What Is A Structured Settlement or Periodic Payment?

A “structured settlement” is an alternative to a lump sum payment that may result from any of the following:

-        a private settlement or a legal claim between two or more parties

-        a court award or judgment resulting from a successful lawsuit

-        an insurance settlement

-        gambling winnings, including lottery and casino jackpots

-        structured annuities

-        sports or entertainment contracts

-        workers’ compensation settlements  or similar benefits

The term “periodic payment” is simply the legal definition of a structured settlement as set forth in the Internal Revenue Code.

History

Prior to the 1970s, most lawsuits and insurance settlements were paid out in one lump sum. This began to change as the number of personal injury awards grew and the amounts began increasing exponentially. Structured settlements were also encouraged by changes to the tax code, making this income tax-free under certain conditions.

The first system to utilize structured settlements was Canada, following a massive lawsuit over the drug thalidomide (infamous for causing birth defects). The concept began catching on in the U.S. a few years later. Today, structured settlements are part of statutory tort (personal injury) law throughout the English-speaking world as well as other nations where common law (precedent) is widely recognized and used in court decisions.

Legal/Tax/Financial Implications

In the U.S., structured settlements are regulated at both the federal level under the Internal Revenue Code (Section 5891(c) (1); 47 states also have laws in place governing these payments and for the protection of both recipients and payers.

Advantages and Disadvantages

Structured settlements have some distinct advantages over lump sum payments, not all of which have to do with taxes and other legal issues. Primarily, a structured settlement prevents people who have not reached the age of majority or are otherwise inexperienced with finances from receiving large sums of money.  A structured settlement can be set up as monthly benefits, periodic lump sums or a combination of both.  However, if there is a need for a large amount of cash for some reason, the flexibility of these payments may be limited. In such cases, selling structured settlement payments to a third party is a viable alternative.

About CBC

CBC Settlement Funding can provide you with a lump sum cash advance for all or part of structured settlements. Contact us today for more information on customized cash options to fit your financial needs.