Buying or Selling a Structured Settlement

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A structured settlement is a financial or insurance arrangement, including periodic payments, that a claimant accepts to resolve a personal injury tort claim or to compromise a statutory periodic payment obligation. 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 affect 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."


The United States definition of “structured settlement” for federal income taxation purposes, found in Internal Revenue Code Section 5891(c)(1), is an "arrangement" that meets the following requirements:

A structured settlement must be established by:

v       A suit or agreement for periodic payment of damages excludable from gross income under Internal Revenue Code Section 104(a)(2); or

v        An agreement for the periodic payment of compensation under any workers’ compensation law excludable under Internal Revenue Code Section 104(a)(1); and

v       The periodic payments must be of the character described in subparagraphs (A) and (B) of Internal Revenue Code Section 130(c)(2) and must be payable by a person who:

v        Is a party to the suit or agreement or to a workers' compensation claim; or

v       By a person who has assumed the liability for such periodic payments under a qualified assignment in accordance with Internal Revenue Code Section 130.

Legal Structure:

The typical structured settlement arises and is structured as follows:

v       An injured party (the claimant) settles a tort suit with the defendant (or its insurance carrier) pursuant to a settlement agreement that provides that, in exchange for the claimant's securing the dismissal of the lawsuit, the defendant (or, more commonly, its insurer) agrees to make a series of periodic payments over time. The insurer, a property/casualty insurance company, thus finds itself with a long-term payment obligation to the claimant.

v       To fund this obligation, the property/casualty insurer generally takes one of two typical approaches: It either purchases an annuity from a life insurance company (an arrangement called a "buy and hold" case) or it assigns (or, more properly, delegates) its periodic payment obligation to a third party which in turn purchases an annuity (which arrangement is called an "assigned case").

Structured periodic Payments versus Receiving a Lump Sum:

There are issues that one should understand before opting for a structured settlement agreement. If payments are made to an estate, they are free from income tax but subject to estate tax. Purchasing a structured annuity can affect the availability of ready money with an individual. State and federal laws govern the closing of a structured settlement. The closing process usually gets completed in 3-6 months.

Some people who enter into structured settlements feel trapped by the periodic payments. They may wish to purchase a new home, or other expensive item, yet be unable to muster the resources because they can't borrow against future payments under their settlement. 

Often individuals who come into money by acquiring a lump sum are unable to invest it wisely and often spend it wastefully, this is not possible with a structured settlement where small amounts are made available periodically and therefore a person’s spending is regulated and the money is free of state as well as federal taxes. As against this, the interest accrued from investments made from money obtained through a lump sum is subject to federal and state tax. However, some people will do better by accepting a lump sum settlement, and investing it themselves. Many standard investments will give a greater long-term return than the annuities used in structured settlements.

How to Sell a Structured Settlement Payment:

Those who sell a part of their structured settlement do so to meet near-term requirements. There are various institutions that buy structured settlements. The transactions can vary in amount from ten thousand dollars to 1.5 million dollars. More than two-thirds of the states in the United States allow individuals to sell structured settlements. According to the federal law HR 2884, annuity owners do not come under any tax obligations as a result of selling their structured settlements

Before you sell your settlement you should do some research and check the purchasers’ past payment record and their relationship with insurance companies and what if the purchaser go out of business.  In some states it is mandatory to obtain tax and financial advice.  However, it is compulsory to take advance approval from court as set by state and federal laws.  Since the buying company has to make a profit, the lump sum they pay is less than the total structured payment.  Unless it is absolutely necessary, selling a structured settlement is not a goof idea.

Restrictions for Selling a Structured Settlement:

About two thirds of states have enacted laws which restrict the sale of structured settlements, and tax-free structured settlements are also subject to federal restrictions on their sale to a third party. Also, some insurance companies will not assign or transfer annuities to third parties, to discourage the sale of structured settlements. As a consequence, depending upon where you live and the terms of your annuities, it may not be possible for you to sell your settlement.

Other Factors to Consider for Selling:

Before entering into a structured settlement one should be on guard for potential exploitation in relation to the settlement, such as:

v       Excessive Commissions:   Annuities are highly profitable for insurance companies and their agents may use pressure or unfair means to sell your settlement.  Plaintiffs should compare the fees and commissions charged for similar settlement packages by a variety of insurance companies, to make sure that they are in fact getting full value.

v       Conflict of interest:  Some time the plaintiff’s attorney may also be in the insurance business or refers the client to a particular financial planner without disclosing his vested interest.

v       Life Expectancy:  One’s life expectancy and the length of the structured settlement must be considered. and whether it is appropriate to enter into an annuity where payments will cease upon death.  It will make sense to insist upon an annuity that pays a minimum number of payments, or one that will pay a balance into the plaintiff's estate.

v       Using Multiple Insurance Companies – If the settlement is large, it is appropriate to purchase annuities for a structured settlement from several different companies, dividing the settlement between those companies. This will provide protection in the event any of those companies defaults or goes out of business.  

This Article is only for general information and should not be considered a legal advice.  For more detailed information, please visit the following links.

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