Discover how structured settlements provide tax-free financial security for personal injury plaintiffs, including the benefits and strategies
After the parties have agreed to the amount of compensation in a settlement negotiation for a case of personal injury, the next question would be how the amount will be received by the injured party. One of the options that parties can consider are structured settlements – this is apart from a lump sum payment or a mix of both methods.
In this article, we’ll discuss what structured settlements are, how they’re made, and some legal considerations when negotiating this type of deal. This can be used by lawyers who want to know more about these deals, as well as their clients who may be considering this option.
Personal injury cases often result in out-of-court settlements between the plaintiff and the defendant, including the defendant’s insurance company. In such a case, a structured settlement or annuity contract payout is one of the methods for releasing compensation to the plaintiff. It may also be a condition for either of the parties to reach a settlement, such as when it’s required by the defendant’s insurance company.
Structured settlements are one of the methods for the plaintiff to receive the agreed injury payout from the defendant or the insurer; the other method being a lump-sum settlement. By agreeing to a structured settlement, the plaintiff in a case for injury, disability, or death will receive the annuities gradually, depending on the period agreed upon, such as:
The period over which the payment is made (e.g., for three years or five years) can also be agreed on by the parties. This is applicable to all cases of personal injury and torts, such as car accidents or medical malpractice.
However, using a structured settlement does not mean that plaintiffs cannot receive it in a lump sum manner. In other cases, it can be a mix of structured and lump sum settlement payments. For instance, a lump sum payment can be made after the third year, with the first and second years being in a structured settlement.
Watch this video to know more about structured settlements:
You can also consult another legal professional to know more about structured settlements. Check out this Special Report on Canada’s Best Personal Injury Law Firms from Canadian Lawyer Magazine, one of our sister publications.
There are several advantages as to why parties opt to do a structured settlement. One of the main reasons is plainly because it’s ‘structured’ — plaintiffs have a feeling of control over how payments are made. This also goes the same way for defendants and their insurance companies.
Because of the nature of a structured settlement, it’s the plaintiff who needs to adjust to how their injury payouts are structured, and not the other way around. If they’re paying rent, for instance, then a monthly payment would be the best option. If they want to receive a larger amount but at a lesser frequency, then they may want to opt for quarterly payments.
Aside from the time-element of how periodic nature of the payments, a structured settlement can be adjusted according to the payout amounts. The payments may also gradually increase after a certain period; for example, they may slightly increase every year as an offset to inflation.
As such, this type of flexibility is the most sought-after feature of a structured settlement.
Generally, compensation and personal injury settlement amounts are tax-free in Canada. Whether for special or general damages, settlement payouts are non-taxable amounts and excluded from the recipient's income for the purpose of determining their income tax liabilities. This is regardless of whether they're paid as a lump sum or through a structured settlement.
However, there are certain exceptions to this rule:
It means that both an injured person’s trustee and creditors cannot use the personal injury payouts to pay off their debts. At the very least, these payouts do not form part of the debtor-injured person’s property for the purpose of paying their creditors, according to the Bankruptcy and Insolvency Act (BIA). This is true, especially for payments needed by the debtor-injured person for daily living expenses.
Similar to what may be taxable in personal injury compensation, trustees can somehow take a share of that portion of the compensation for the injured person’s lost income.
Using a structured settlement is not an automatic substitution to lump sum payments, since there are instances where it’s not effective for the parties. Depending on the situation, counsels may also agree that having a lump sum payment would instead be more suited for the needs of the plaintiff. This ultimately falls on a judgment call on every party to the negotiation process to evaluate the case and make a sound decision.
From the perspective of the recipient, one of the cons of using a structured settlement are the strict policies may prevent them from using the payments whenever the need arises. Here’s a brief video about this:
This directory of the best personal injury lawyers in Canada as ranked by Lexpert is another tool you can use when looking for lawyers to learn about structured settlements from. Lexpert is one of our sister publications.
Related to its being a protected fund, the money invested in a structured settlement is generally not liquid. It’s difficult to easily convert them to hard cold cash should there be an immediate need for it.
Another thing: the possibility that the insurance company defaults on its payment. Although a structured settlement and any other funds handled by an insurer is secured and backed up, it’s not always the case.
But since these are all risks, it can be managed by ensuring that the fund is:
Not all settlements can be structured in a way that is gradually and periodically released to the plaintiff. Here are some of the things where structured settlements are not as effective as it seems:
when the personal injury payout is low: as properly justified by evidence, having a lump sum payment may be the better option if the amount of compensation is not that high, as this is more advantageous for the defendant and their insurer
when the recipient still has large bills to pay: while it depends on the purpose of the award, if the injured person still has large payables (e.g., medical expenses) that needs immediate payment, then a structured settlement is not an option
Outside of these circumstances, parties may then consider using a structured settlement. If in line with the law, it’s still the pleasure of the parties that will dictate whether to use such arrangements in the end.
On the other hand, there are some legal and practical considerations that parties should consider when deciding whether to use a structured settlement. At most, here are some of the instances where structured settlements are best suited for:
to pay future costs: if part of the settlement is to pay a future cost, whether it’s for future medical bills, costs of care, or to offset lost income, a structured settlement will be a more appropriate method than to pay a pre-determined lump sum; this is also applicable for future costs when the injured party is still young and would need constant care because of the injury
if required by the law: some provincial laws and rules of court may require that structured settlements be pursued when a certain range or amount has been reached as the compensation for personal injury or malpractice cases
to protect the defendant: when news that the defendant paid a hefty lump sum would be damaging to their image as a public figure, breaking this large sum of money into tiny bits over an extended period will be more beneficial
to help in financial management: especially when the injured party has no financial capacity and knowledge to manage a huge lump sum of compensation, it may be financially wiser to do a structured settlement instead
to bypass policy limits: if the compensation is huge, and the insurance policy has a limit to such payment, using a structured settlement may be used to bypass these policy limits for a win-win solution — the injured party gets what they deserve, and without using the defendant’s personal properties to satisfy the compensation
It’s therefore upon the legal counsels of both sides to evaluate the case head-on to determine if using structured settlements are required or proper for the case.
When negotiating a personal injury payout with structured settlements in mind, here’s a process that counsels and parties can use during the said negotiations:
We’ll discuss each of these steps below:
Every payout has different sub-details, depending on various factors, such as:
These parameters would tell both parties what should be included in the payout, which will be helpful later when deciding if a structured settlement is needed or not.
Here are some suggested main points that parties should consider as the sub-details of a personal injury payout:
When all these are specifically identified, parties can now use their calculators to determine the amount of each item.
After each item has now a corresponding amount, the bigger picture has been drawn that will help parties choose whether to do a structured settlement or a lump sum release. Having a tabular comparison would help both sides visualize the situation after they’ve agreed to either of these options and leave the negotiation table.
When the parties finally agreed on settling not just the amount to be paid, but also in the process these amounts will be released, it’s time to document everything in black and white. There should be particular attention to the details of the settlement agreement, since future disputes are solved using the very same agreement.
Settling compensation for a personal injury case is not an easy task to do, especially for lawyers representing any of the parties. As a way of easing things, settlements are structured as a win-win solution for everyone. For the best results out of the negotiations, counsels are urged to discover the ins and outs of structured settlements. At the end of the day, serving justice for the injured party, while considering the defendant’s own circumstances, should prevail over the dollars in question.
Other related topics about structured settlements can be found on our Personal Injury practice area page.
