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What is a structured settlement?

No, we do not mean your newly built house that’s starting to lean a little to the left — in which case a lawsuit may have to be filed against your contractor (but that’s a column for another time). We’re talking about settlements in lawsuits.

Where one party seeks money from the other party, a structured settlement is where the party defending the claim agrees to pay money to the claimant, but the payment is to be made over time in installments. In exchange for that payment arrangement, the party suing agrees to drop the lawsuit or waive the right to sue in the future over that claim.

Structured settlements are typically used in personal injury cases. But they can be in any case involving a claim for money compensation.

Structured settlements commonly involve the insurance carrier that provides liability coverage to the defendant — the party getting sued — to buy an annuity or perhaps U.S. treasury bonds. The purchase price for the annuity or bond is paid by the carrier to a financial company providing the annuity or bond investment. The injured party is named as the recipient of the periodic dividends issued from the income generated by that investment over the period of time agreed in the settlement.

The benefit of a structured settlement to the liability carrier for the defendant is the ability to remove the claim from its books because it typically sells or assigns the settlement obligation to the annuity provider right away. And it is usually cheaper since more money might be paid over time to the injured party from the annuity than a present value lump sum payment. This is particularly true in class actions where billions may have to be paid to thousands upon thousands of claimants.

The benefit of a structured settlement for the injured party is that it becomes a financial planning tool. For example, it might be a big help in trying to salvage Medicaid qualification that otherwise would be jeopardized by the injured party receiving a chunk of cash now as opposed to periodic payments spread into the future.

Structured settlement recipients can sell their future payment rights to companies for a discounted present value. This is typically done when the recipient has need for cash in the present — like catching up on house or car payments that are in default, or perhaps funding a kid through college.

Most states, including Illinois, require approval of such buyouts by a court judge. The policy behind this law is to make sure that the injured party does not foolishly or frivolously relinquish their right to future payments or give up their rights for an inadequate sale price.

All funds received by claimants in settlement of personal injury claims are exempt from taxes under IRS law. Tax laws also allow the sale or assignment of structured settlements without tax penalties between IRS-approved financial institutions. This promotes the use of structured settlements in both state and federal lawsuits.

Trying to straighten one’s crooked house foundation settlement, however, will always be very taxing.

Brett Kepley is a lawyer with Land of Lincoln Legal Aid Inc. Send questions to The Law Q&A, 302 N. First St., Champaign, IL 61820.