Structured Settlements

What is a structured settlement?

A structured settlement is an agreement utilized in the resolution of a dispute where the plaintiff receives future payments in lieu of a lump sum. It can be used for the full amount or a partial amount of the plaintiff’s recovery. The payments can be made in regular installments, such as monthly or annual payments, or in lump sums. The payments can begin immediately or be deferred to a later date. The party taking on the obligation to make the future payments typically purchases an annuity from an insurance company to guarantee the payments are made in full. This arrangement provides security to the plaintiff and removes their funds from the ups and downs of the market.

What are the benefits of a structured settlement?

  • Tax-free growth for qualified settlements
  • Flexible formatting allows customized plan tailored to individual needs
  • Ability to preserve government benefits such as SSI, Medicare and Medicaid
  • Stress-free investment because payments are guaranteed
  • Security of lifetime payments prevents complete depletion of assets
  • Ability to designate a beneficiary to receive remaining guaranteed payments
  • No investment fees or ongoing management costs
  • Option to have an annual cost of living adjustment
  • Protection from risk of excessive spending, bad investments, and volatile market conditions
  • Protection of future annuity payments from claims of creditors in most states
  • Medical underwriting could increase payment amounts of lifetime payments
Photo of a structured settlement recipient
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Process

The plaintiff and defendant (or qualified settlement fund) agree that as part of the consideration for release, future periodic payments will be received in lieu of an immediate lump sum of cash to the plaintiff. This future periodic payment obligation is assigned by the defendant (or qualified settlement fund) to Independent Assignment Company through a qualified assignment agreement pursuant to Section 130 of the Internal Revenue Code. Independent Assignment Company then purchases an annuity from Independent Life Insurance Company to satisfy the obligation set forth in both the release and qualified assignment agreement. Independent Life Insurance Company would make the payments directly to the plaintiff as directed by Independent Assignment Company. A visual overview of this process can be seen below:

 

Structured Settlement Process Image

 

Medicare Set-Asides

When a Medicare recipient has been injured and receives funds to resolve their claim, Medicare requires that funds be set-aside to pay for future medical expenses associated with the injuries sustained in the accident. It is Medicare’s position that Medicare should be a secondary payer for these expenses. If funds are not set-aside, the plaintiff risks losing their Medicare eligibility.

To determine what needs to be set-aside, an allocation report is created by a professional well versed in Medicare compliance. The result of the allocation report informs the plaintiff and their representatives what the total amount to be set-aside is, taking into account the plaintiff’s life expectancy.

The plaintiff can either set-aside the full amount in an interest-bearing checking account, or they can utilize a structured settlement to make an annual payment into the Medicare Set-Aside account. By using a structured settlement, a significant cost-savings can be realized as the interest rate of the annuity allows for less money to be used from the outset to achieve the same result.

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