The Primary Market

Structured settlements are used to settle lawsuits and claims, primarily personal injury and tort claims. Instead of the plaintiff/claimant being paid a lump sum to settle their claim, a structured settlement generally provides for payments (monthly, periodic lump sum, or both) to be made to the plaintiff/claimant over a long period of time, 20, 30, 40 years or longer, or perhaps for as long as the plaintiff/claimant is alive. When employed appropriately by a knowledgeable, informed professional who understands the advantages and disadvantages of structured settlements and thoroughly explains the structured settlement to the plaintiff/claimant, they are useful and valuable tools that promote the settlement and resolution of lawsuits and claims and provide additional benefits to the parties involved in the structure.

Those with the most knowledge of structured settlements believe that the genesis for what has grown to be a multi-billion dollar structured settlement primary market was in the early 1980’s when a pharmaceutical company that had sold a drug to expectant mothers that caused birth defects in their children on a massive scale. When it appeared that the pharmaceutical company was going to be financially unable to satisfy all of the claims if money was paid out in lump sums to those who were injured, the concept of “structuring” the payouts to the claimants over time seemed to be a good alternative. Structured settlements are often used to settle claims/lawsuits involving minors, in order to defer their receipt of funds until after they reach the age of majority. Structured settlements are also popular tools for settling large, catastrophic injury cases, in order to provide the settling party a recurring, reliable payment stream. Some would argue that structured settlements were primarily intended, and are most appropriate for, settling catastrophic injury cases and claims involving minors. However, it is indisputable that structured settlements are now used to settle all types of claims and lawsuits, large and small, throughout the country.

In the 1980’s Congress enacted laws that bestowed tax benefits on structured settlements and those tax benefits were not limited to the settling claimant. While section 104 of the Tax Code provides that income received in settlement of personal injury lawsuit/claim or workers compensation claim, whether received in a lump sum or by way of periodic payments, is exempt from the recipient’s income, that is not the only tax advantage of structured settlements. Section 130 of the Tax Code allows the parties to the structured settlement to purchase an annuity or other “qualified funding asset” to fund the obligation to make the future periodic payments and the parties that fund structured settlements with annuities also receive tax benefits. Furthermore, it is generally accepted that structured settlements allow defendants and casualty insurance carriers to settle lawsuits and claims for less than with a lump sum.

Aside from the tax benefits, life companies that issue structured settlement annuities and structured settlement brokers who advocated and arranged structured settlements, in lieu of one-time, lump sum settlements, also benefitted greatly from the dramatic increase in structured settlements.

As the primary market for structured settlements grew dramatically, the disadvantages of structured settlements became more apparent. The tax laws that encouraged structured settlements, particularly those that involved qualified assignments, came with a price. Specifically, the tax laws limited the flexibility and liquidity of such settlements by restricting the future periodic payments from being “increased, decreased, accelerated, or deferred,” once the arrangement was agreed to by the settling parties. The inflexibility of the structured settlement arrangement for the payee is what led to the development of the secondary market.