Structured Settlements

Structured settlement is an alternative to a lump sum cash payment in the resolution of personal physical injury, wrongful death, and workers’ compensation cases. The settlement usually consists of two components: an up front cash payment to provide for immediate needs and a series of future periodic payments. These payments are funded by the defendant’s purchase of an annuity policy, treasury bond program or reinsurance from a life insurer who makes the periodic payments directly to the plaintiff. The structured payments must be determined at the time of settlement agreement and release, not afterwards when it is too late.

A structured settlement is most advantageous when plaintiffs require payment of funds over a period of time, such as:
• Plaintiffs who require continuing future medical expenses
• Plaintiffs (or dependents) who require replacement of lost future income
• Plaintiffs who require a secure lifetime tax-free income
• Plaintiffs with minimum experience in managing money
• Any case involving a minor, since courts usually will not allow payments to be made directly to the minor until he or she reaches the age of majority.
• Workers’ compensation, total disability or death claims

We obligation to make future payments to personal physical injury claimants under I.R.C. §104(a)(2) can be assigned to a third-party, often resulting in a more secure arrangement for the claimant than if the original defendant or insurer remained responsible for the payments. We provision of the law authorizing a "qualified assignment," I.R.C. § 130, also allows the claimant to have secured interest in the annuity contract that funds the payments without jeopardizing the tax-free income status of the payments. A "qualified assignment" of workers compensation payments was authorized on August 5, 1997, by the addition of the reference to I.R.C. § 104(a)(1) under I.R.C. § 130, for claims filed after that date. For earlier claims, there are "nonqualified" assignments available, funded by annuities or reinsurance agreements.
The more the settlement broker can understand about how the settlement proceeds can most benefit the claimants, the better job the broker can do in designing the program best suited for the claimant.

For minors, structured programs have significant advantages over cash settlements. First, with a cash settlement, the claimant will have immediate access to the funds at the age of majority. This could mean handing a very large check to a minor. Next, the investment of the settlement proceeds will be governed by the probate court. The allowable investments will include bank CD’s, U.S.Treasury obligations and municipal bonds. Currently, the structured program pays a higher aftertax rate of return than any of the allowable investments governed by the probate court. Finally,with a cash settlement, tax returns must be filed,creating a paperwork nightmare every year between settlement and the claimant’s reaching majority.
Additionally, if the taxes are paid out of settlement proceeds, an annual trip to the probate court will be necessary

Structures can provide predictable, guaranteed cash flow to assist in supporting day-to-day costs of living on a tax-free income basis. This is particularly important to those individuals who have permanent disabilities and will depend on the settlement proceeds for all or part of their future living expenses.
Finally, if one is planning to use settlement proceeds as a part of retirement planning, structured annuity or bond trust payments do not impact Social Security, where other investments might.

Periodic payment streams can be set up to increase annually for protection from inflation, and they can be guaranteed for life so that the claimant is never in danger of outliving his or her savings. For individuals with serious health problems facing them, structured programs have significant advantages over cash settlements. People with serious health problems, as a group, statistically will live shorter lives than the population as a whole. This fact allows the life carrier underwriting the structure to provide a greater lifetime benefit to the person with health problems for a given premium payment than would be given to a person with a standard life expectancy. This is called mortality risk, and life insurance companies are in the business of assuming mortality risk. To prevent the life insurance company from reaping a windfall in the event the annuitant dies soon after payments begin, the structured settlement agreement can guarantee a minimum number of payments that would go to designated beneficiaries of the payee.

For claimants and their family members who receive Medicaid coverage for medical assistance and nursing home care, Supplemental Security Income(SSI), Aid for Families with Dependent Children (AFDC), food stamps, certain veterans benefits and Section 8 housing, the direct receipt of settlement proceeds can cause loss of eligibility or such "means tested" benefits. A properly established special or supplemental needs trust,created under the provisions of 42 U.S.C. § 1396p, may allow the claimant or claimant’s family to continue to receive public assistance payments in addition to the benefits of settlement proceeds.

The annuity company selected for a structured settlement should be from among the strongest life insurance companies in the industry, with very high ratings by the independent analysts. Under the Uniform Payment of Judgments Act of 1990, to become a qualified insurer, an insurance company must be an admitted insurer in the state and must request designation by the insurance commissioner. The insurer must have a minimum of $100,000,000 of capital and surplus, exclusive of any mandatory security valuation reserve, and must have at least the following minimum ratings from two nationally recognized rating organizations:
A.M. Best, A+, Moody’s, Aa3; Standard & Poor’s; AA-; Duff & Phelps, AA-. All companies represented by the broker whose name is on this publication meet these stringent criteria, which provide a good basis for consideration. Bond trusts, an alternate to annuities, are backed by the full faith and credit of the United States and, thus, provide greater security. But, they generally offer less yield and are limited in flexibility of payment design. Bond trusts cannot offer guaranteed lifetime payments and cannot consider impaired life expectancy. A settlement design can combine the strengths of both types of funding assets.The company selected should accommodate the need of the claimant and should offer a competitive rate. If the claimant prefers a particular company or, conversely, wishes to eliminate a particular company from consideration for any reason, that should be done.
Majestic Settlement Consultants can write with virtually any company in the structured settlement marketplace, including all of the major ones. All structured settlement presentations are made with the understanding that neither the settlement broker nor the broker’s affiliations are engaged in rendering legal or accounting advice. The tax laws and precedents are presented to the best of their understanding. However, the claimant should retain independent tax counsel before reliance on the presentation. Also, it should be noted that tax laws may change at any time.

PAYMENTS ARE EXCLUDED FROM GROSS INCOME.
Tax-free pursuant to Sections 104(a)(1) and (2) of the Internal Revenue Code.
EXTREMELY LOW RISK.
Payments are backed by the largest and highest rated life insurance companies in the country. The life insurance industry is one of the strongest sectors of the U.S. economy.
BENEFIT FORMAT IS VERY FLEXIBLE.
Limited only by our imagination and the amount of the settlement, the payment stream can be made the same each year or increase annually to offset the effects of inflation on purchasing power; plus they can be made on a lifetime basis, assuring that you cannot outlive the payments.
HEIRS PROTECTED BY GUARANTEEING PAYMENTS.
Payments can be guaranteed 5, 10, 15, 20, 30 years or longer to protect heirs and prevent a windfall to the life insurance carrier.
STRUCTURED PAYMENTS DO NOT IMPACT RETIREMENT PLANS.
Payments do not affect Social Security and other entitlement programs, where cash settlements might offset benefits.
STRUCTURED PROGRAM CAN BE INTEGRATED WITH A COMPANION INVESTMENT PORTFOLIO.
If one has the risk tolerance to invest in stocks, periodic payments provide an ideal source for "dollar cost averaging," a strategy of investing the same amount of money each month or quarter that lowers the per-share cost over time.
STRUCTURES PROVIDE THE HIGHEST AFTER-TAX RETURN WITH LOW RISK IN TODAY’S INTEREST RATE CLIMATE.
If one believes rates may increase in the future,payments can be returned in intervals (as lump sums) to be invested at the prevailing rate, similar to "bond laddering," an investment strategy where you purchase bonds that pay back on different dates, i.e., every three years, to reduce the risk that you have locked in an interest rate at an unfavorable time.
PERIODIC PAYMENTS RELIEVE THE BURDEN AND ExPENSE OF MONEY MANAGEMENT.
Periodic payments avoid agonizing investment decisions, plus eliminate management fees that can be as much as 8.5 percent on a one-time basis or up to 3 percent of assets annually.
MOST EFFICIENT WAY TO PURCHASE A HOME OR TO START A BUSINESS.
Payments are made with tax-free dollars, while maintaining a tax write-off (double-dipping Uncle Sam). Structures can provide cash flow to start a business while protecting the downside of losing settlement proceeds, if the business should fail. The vast majority of new businesses fail within five years.
REDUCES THE POTENTIAL OF DISSIPATION OF SETTLEMENT PROCEEDS. Statistically, 90 percent of large lump sum settlements are gone in less than five years.