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 defense: simplicity, provided the claimant will accept the defendant's creditworthiness.

   Disadvantage to defense: creation of a hard liability that must be carried on the company's books.

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 defense: allocating assets to meet future obligations offsets the long-term structure liabilities. The company may be allowed to eliminate the liabilities from its balance sheet altogether, or at least present them as a footnote. Use of an annuity policy generally means reliable delivery of checks and requires no ongoing direct contact with the clalimant. Defense retains ownership of the assets (the annuity policy).

   Disadvantage to defense: future payments remain a contingent liability. Any failure of the annuity company reinstates the liabilities as direct obligations.

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 defense: 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.] Defense secures a complete extinguishment of liability.

   Disadvantage to defense:a little extra paperwork.

Reality: the vast majority of cases are assigned settlements. This is generally acceptable to claimants 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.