may also require the plaintiff to pay
additional tax based on the application of the Alternative Minimum Tax
under Internal Revenue Services rules.
Most plaintiffs will benefit from
spreading out the payments over
a period of years. Other plaintiffs
may choose to defer payments until
retirement or some other time when
their tax bracket is likely to be lower.
Plaintiffs who may want to utilize the
settlement funds for future expenses,
such as college tuition for their children, are also potential structured
settlement candidates.
Creating the Structured
Settlement
Any time future benefits are claimed,
analyze an illustration of present value
to show the present cost to purchase a
replacement benefit stream. The illus-
tration is a confidential evaluation tool
for the claims adjuster and defense
counsel, it is not created in the form of
a settlement offer.
The biggest benefit of the structured settlement is the ability to stretch the available money to meet the plaintiff’s needs.
The rate of return is usually better than
that available for similarly safe investments. Because investment income is
growing on a tax-deferred basis, the
return may be higher than the plaintiff
could achieve outside of the structure.
Using a structure can magnify even a
small increase in the offer and help settle
the case within the available authority.
Once the defense team has decided
on the correct evaluation of the claim,
they can make structured settlement
offers that show the periodic pay-
ment benefit streams. Allowance
must be made for attorney fees and
case expenses and these are usually,
but not always, funded by an upfront
lump sum payment in addition to
the periodic payments. To the extent
possible, based on available informa-
tion, settlement options for the peri-
odic payments should be planned to
meet the plaintiff’s unique financial
needs before negotiations. Since nego-
tiations often require timely altering
of the initial structured settlement
options created, it is important to have
a structured settlement broker either
in attendance or available by phone to
make real-time changes to the options
as the negotiations progress.
The plaintiffs’ lawyers may choose to
defer some or all of their fees. In some
cases, such as those based on a breach
of contract theory, this may help the
plaintiff avoid recognition of that portion of the settlement. Perhaps more
importantly, sophisticated plaintiffs’
practitioners will recognize the benefit
to themselves in deferring fees through
a structure. Because of the doctrine of
constructive receipt, this can only happen if there is a settlement. If the case
goes to final judgment with no further
available recourse, structuring is not
an option for either the plaintiff or the
attorney. As with money going directly
to the plaintiff, an attorney contingent
fee structure must be memorialized in
the settlement document.
Structuring is the only way to defer
recognition of taxable income paid to
settle an employment dispute. Because
there are no direct costs associated
with the structured settlement, it is
always a good idea to consider whether this tool can help.
Teddy Snyder, Esq., is a consultant for Ringler
Associates. Kenneth West, RPLU, CPCU, AIC,
is an Assistant Vice President and Senior
Claim Specialist for the Chubb Group of
Insurance Companies.
