Alternatives for Financing a Structured Settlement
As mentioned previously, a structured settlement, unlike a lump sum settlement, creates a contractual duty to make future payments to the claimant. Retaining this obligation is often unattractive to the defendant (which is more often than not represented by a casualty insurer), as there exists a desire to "close the file" and end the expense associated with handling a claim. Hence, in a vast majority of circumstances, the "duty to pay" is transferred to a third party rather than "self-financed."
A transfer of the obligation to make structured settlement payments is commonly known as an "assignment" (containing both a contractual duty to make payments as well as a full release from tort liability). Because it is a "full release," the assignment entails the injured party agreeing to look exclusively to the new obligor for all future payments.
The predominant method for a defendant/casualty insurer to transfer its structured settlement obligation is by qualified assignment under Section 130 of the Internal Revenue Code. In fact, this is the only method of transfer available to a self-insured. Section 130 provides that the amount paid to a third party (i.e., injured party) for assuming a structured settlement obligation may be excluded from the third party's income, provided that the following conditions are met.
- The obligation that is transferred must be an obligation to make a structured settlement on account of "personal injury or sickness (in a case involving physical injury or physical sickness)."
- The claimant must be able to exclude such payments under Section 104(a)(2) of the Internal Revenue Code.
- The third party (the new obligor) must purchase an annuity or a United States debt instrument to fund the obligation within 60 days of the date of the qualified assignment.