The Low Down on Structured Settlements

In recent years, structured settlements have become increasingly popular, but what are they? What are the pros and cons of such agreement? What are the alternatives?

A structured settlement is money awarded by the courts as a result of a lawsuit. The payments are paid over a fixed period of time or over the recipient's lifetime. Some settlements may include a portion of the money to be paid as a lump sum payment, while others only offer periodic payments.

Structured settlements are often awarded to:

People with temporary or permanent disabilities Guardianship cases involving minors or persons found to be incompetent and workers compensation cases Wrongful death cases where the survivors need monthly or annual income Severe injury with long-term needs for medical care, living expenses and family support

For over 20 years, the federal government has been encouraging the use of structured settlements. Originally used to pay out large settlements in tragic cases, they are now being used to fund cases as small as $5,000. In 1982, a bipartisan coalition of legislators in Congress came together to pass legislation that amended the federal tax code. This is known as The Periodic Payment Settlement Act of 1982 (Public Law 97-473).

Under The Periodic Payment Settlement Act of 1982 (P.L. No. 97-473), are specific tax rules to encourage the use of structured settlements to resolve physical injury cases. Section 104(a)(2) of the Internal Revenue Code, offers tax advantages to the plaintiff by guaranteeing that the full amount of the structured settlement payments is tax-free to the victim. On the contrary, the investment earnings on a lump sum payment are usually fully taxable. This piece of legislation was enacted to protect the rights of the annuitant.

Some people feel financially trapped by the periodic payments. Their financial needs have changed and they find the inflexibility of a structured settlement restrictive. Having a lump sum of cash would provide them with the financial freedom they desire. For these individuals, a structured settlement transfer, also known as selling payments, is a great option. An individual can sell their future annuity payments to a third party, in exchange of a lump sum. The individual receives a lump sum of cash to be used as they desire. Some individuals use the lump sum to avoid foreclosure, put a down payment on a home, continue their education or purchase a car; while others may chose to invest the money themselves to maximize their return.

Selling annuity payments for a lump sum is very common and the process is easy and hassle-free. In order to protect the rights of the annuitant in these cases, forty-six states and the federal government have enacted additional consumer protection statutes that establish strict conditions for these transactions. Under the federal law, court oversight and approval is required for individuals who chose to sell payments from a structured settlement to a third-party company. The details of the statues vary by state but the courts approval is necessary to protect the annuitant and to ensure that the annuitant is receiving a fair amount for their payments.

Annuity owners should feel confident that they are protected by the law. Annuity owners should also feel assured that they can have immediate access to their annuity payments through the option of selling them for cash today.