example, is it still strategically prudent, or even accurate, for the National Association of Structured Settlements Trade Association (NSSTA) to maintain "structured settlements enable injury victims to live free of reliance on government assistance" as a public policy justification?

One reason why defining structured settlement public policy should be important to NSSTA and its members, especially now, is the linkage between structured settlement public policy and structured settlement benefits.

Therefore, if NSSTA decides to continue to market structured settlement benefits, Independent Life believes re-positioning structured settlement public policy into a core component of personal injury settlement planning should represent a high priority for NSSTA’s future. And, from a structured settlement perspective, much of personal injury settlement planning involves helping injury victims effectively integrate our products with other government benefits.