Structured settlements are financial or insurance agreements as defined in the Internal Revenue Code – where a tort claim is resolved. What is a tort claim? What circumstances lead to a structured settlement? How is it arranged?
A tort is a harm done on someone because of a person’s behaviour. Contrary to popular belief a tort is not always an illegal act – it is more that has caused some form of harm or loss to another person. A tort claim maybe brought by anyone who had suffered loss. The person who has committed a tortious act is called a tortfeasor. The tort claim is somewhat referred to as payment to “damages” incurred from a tortious act, usually monetary compensation. Varied forms of a tortious act are vehicular accidents, false imprisonment, defamation, environmental pollution and many others. Torts maybe categorized as negligence, intentional or quasi-torts. The standard action in a tort is negligence.
Negligence acts include claims coming from car accidents and many personal injury accidents of many kinds including clinical negligence and workers negligence. Intentional torts, on the other hand, pertain to occupation or use of land. One form is trespassing. Quasi-torts are loosely grouped acts related to workers’ compensation which are alternatives to settle disputes between employee and employer.
Structured settlements were first used in Canada in the late 1960s and early 70s after a settlement on the case where children were affected by a chemical known as Thalidomide. Annuity or periodic payments were purchased for the kids involved and the payments were made via the Official Guardian of Ontario. This settlement has become popular in the United States in the 1970s as an option against lump sum settlements which are often affected by inflation rates. Lump sums as observed were spent in a short period of time; leaving a lot of the claimants in a destitute state after all the cash has been spent.
A structured settlement arises from a tort injury where the tortfeasor or defendant, in exchange for the dismissal of the case in court, agrees to pay the claimant from the “damages” incurred by his act as explained here. The periodic payments shall be made over time and may come in the form of insurance on the part of the claimant. The defendant may purchase an annuity from an insurance company or may assign its periodic payment obligations to a third party which in turn purchases a “qualified funding asset” to fund the payments. A claimant may also have an option to cash out or obtain a cash advance on once structured settlements rather than wait over a period of time.
Structured settlements have gained popularity over the years because of its many advantages. They are payments which are completely free from tax and are seen as totally secure.