Structured Settlements: Best Practices

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Structured Settlements: Best Practices

Have you ever had a client ask you if you can offer structured settlement annuities? Do you have any clients that are attorneys? Or have you simply heard the late-night television commercials about ‘I want my cash now’ and wondered what it was all about?

What is a structured settlement?  A structured settlement annuity arises from a legal settlement (usually from a personal physical injury claim) in which the claimant receives a series of periodic payments in the future and, usually, some amount of cash at the time of settlement.  The future payments are usually funded by a commercial annuity offered by nine different life insurance companies and is purchased by the defendant or the defendant’s insurance company.  Structured settlement annuities are governed by different tax laws than other retail annuities, so there are important points to consider with a structured settlement: 1) the claimant cannot have constructive receipt of the settlement funds and cannot directly purchase the annuity; and 2) the claimant does not own the annuity; it is owned by either the defendant’s insurance company, or, most commonly, by a third party assignee that is corporately related to the issuing life insurance company.  The claimant has the right to receive the payments, but has no rights of ownership.  These aspects are in place to preserve the tax-free or tax-deferred nature of the periodic payments.


In addition to claimants involved in a legal settlement, attorneys who receive contingency-based fees can opt to structure their fees at the time of settlement in order to defer income and taxation, even if the claimant does not want to structure a portion of their settlement.  The same process applies to structured attorneys’ fees as outlined above in order to preserve the tax deferral.


Most cases involve some type of physical injury, such as car accidents, medical malpractice claims, injuries to children and work-related injuries. For any case involving a physical injury, the settlement money is tax-free under 104(a) of the Tax Code.  Other cases involving emotional distress, discrimination, wrongful termination, etc. are referred to as ‘non-qualified’ since the entire settlement is taxable to the claimant.  The benefit of a structured settlement to claimants is either a completely tax-free payout or tax-deferral of the proceeds, depending on the type of settlement.


Hypothetical (but Typical) Case.  The father of two young children was killed in an auto accident.  The surviving spouse/mother contacted the family’s financial advisor and asked him to assist her and her attorney with the settlement against the truck driver and his employer.   After many settlement negotiations, the settlement was successfully completed and settled for a total of $3,000,000.00.  After attorney’s fees ($999,900.00) and costs and hospital liens, the family’s net settlement was $1,950,000.00 with $600,000.00 allocated to the children as a structured settlement.  The advisor contacted the AVITAS Division of Millennium Settlements as soon as the attorney mentioned that a structured annuity would be needed for the children’s portion of the settlement.


The AVITAS Sales Representative explained the steps of the structured settlement process to the advisor. They worked together with the mother to create needs-based structured settlement annuities for each child which included guaranteed payments for college tuition, guaranteed monthly income and a large lump sum payment for reinvestment at age 30—all payments would be tax-free.  In addition to the structured settlement annuities, the financial advisor and AVITAS Sales Representative coordinated the annuities with other financial products—a life insurance policy on the mother of the children to ensure the children will be protected should the mother have an untimely death as well as an investment account and other products in order to create a comprehensive financial plan for the family’s future needs.


Best Practices.  When you have a potential case, it is best to get the AVITAS team involved as soon as you can since timing is always a concern for attorneys.  We work as a team—you as the lead contact for your client and attorney and the AVITAS representative as your ‘back office’ and structured settlement expert—to assist the client and attorney throughout the settlement process and ideally, well before the case settles to have time to fully develop the plan for the client.  The AVITAS representative can help assess if a structured settlement is an appropriate option for the client; assist the attorneys during mediation, provide all structured settlement quotes and draft the settlement documents for the attorneys containing the specific language needed to comply with the appropriate Tax Codes.


I’m interested.  Now what?  If you have existing attorney clients, family or friends, it is as simple as letting them know that you, as their advisor, are able to offer them and their clients structured settlement services through your company's partnership with Millennium Settlements.  You can contact the AVITAS Team of Millennium Settlements at 866-670-9288 or to learn more.





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