Structured Settlements


Author: Attorney John R. Orton


Clients involved in personal injury cases often ask about “structured settlements.”  Here is a brief overview of “structured settlements.”

What is a “structured settlement”?

A “structured settlement” is a way for a plaintiff, in a successful personal injury case, to receive payment from a defendant.  In most cases, the defendant (or the defendant’s insurance company) pays a lump sum to resolve the plaintiff’s claim.  However, when a structured settlement is used, instead of receiving a lump sum from the defendant, the plaintiff receives a tax-free stream of payments.

In general, the process works as follows:  The plaintiff and the defendant reach an agreement to resolve the claim and for the defendant to pay all or part of the settlement to the plaintiff through a schedule of payments over time.  The defendant funds and assigns to a third party the obligation to make future payments to the plaintiff.  The third party acquires an annuity, usually from a life insurance company, which pays the required amounts to the plaintiff on the agreed schedule.

For example, a plaintiff might resolve a case for $100,000.00.   Instead of receiving a check for the lump sum of $100,000.00, the parties can agree to a structured settlement which will make a series of scheduled payments to the plaintiff over time through an annuity.  Depending on the terms of the annuity, these pre-set amounts can be paid monthly, or annually, or bi-annually, or at such other times as the parties may agree.

Pros of structured settlements.

A structured settlement always pays more, in total, than the lump sum used to establish the structured settlement.  For example, if a plaintiff resolves a case for $100,000 and elects to use a structured settlement, the structured settlement may pay the plaintiff $200,000 or $300,000 over time depending on the terms of the structure.

All of these payments, (including the amounts over $100,000) can be “tax free” if the structured settlement is properly created.

Other benefits are more dependent on the circumstances of the plaintiff.  Here are a few examples:

  • If the plaintiff is a minor or young adult, a structured settlement can control the stream of payments so that the young plaintiff is not tempted to foolishly spend a lump sum settlement.
  • If the plaintiff has a long-term injury, a structured settlement can help ensure funds are available in the future for costs which the plaintiff anticipates incurring over a lifetime.
  • If the plaintiff has trouble managing money or is a spendthrift, a structured settlement can control the stream of payments so that the plaintiff is protected from their own mismanagement of money.
  • If a plaintiff does not need funds immediately, a structured settlement can delay payment for years, and thereby allow the amount of the payment to grow.
  • If a plaintiff dies unexpectedly, the payments can transfer to a beneficiary.

Cons of structured settlements.

Once the terms of the structured settlement are finalized, the plaintiff cannot change them.  Hence, if circumstances change, the plaintiff cannot renegotiate the payment schedule.

A plaintiff can attempt to liquidate a structured settlement by selling the stream of payments to a third party.  However, the plaintiff will surrender significant value to “cash out” a structured settlement.   It is often a bad financial move.

Settlement funds are only available according to the established schedule of payments.  If  an emergency occurs, the plaintiff cannot tap into the structured settlement for extra cash.

The structured settlement process

It is important to work with a lawyer and a settlement planner who are experienced with structured settlements.  There are stringent IRS rules which must be followed to ensure that the payments are “tax free.”    A mistake can be costly.

In the right case, a structured settlement can be a wonderful tool to help compensate the plaintiff for the injuries he/she has suffered.  However, the process is complicated and so care must be exercised.