Structured settlements in the United States
Having first been introduced in Canada after a settlement for children affected by the infamous drug, Thalidomide, structured settlements gained steadily in popularity in the United States throughout the 1970’s. This gain in utilization was also a predictable outcome of the evolving IRS rulings during that time, combined with markedly higher interest rates, and an upswing in the size of personal injury awards dealt in the courts. The most significant change in IRS policy was the fact that, if certain requirements were met in these compensation cases, then claimants were not liable for federal income tax. At the same time, increased interest rates resulted in larger deferred payments becoming possible with the same or even lower present value cost.
In the United States, implementation of structured settlements is legally regulated at the federal and the state level. This intimate relationship is demonstrated by the fact that the Federal Structured Settlement Laws include sections of the (federal) Internal Revenue Code. ‘Periodic payment of judgment statutes’ (another name for structured settlements), are also included in state structured settlement laws, as are structured settlement protection statutes. The National Conference of Insurance Legislations (NCOIL) has created a model for structured settlement protection acts, a model that is currently utilized by 47 of the states. 37 of these acts are founded, either partially or completely, on the NCOIL model act.
Structured settlements are also affected by Medicaid and Medicare regulations and laws. Preservation of a victim’s Medicaid and Medicare benefits is ensured by the incorporation of structured settlements into “Special Needs Trusts” or “Medicare Set Aside Arrangements.”
Specifically created to free injury victims from the additional tax burden that capital gains and interest revenue usually creates, every payment of the entire award is tax-free. Special provisions in the tax code allow for this rather interesting structure, which essentially confers all the benefits of ownership (of the injury compensation payment) without the accompanying taxation obligations. In essence, the claimant is seen by the United States tax code as owning only an expectation of being paid, whilst not actually owning anything else.
Rather than giving the victim, his family or his law firm the cash in hand, the defendant places the money for the settlement structure with a subsidiary of a life insurance company, known as an “assignment company”. The assignment company, in turn, buys the annuity from its parent life insurance provider, holds the policy from then on, and proceeds to pay the claimant out according to the monthly (or other) schedule, required by the contract.
The federal government has actively encouraged both injury sufferers and their families to make use of structured settlements, particularly since 1982, though their implementation was already rising steadily in the 1970’s. In the decades since then, structured settlements have garnered wide-ranging and long-term support from plaintiff attorneys, legislators, disability activists and advocates, state attorney generals and judges.
Looking at the history of court-mandated damages, we see that in the past, injury lawsuits were likely to result in the payment of a single lump sum to the successful claimant. Such payments, particularly in cases of catastrophic injury, were highly likely to place the victim (or the family) in a very difficult position financially. In the throes of adapting to a radically altered lifestyle, the victim was unlikely to have the resources or the time to manage major sums of money. Mismanaged funds, especially in the early days of adjustment, lead too often to serious financial difficulties, with the unfortunate result that victims run the risk of losing specialised medical care and their very independence, eventually falling on the mercies of public assistance.
This sad cascade of effects in too many cases led directly to the efforts of a bipartisan coalition of legislators in Congress in 1982. They worked together to pass legislation that amended the tax code of the time, The Periodic Payment Settlement Act of 1982 (Public Law 97-473), an action that formally recognized – and actively encouraged – the implementation of structured settlements in physical injury lawsuits.
Vigilant regulation continues to protect the consumer, as shown in the enactment, in recent years, of consumer protection statutes in 46 states (as well as the federal government), strictly governing the conditions under which structured settlements may be sold on by claimants. In such cases, under federal law, courts must both approve and oversee a victim’s choice to sell payments from any structured settlement to a third-party company.