Legal Question in Personal Injury in Maryland

Structuring, some basics

There are situations in which one may receive a large sum of money through a settlement. Often as compensation for personal injuries, such payouts get reduced because of costs of legal action:

fees, costs advanced

Medical and other costs,

Medical and related costs paid by the injured party's own insurer, who must be repaid (lien).

After all deductions have been made from the settlement the remaining amount may be paid out. Injured parties may also choose a "structured settlement," i.e., where the settlement is paid out in increments.

Structuring is often favored by insurance companies (who pay the settlement). The reasoning includes:

Protection against the injured party spending the award too quickly (most lump-sum awards spent in 5 yrs)

If injuries are catastrophic and the award large, to meet the needs for income and medical care in the future

Many courts prohibit parents to manage awards. Settlements also avoid ligation costs.

Procedures:

Structuring may be applied to all or a portion of an award. Procedures governing such settlements vary from state to state. Common elements include:

Negotiations-in order to determine the amount and duration of needed periodic payments, financial experts should be consulted.

Amount-there must be a determination regarding the available amount for periodic payments. This calculation may include setting aside amounts needed for fees, costs, medical bills, future medicals, lump-sum needed by the injured, etc.

Annuity Contract:

Parties must select and negotiate an "annuity contract" to fund the periodic payments. Annuity contracts are offered by some insurance companies, and may entail one lump-sum payment for a guaranteed stream of payments for a specified time or even for the life of the recipient.

Drafting of the agreement:

Some jurisdictions require court approval for the finalized structured settlement agreement.

Tax Benefit:

Besides guaranteeing a stream of income for a period or for life, there also may be federal tax advantages to a structured settlement. The Federal Periodic Payment Settlement Act expanded the injured taxpayer's benefits to allow the exclusion from income of periodic payments.

Annuity payments are based upon various factors, including how long the recipient is likely to live. The injured party may live longer and end up receiving substantially more than the original award or settlement, but the excess may also be tax free, providing the injured party never had receipt of the funds used to buy the annuity and has no ownership rights.