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Structured Settlements: Claimants
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The Structured Settlement Industry was created in the 1970Ís because of Internal Revenue Service rulings. These rulings made it clear that periodic payments to claimants in personal injury cases were free of federal taxation as long as certain conditions were met. This IRS acknowledgment made the concept of using periodic payments to help injured parties and defendants resolve claims popular. Before this time, U.S. common law promoted lump sum payments to claimants.
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Because of IRS Revenue Ruling 79-220, Structured Settlement proceeds, including interest, are exempt** from federal and state income taxes. Claimants can avoid the tax burden that comes with investment earnings from a cash settlement which, over time, provides significant tax savings and maximizes the value of the proceeds.
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Instead of a lump sum payment, structured settlements provide periodic payments for a fixed amount of time. These payments might consist of equal installments, installments of varying amounts, or an upfront lump sum payment with periodic payments to follow. Structured settlement payments might be paid for a short duration or continue for the remainder of the claimant's life.
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A Structured Settlement is a means of settling a personal physical injury claim with a plan designed to meet the unique needs of the injured party. Instead of accepting a cash settlement in a single lump sum, claimants who chose a Structured Settlement receive future periodic payments made through a Structured Settlement annuity.
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Many people think of using structured settlements only when the claimant is young, allowing for many years of interest accrual and tax advantages. If the claimant is a minor, it may be possible to generate a tax-free rate of return of 8-10%, which could equal a taxable rate of return of 10-12%.
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The United States has enacted structured settlement laws and regulations at both the federal and state levels. Federal structured settlement laws include sections of the (federal) Internal Revenue Code. State structured settlement laws include structured settlement protection statutes and periodic payment of judgment statutes. Medicaid and Medicare laws and regulations impact structured settlements. To preserve a claimant’s Medicare and Medicaid benefits, structured settlement payments may be incorporated into “Medicare Set Aside Arrangements” “Special Needs Trusts."
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