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.
- 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
- The defendant assigns its future
payment obligation to an assignment company that is
an affiliate of the life insurance company.
assignment company becomes responsible for making the
future periodic payments specified in the settlement
- The assignment company purchases
a structured settlement annuity from the life insurance
company with funds provided by the defendant.
life insurance company guarantees that the assignment
company will make all the future payments.
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.