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What is a structured settlement? A structured settlement as it is called is modeled after an annuity. Structured settlements work as as an annuity would when given as part of a lawsuit, injury, or any other settlement. Structured settlements are set up in such a way that you are paid over an extended period time instead of given a lump sum cash payout. Structured settlements were first taken into consideration in the legislative process in 1982. Their were various provisions- or changes in the tax code- that made what is considered ‘qualified’ structured settlements more beneficial to those buying the annuity as part of the settlement they are giving. The United States Congress made these changes as a way to make larger settlements more preferable to both parties involved.
Today millions of people choose a structured settlement payout over having a lump sum payment made. Often times too courts will award structured settlements are a part of a compensation or injury claim. The defendant will buy the annuity. It is then paid out over time to the claimant. Although claims typically pay out over time, it can be beneficial for the owner of the structured settlement (or annuity) to sell their structured settlement for a lump sum. New York was one particular State that had changes made to its state laws to make structured settlements more agreeable to the party winning the settlement. Prior to this those parties did not always receive adequate compensation. The reason for this is that the structured settlement system itself is relatively new in America and actually started in Canada in the 1970s.
Under typical structured settlements guidelines the individual receiving the settlement will have payments made to them for an extended period of time. Other times they will receive payments for a lifetime. This system insulates the ‘victim’ from loses that could otherwise be incurred if they were to meet economic hardship. It also makes the settlement process much more palatable to defendants.
Prior to 2002 many states did not have regulations in place regarding structured settlement factoring. As a general rule they followed the guidelines mandated in IRC 5891. Because of this a considerable amount of transfers of structured settlements annuities between the years of 1988 and 2002 were not court ordered as they would be today. The approval process can take from a few weeks to months. After the settlement is fully transferred the party buying the settlement takes on all risks associated with the settlement. Most structured settlement companies then have arrangements made in advance to sell said settlement to a financial institution at a particular margin or sell them as securities at a later date. Many of these securities (if they have qualified settlements as part of their structure) are considered triple AAA. The securities have various other financial products in them as well.
Today the ‘qualified structured settlement’ is the most common of all settlements. Victims wishing to have a lump sum payout can seek a structured settlement company that will buy their settlement and take on associated risks. Often times this is preferable due to the nature of the settlement as the settlement holder was injured and therefore unable to work.
Check back with us in future as we will posting articles with more specific examples of structured settlements history.