Structured settlements provide you with a unique opportunity to take advantage of an investment without risk or tax consequences. Sometimes called a “periodic payment settlement,” these are claim settlements under which some of the proceeds will be payable in deferred installments in lieu of immediate cash.  What does that mean to you?

Settlements paid in the form of a single lump sum—especially in catastrophic injury cases—place claimants and their families in the position of managing money that may be intended to provide for a lifetime of medical and income needs. Most people are not experienced in handling large sums of money and, as a result, it is often either spent too quickly or invested, leaving little or nothing to cover the future needs of the seriously injured person.

Structured settlements were developed in order to create a more stable financial footing for claimants.  In 1982, the use of structured settlements was encouraged by Congress and special tax code was written. Instead of receiving a single lump sum, guaranteed payments can be made to you over time, through the purchase of an annuity, to better meet your financial needs.

The Internal Revenue Service determined that since the money you receive through a structured settlement is compensation for an injury, you will never pay taxes on any of the payments (principal or interest). There are two primary articles of legislation governing the tax treatment of structured settlements: IRC 104 (a)(2) and IRC 130

Payments from a structured settlement can be scheduled for any length of time, even for your lifetime, and since you work with a Consultant to determine the payment design, you can remain confident that your future financial needs are addressed. Payment designs can include bi-weekly, monthly, quarterly or annual payments as well as future lump sums. Ongoing payments can be in level amounts or can keep up with inflation by using a Cost of Living Adjustment (COLA). 

If a single lump sum payment is taken as compensation for an injury, it is tax-free, but any additional income (called Interest Income) you receive from investing the lump sum will be taxable. The bottom line is that structured settlements provide you with a unique opportunity to take advantage of an investment without risk OR tax consequences.

Further Resources

At the core of the federal tax code's explicit recognition of structured settlements is the concept of constructive receipt: learn more

Legislative actions and tax codes related to structured settlements:  The Periodic Payment Settlement Act of 1982, 468B, 72(u) or 5891

How Federal Tax Rules Benefit all Parties in a Claim

Structured Settlement: Financial Security after a Child's Accident

 

Medicaid
Medicaid, Social Security, and Supplemental Security Income (SSI) are a few of the public benefits available people with limited assets and/or income.  When there is a personal physical injury or sickness claim, a settlement most often involves receipt of a cash lump sum payment—however, Medicaid and SSI are needs-based programs so a lump sum cash settlement would most likely make the claimant ineligible for these government public assistance programs.

 If you receive a structured settlement, the periodic payments will also be considered income for the purpose of qualifying for government assistance. For this reason, it is recommended that a structured settlement fund a special needs trust. Assets in a Special Needs Trust are not counted for purposes of qualifying for needs-based programs.  In the case of a Special Needs Trust, the payee of the structured settlement is the trust.  A trust is basically money or property held by one party for the benefit of another.  A Special Needs Trust is an irrevocable trust with a trustee who will use the assets for the benefit of the injured party and is the only person that can make a distribution from the trust.  A Special Needs trust must be approved by the court and can be used for most expenses other than basic support such as room and board.  

Medicare
Medicare has a statutory right to be reimbursed for an injury victim’s medical expenses AND a right to recover from the victim’s future medical expenses before Medicare’s secondary coverage applies.  All parties in WC (Workers Compensation) cases have significant responsibilities under the Medicare Secondary Payer (MSP) laws to protect Medicare's interests when resolving WC cases that include future medical expenses.

The recommended method to protect Medicare's interests is a Medicare Set-Aside (MSA) in WC cases, which allocates a portion of the WC settlement for future medical expenses. An MSA is an interest-bearing account, either professionally administered or self administered, that holds the funds to pay for future medical and drug expenses related to an injury for which a WC claim has been filed.  Structured settlements have become a popular method of funding MSAs because of the reduced cost to the parties.  

The benefits of using a structured settlement for an MSA:

  • Structured Settlement consultant handles all the details and the work involved in setting up the MSA.

  • Can reduce the cost by up to 50% when annuitizing the MSA

  • Reduces claim reserves

  • Age ratings reduce premium if a traditional or NQ assignment is used.

  • Contingent liabilities may be eliminated

  • Reduces adjustment expenses by resolving claims more quickly which may include reduced attorney fees, investigation costs and medical costs which continue to rise

  • Structured settlements are a great tool as claimants are used to period payments (weekly payments from WC)

  • Multiple settlement designs available which allows structuring to meet present and future individual needs

  • Conference calls to attorneys and claimants to help educate all parties on the process

CMS/Medicare has not issued any memos or rules regarding Liability Medicare Set-Asides.  However CMS/Medicare does take the position (pursuant to statute) that CMS/Medicare’s payments for medical treatment of an injury are secondary to any policy of insurance, workers’ compensation, liability and/or no fault benefits that is primary for paying that medical treatment. Although Medicare has not come forth with any rules that outline how to protect Medicare's interests with regard to a Liability Medicare Set-Aside (as they have done with Workers’ Compensation), an argument could be made that Medicare’s interests are protected if a Liability Medicare Set-Aside is done the same way a Workers’ Compensation Medicare Set-Aside is done.

“CMS’s legal position is if a liability settlement designates that the settlement includes money for future medical care, a set-aside is appropriate. However, there is no formal process to review Liability set-aside proposals. Depending on the availability of medical staff, some Regional Offices will review a proposal. You do not have to submit a proposal to CMS. It is sufficient to have it on the record that the fund is created.”

—CMS/Medicare

Further Resources

Learn more about CMS

Medicare Set-Asides with Workers' Compensation Claims

 

Special Needs Trusts
Improves a disabled person’s quality of life without endangering eligibility for government programs.

Qualified Settlement Funds
Allows the settlement of lawsuits with multiple claimants before there is an agreement on how settlement amounts will be allocated.

Treasury-Funded Structured Settlements
Backed by the full faith and credit of the United States, these are perceived by domestic and international investors to be one of the safest bond investments in the world.

Other Non-Qualified Structures
These can be considered in any transaction wherein the parties would benefit by receiving an annuity stream instead of up-front cash.

 

In 1982, the Internal Revenue Service created an opportunity for claimants to invest a portion of settlements in a tax-free structured settlement. The interest income is not taxed by the IRS as it is considered compensation for a loss. However, if you settle your claim with a lump sum and then invest the money yourself, you will pay taxes on the interest earned.

Guaranteed Payments
Unlike a cash-only settlement, a structured settlement will provide guaranteed benefits at specified payment dates to assure your financial security. You can receive monthly, annual or quarterly payments for life or for a specific period of time along with lump sums at designated intervals.

Flexibility to Meet Individual Needs
A structured settlement is designed to meet your needs. You may wish to provide for future education expenses, supplement a retirement fund, or simply provide for general financial security. Based on your input, the payment plan will be tailored to meet your objectives.

Maximum Security
Structured settlements offer an element of "spendthrift" protection. Since you have no direct or indirect ownership of the annuity, it is considered "bankruptcy proof". That means your payments will not stop regardless of your financial situation.  

Financial Stability
Unfortunately, 90% of all lump sum settlements are spent within five years, and 70% are spent in the first year of a minor reaching his or her age of majority. A structured settlement can eliminate the stress associated with the financial responsibility of providing consistent income.

Further Resources

Structured Settlement Annuities: Safe, Secure and Highly Regulated

Structured Settlements: Financial Security After a Child's Accident

Structured Settlements and Qualified Assignments: How Federal Tax Rules Benefit All Parties in a Claim

Structured Settlements: Your Future. Guaranteed.