What is a ‘Structured Settlement’?
When a person suffers a serious injury as a result of medical malpractice or another cause, they are often better served by an award that provides ongoing income rather than a lump sum. If someone is rendered unable to work or cannot earn the income they once did due to their injuries, regular ongoing payments will better enable the person to manage their ongoing expenses than a large one-time payment would. In addition, if damages are awarded as a lump sum, there is a greater risk of mismanagement, which may have a significant negative impact on the plaintiff.
However, the problem with any income stream is that it is taxable. The value of the payments is thereby diluted. The solution would be to build the tax into the settlement, but that in turn increases the needed initial capital. The solution is a structured settlement.
A structured settlement is similar to an annuity. A sum of money is placed into an interest-bearing financial instrument and is then paid to the purchaser at fixed intervals for a set period of time.
A structured settlement is a guaranteed tax-exempt income stream, only available to people who are settling personal injury claims. The process entails using some or all of a personal injury settlement and depositing that sum with a life insurance company in exchange for guaranteed tax-free payments for a plaintiff’s lifetime or a certain period of time. The payments are not considered income by the Canadian Revenue Agency (CRA).
Personal Injury Damages
A large and crucial component of most malpractice actions is the loss of future income and the cost of treatment going forward. The damages sought in a personal injury action is not money they can afford to lose. Do they risk the uncertainties of the market for this money or do they take a more secure and guaranteed route? Further, under the market route, they might need to hire and pay a manager and would face an income tax burden. Yes, the court would gross-up their award to attempt to cover these expenses but there would always be some risk that the interest they made would not be enough to cover their needs.
How a Structured Settlement is Calculated
The amount and time period of a structured settlement will depend on a number of factors. Generally, the total amount of damages will be calculated based on a number of factors, including:
- age of the injured party
- income and income potential of the injured party
- costs associated with the injury, such as home care and medical equipment
- the severity of the injury
Once the amount is determined, the damages, as well as any costs associated with creating the structure, will be paid into an interest-bearing instrument and regular payments will be set for the specified period of time.
Structured Settlements: The Advantages
The advantages of a structured settlement are obvious. There would be a guaranteed income stream for life, it would not be taxed and no manager or management of a portfolio would be needed. This result can also be achieved for less money as the risk for the insurer would be based on the favourable impaired life rating of the injured plaintiff. Further, the payments are non-assignable and cannot be cashed in, which further protects the plaintiff. The annuity can also be structured to allow for varying periodic, or lump sums, to be paid out for larger expenses like tuition, home renovation etc.
A further advantage of this system is the interest-earning potential. Because the money will be earning interest while payments are made to the injured party, the actual amount paid out is likely to be significantly more over time than the original damages award.
A structure is still a voluntary decision and one cannot be forced upon the plaintiff. However, once a structured settlement is in place, it cannot be undone.
At Wise Health Law, our health law lawyers rely on their significant trial and civil litigation experience to provide our clients with exceptional guidance and representation in medical malpractice claims. To find out more about how we can help, contact us online, or at 416-915-4234 to schedule a consultation.