What is a Structures Annuity Settlement?
Structured mapping, in essence, guarantees a tax-exempt annuity. A structured settlement is a way of paying or settling a claim for damages on a regular basis over a period of time or for life. Installment payments are usually presented within a minimum of five years.
As with any compensation required or lawfully provided for wrongful death or death, the payment of a settlement is tax-free. However, if the payee uses the money to make a profit, such as interest, investment growth or capital gain, that portion is taxable.
Structured placements are increasingly popular among insurance companies, plaintiffs and defendants. For recipients, a structured solution is a stream of tax-free and credit-free payments that can last for years or years. For insurance companies or other individuals making structured solutions, the cash required to buy an annuity may be lower than the compensation provided.
Structured solutions can be very flexible in design. Payments can be planned to increase at certain points in time, such as when surgery is needed or large medical expenses are expected later in life. Payments can be indexed at a fixed interest rate or linked to the Consumer Price Index to offset inflation. They can also enter a series of payments at once.
About half of all important cases in Canada are settled based on at least part of the settlement paid with a series of tax-exempt payments over a certain period of time or claimant’s time.
How is a Structures Annuity Settlement created?
The unsuccessful party in the lawsuit (or its insurance company) buys the right annuity to meet the required payment to the successful party. An annuity is non-transferable, non-assignable and non-transferable. This means that no one (including creditors) can change or terminate an annuity under any circumstances.
An annuity payment is generally guaranteed for a specified period by the insurance industry, but the original defendant is ultimately responsible for each payment to the claimant. The “guarantee period” maybe for the first few decades of a life annuity or for a fixed term.
The right to draft a settlement must be negotiated in the settlement process and must be part of the documented settlement agreement. Funds to purchase an annuity must pass from the defendant or their agent to the annuity company or its agent. You cannot accept settlement funds first and then buy your own structured settlement joke after the fact. An annuity must, in fact, be purchased by the defendant or the insurance company. In the weeks leading up to the settlement, the claimant must ensure that his or her attorney reserves the right to arrange any part of the settlement.
In theory, anyone with a life insurance license can sell a structured settlement annuity. Without special experience, however, a structured settlement may be made improperly leaving the claimant with significant tax liability. Structured settlement brokers (of which there are about a dozen in Canada) are well-known in the legal profession and the insurance community. A structured solution broker will usually provide all the necessary documents and help calculate the appropriate structure.
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