What Is A Structured Settlement?

Although most people don't know it, personal injury settlements are highly tax-sensitive. Planning one's settlement using "tax-smart" strategies can substantially increase total net payouts and help resolve cases that might not otherwise settle.

A structured settlement, sometimes called a "structure", is an agreement in which an injured person agrees to accept a series of payments over time (as opposed to a single lump sum) from a defendant or insurer in return for a release of his or her claim. The name refers to the fact that payments are structured to meet specific needs. Depending on the type of injury, these payments may be tax-free or tax-deferred.

The first payment is typically a check to cover attorney’s fees, liens, and expenses and to establish a cash reserve for the claimant. Future payments on assigned cases are backed by either U.S. Government bonds or annuity contracts from state-regulated life insurance companies*.

A typical structure might look like this:

$350,000 cash at settlement
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$2,000 per month guaranteed for life,
not less than 30 years certain
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$20,000 paid in year 5
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$40,000 paid in year 10
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$60,000 paid in year 15
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$100,000 paid in year 20
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*As required by tax law. See Internal Revenue Code Section 130