Featured Video Play Icon
How to substantiate a settlement agreement
March 21, 2014
Taxes on compounded growth on principal amount in annuity
March 21, 2014
Show all

Any disadvantages to a structured settlement agreement?

There are some risks with a structured settlement agreement. First, one main concern for defendants is that a third party assignee or payor may become insolvent. With structured settlements, it is important that the plaintiff not own the annuity. That is why, normally, the defendant makes a single lump sum payment to a third party assignee (usually a life insurance company) who then becomes obligated to make payments to the plaintiff. The insurance company then purchases or funds an annuity that thereafter funds the plaintiff’s periodic payments. In this way, the plaintiff does not own the annuity.

Second, the plaintiff typically cannot alter the amount of annuity payments once the structured settlement is finalized. This could be unfortunate if the plaintiff’s financial circumstances were to change, and he finds himself needing more or all of the annuity immediately (e.g. to pay for unanticipated or unexpected expenses).

Third, the plaintiff typically holds no rights to the annuity greater than that of an unsecured general creditor. As mentioned above, it is important that the plaintiff not be the owner of the annuity—otherwise, it may trigger inclusion in gross income of the entire settlement amount (and thus taxation) for the current year under the doctrines of economic benefit and constructive receipt.