Structured Settlement

A detailed explanation

A structured settlement is a single or series of future tax-free payments accepted as part of a settlement in addition to, or instead of, an up-front cash payment.

How it works

1. The claimant and the defendant agree to settle the claim for an up-front cash amount and a series of specified future payments. A settlement agreement is signed by both parties reflecting their agreement.
2. The defendant assigns its future payment obligation to an assignment company that is an affiliate of the life insurance company.
3. The assignment company becomes responsible for making the future periodic payments specified in the settlement agreement.
4. The assignment company purchases a structured settlement annuity from the life insurance company with funds provided by the defendant.
5. The life insurance company guarantees that the assignment company will make all the future payments.
6. The assignment company directs that the annuity payments be made directly to the claimant or to a trust created for the claimant.

Having the settlement agreement provide that the future payments come from the defendant, and then having this obligation assigned to an affiliate of the insurer issuing the annuity ensures that the entire amount of the payments, including the investment income provided by the annuity, will be tax-free as provided under Section 104(b) of the Internal Revenue Code. In addition to being tax-free, the agreed-upon future payments are not reduced by any fees or other costs and can be deposited directly into the claimant's bank or trust account.