Structure of the Deal

Structured Settlements must be arranged in precise fashion to secure the desired tax treatment for all parties and there is a narrow range of acceptable formats. Most structured settlements will conform to one of the following three models:

1. DIRECT SETTLEMENT Defendant agrees to make future payments directly to the plaintiff

   Advantage to plaintiff simplicity, provided the defendant is creditworthy.

   Disadvantage to plaintiff: credit risk; if the defendant goes out of business or becomes financially impaired, future payments may stop.

2. FUNDED SETTLEMENT The defendant agrees to make future payments to the plaintiff and purchases a funding vehicle (i.e., an annuity contract) to make the payments on their behalf.

   Advantage to plaintiff slightly more secure in that the defendant has allocated funds to secure future payments. Use of an annuity policy will generally mean reliable delivery of checks and requires no ongoing direct contact with the defendant.

   Disadvantage to plaintiff: the defendant still owns the funding vehicle and can have the payments terminated or redirected. In a bankruptcy, the funding vehicle would become an asset available to creditors and the plaintiff (as a potentially unsecured creditor) would have to take their place in line.

3. ASSIGNED SETTLEMENT The defendant agrees to assign their obligation for future payments to a third party who then buys and holds a funding vehicle to make future payments to the plaintiff.

   Advantage to plaintiff future payments are secured with a funding vehicle that is no longer owned by the defendant. Credit risk transfers from the original defendant to the assignment company. [These are typically special-purpose corporations affiliated with the life insurance company whose annuity is used to fund the payments. They assume liability for future payments from the defendant via novation, and then purchase an annuity contract to match their future payment obligations.]

   Disadvantage to plaintiff: plaintiff is now dependant on the assignment company for all payments. There is no recourse with regard to the original defendant if any problems arise on future payments. The fundamental security of these arrangements still lies in the quality of the annuity policy the assignment company uses to fund its obligations. The use of top-tier companies is key to long-term security.

Reality: the vast majority of cases are assigned settlements. This is generally acceptable to plaintiffs provided acceptable credit ratings and security provisions are in place.

Absent the ability to assign away future liabilities, most defendants would not agree to structure settlements for plaintiffs.