The History of Structured Settlements

Structured settlements have become increasingly common in the past few decades as a form of compensation for incidents involving personal injury, medical malpractice, and wrongful death. But how did structured settlements come about? And what laws at the federal and state level govern them? Here, we dive into the history of structured settlements.


 

The Origin of Structured Settlements

It was an unfortunate incident which spurred the creation of the structured settlement as a form of payment. In the 1960s, a pharmaceutical company created a drug called Thalidomide that was intended to treat morning sickness in pregnant women. However, the drug, which was used by thousands of women in Canada, also caused severe, life-threatening birth defects in their children. The company needed to compensate the survivors and help them to pay for the specialized health care that they needed. Because they would need care for the rest of their lives, a lump sum did not seem like a practical solution.

Although the first claims relating to the use of this drug began in Canada, similar cases were also filed in the United States. It was this case in particular which caused structured settlements to become a popular form of payment in medical malpractice disputes. 

 


 

Federal Structured Settlement Laws 

The history of structured settlements also includes the passing of numerous laws to protect the rights of individuals who receive structured settlements.

  • IRS Code Section 104

    Passed in 1954, prior to the first cases that resulted in structured settlements, this section of the IRS code was created to ensure that any cash settlement from a personal injury case would be tax exempt.
  • Periodic Payment Settlement Act

    In 1983, the IRS code was updated to specify that payments from structured settlements should also be tax-free. The Periodic Payment Settlement Act (PPSA) not only includes payments from personal injury cases, but it also covers money received for sickness and worker’s compensation cases.
  • Structured Settlement Protection Act

    While the PPSA guaranteed the tax-free status of payments, it did not necessarily protect the rights of those receiving them. Enacted in 2002, the Structured Settlement Protection Act (SSPA) imposed a 40% excise tax on any transaction that was not approved by an applicable state court. It was primarily enacted to protect structured settlement recipients and their dependents.

State Structured Settlement Laws  

States have their own laws regarding the sale of structured settlement payments. In fact, most states have a version of the Structured Settlement Protection Act. For example, some states require that sellers receive third-party advice before they sell their payments, while others stipulate that certain types of settlements, such as workers’ compensation, cannot be sold. It is important to understand your state’s requirements. Our representatives at J.G. Wentworth are knowledgeable of the requirements. 

Our own history with the sale of structured settlement payments affords us the knowledge and experience to streamline the process. To date, we’ve helped thousands of people just like you -- take a look at their structured settlement stories.

If you want to learn more, or you are considering selling your structured settlement payments, contact us today.

 

Works Cited

IRS Code Section 104: https://www.law.cornell.edu/uscode/text/26/104
https://www.webharvest.gov/congress109th/20061120085725/http://www.house.gov/jct/x-15-99.htm
Citation: Joint Committee on Taxation, Tax Treatment of Structured Settlement Arrangements, (JCX-15-99), March 16, 1999.

[Justification for Encouraging Structured Settlement]

The amount of damages in a case involving personal physical injuries or physical sickness may be based on the lifetime medical needs of the recipient. If a recipient chooses a lump sum settlement, there is a chance that the individual may, by design or poor luck, mismanage his or her funds so that future medical expenses are not met. If the recipient exhausts his or her funds, the individual may be in the position to receive medical care under Medicaid or in later years under Medicare. That is, the individual may be able to rely on Federally financed medical care in lieu of the medical care that was intended to have been provided by the personal injury award. Such a "moral hazard"(7) potential may justify a subsidy to encourage the use of a structured settlement arrangement in lieu of a lump sum payment to the recipient, to reduce the probability that such individuals need to make future claims on these government programs. Under the structured settlement arrangement, by contrast to the lump sum, it is argued that because the amount and period of the payments are fixed at the time of the settlement, the payments are more likely to be available in the future to cover anticipated medical expenses (assuming the payment stream is not transferred by the recipient).

[Structured Settlement Protection Act]

The bill would specifically provide that the occurrence of a structured settlement factoring transaction does not affect the tax treatment of the parties to the structured settlement under Code sections 72, 130 and 461(h). Thus, the bill would clarify that the exclusion for the assignee of the liability that is currently provided under section 130 would not be affected by the factoring transaction.

The bill would impose a reporting requirement on the person making the structured settlement payments. The bill would be effective for structured settlement factoring transactions occurring after the date of enactment of the bill.

Citation: Tax Treatment of Structured Settlements: Hearing before the Committee on Ways and Means, U.S. House of Representatives, 106th Cong. 1st Session., 1-86 (1999)

Note: This source includes a statement from J.G. Wentworth on page 80

[Pertaining to Periodic Payment Settlement Act]

In the past these awards have typically been paid by defendants to successful plaintiffs in the form of a single payment settlement. This approach has proven unsatisfactory, however, in many cases because it assumes that injured parties will wisely manage large sums of money so as to provide for their lifetime needs. In fact, many of these successful litigants, particularly minors, have dissipated their awards in a few years and are then without means of support. Periodic payments settlements, on the other hand, provide plaintiffs with a steady income over a long period of time and insulate them from pressures to squander their awards.

[State Structured Settlement Laws]

The Administration recognizes that the policy concern underlying the proposed tax-the long-term financial protection of injured persons--could also be addressed outside the Internal Revenue Code. However, such policy concern already underlies the favorable tax rules applicable to structured settlements. The proposed excise tax is intended to ensure the continued effectiveness of the existing tax rules in protecting the long-term financial security of injured persons. In addition, as of the close of calendar year 1998, we are aware of only three states-Illinois, Connecticut and Kentucky-that have passed laws requiring court approval of and fuller disclosure in connection with factoring transactions, and it is unclear whether and when other states might pass similar consumer protection laws.

[Articles on Thalidomide Lawsuits]

Washington Post 1984:
"Settlement Ends Last Thalidomide Lawsuits in North America." The Washington Post. (July 24, 1984 , Tuesday, Final Edition).

New York Times 1970:
“West German Thalidomide Maker Offers $27-Million Settlement.” The New York Times (January 27, 1970, Tuesday, Final Edition). 

Canadian Source with Information on Thalidomide Scandal:
http://www.thalidomide.ca/the-canadian-tragedy/

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