Types Of Structured Settlement Cases
What Case Is Considered To Be Structured?
Structured settlements represent an alternative to, rather than a replacement for, lump-sum settlements; that is, they are not appropriate in all cases. For example, a structured settlement may not be appropriate in the case of a claimant who would like to purchase a business, particularly if the business is within the claimant’s ability and would assist in his or her rehabilitation to a productive life.
Nonetheless, there are a wide variety of circumstances in which structures are a most appropriate means of settlement. These circumstances can be categorized by reference to the nature of both the claim and the claimant:
A-Claim Types Amenable to Structured Settlements :
1-Excess of $50,000
Although structured settlements can be devised on the basis of any principal, $50,000 is generally considered the point at which the additional administrative cost of designing and negotiating a structured settlement is justified by the tax and loss payment savings produced. Infants and claimants in high tax brackets, however, are clear exceptions to this rule. In the case of infants, given that payments are deferred often ten to fifteen years, the investment of even a small amount in a structured settlement can result in substantial payments eventually being generated. Similarly, in the case of claimants who are either in a high tax bracket to begin with or would be pushed into a higher tax bracket by the interest from a lump sum, the investment of, again, even a small amount in a structured settlement can produce significant tax savings.
2-Serious Bodily Injury
The more serious the injury, the greater the damages and therefore the greater the tax and loss payment savings structured settlements have to offer. Moreover, the more serious the injury, the greater the future care costs and, as will be explained below, the greater, again, the benefits structures have to offer.
3-Fatal Injury and Dependency
Fatal injury or wrongful death claims in tort are intended to compensate the surviving dependants for their future loss of support. This type of loss is assessed on the basis of after-tax dollars in most Canadian jurisdictions and subsequently “grossed-up” for the tax that investment of this amount would attract. A structured settlement allows the casualty insurer to avoid the expense of “gross-up” and return some of these savings to the claimant(s) by way of enriched benefits. Moreover, regardless of “gross-up”, structured settlements still offer, as explained above, tax and loss payment savings in proportion to the size of the loss. Benefits of Using Structured Settlements in Claims Negotiations
4-Future Care
Like fatal injury claims, future care claims in tort are assessed on the basis of after-tax dollars in most Canadian jurisdictions and subsequently “grossed-up” for taxes. Consequently, for the reasons cited above, this type of claim is also amenable to a structured settlement.
5-Future Lost Income
Future lost income claims in tort are assessed on a pre-tax basis in most Canadian jurisdictions and therefore there are no “gross-up” savings associated with the use of structured settlements. Nonetheless, a structure can still produce tax and loss payment savings for claimants and casualty insurers, respectively, in proportion to the size of the loss.
6-Excess Limits
Lump-sum damages often exceed the liability limits of the casualty policy in question. This can result in the personal assets of the liable insured being placed at risk, the claimant being confronted with the expense of collecting against the personal assets of the liable insured, and, ultimately, a “bad faith” suit being launched by the liable insured against the casualty insurer.3 These cases can, however, often be resolved within the liability limits by taking advantage of the tax and loss payment savings that structured settlements offer.
7-Multiple Parties
As in the case of excess limits claims, structured settlements can be used to resolve claims in which there are multiple claimants and/or casualty insurers and limited compensatory funds.
8-Questionable Liability or Quantum
Structured settlements offer a compromise solution to claims in which liability or quantum is inconclusive and the potential loss payment is significant. Again, by virtue of the tax and loss payment savings offered by structured settlements, the risk of an “all or nothing” outcome can be avoided and replaced by an outcome acceptable to both claimant and casualty insurer.
9-Punitive Damages
The tax and loss payment savings realized through structured settlements provide an effective means of minimizing both the size and attendant adverse publicity of punitive or exemplary damage claims.
10-First Party Claims (Accident Benefits)
Because first party Accident Benefits payments are made directly by the casualty insurer on a tax-free, periodic basis to begin with, there is no tax advantage to structured settlements in this context. Nonetheless, the fact that Accident Benefits and structured settlements both produce tax-free income makes structured settlements a most appropriate means of evaluating and settling Accident Benefits claims.
B-Claimant Types Amenable to Structured Settlements:
1-Infants
Structured settlements are almost invariably appropriate in the case of infants. As explained above, virtually no principal amount is too small for investment in a structure if the claimant is relatively young. The rate of return on investment in a structured settlement usually exceeds the interest earned on a lump sum paid into court or held in trust. Moreover, although investment income from a lump sum is usually tax exempt until an infant reaches the age of twenty-one, a structure can extend the tax exemption period beyond twenty-one and thereby produce the tax and loss payment savings cited above. Finally, a structured settlement, because of its periodic nature, can provide protection against premature dissipation, which is invariably a large risk, particularly at age of majority.
2-Financially Unsophisticated
Most injured claimants have neither the ability nor the desire to manage an investment portfolio of significance. Structured settlements are guaranteed and self-managing and therefore preclude the risk of premature dissipation and the need and expense associated with financial management.
3-Reduced Life Expectancy
Structured settlements almost invariably provide higher rates of return than conventional investments for claimants who, by virtue of their injury or life conditions, have a shorter than normal life expectancy.
4-Compensation Neurosis
Structured settlements, because they tend to produce earlier settlements in a less adversarial fashion, may be of therapeutic value in the context of claimants suffering from, or likely to suffer from, compensation neurosis.
5-Marginal Rate of Income Taxation
As explained above, claimants who are either in a high income tax bracket to begin with, or would be pushed into a higher income tax bracket by the interest earned on the investment of a lump sum, would derive a larger benefit from tax-free structure income.
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