Structured settlements are financial arrangements designed to provide long-term, tax-advantaged compensation to plaintiffs in personal injury, wrongful death, or other tort cases, ensuring a steady income stream rather than a single lump-sum payment. These settlements are typically established through negotiations between the plaintiff, defense counsel, and a structured settlement annuity provider, with terms that must comply with Internal Revenue Code § 104(a)(2), which governs the tax-exempt status of personal injury settlements. The process requires meticulous planning, as key variables—such as payment frequency, inflation adjustments, and guaranteed periods—must be tailored to the claimant's financial needs, medical prognosis, and life expectancy. Failure to properly structure the settlement can lead to unintended tax liabilities, liquidity shortfalls, or even disqualification from government benefits like Medicaid or Supplemental Security Income (SSI), making legal and financial expertise indispensable.

The first step in establishing a structured settlement is case evaluation, where the plaintiff's attorney assesses the viability of structured payments based on the severity of injuries, projected future medical costs, and the defendant's ability to fund the settlement. Catastrophic injury cases—such as those involving spinal cord damage, traumatic brain injuries, or permanent disability—are particularly well-suited for structured settlements, as they often require lifelong care and income stability. Attorneys must also consider jurisdictional nuances, as some states impose statutory requirements or judicial approval processes for structured settlements, particularly in cases involving minors or incapacitated adults. Additionally, the defendant's insurer or corporate entity must confirm their willingness to participate in a structured settlement, as some may prefer lump-sum payouts to close liabilities swiftly, necessitating skilled negotiation to align interests.

Once both parties agree in principle to a structured settlement, the next phase involves designing the payment schedule, a complex task requiring actuarial input to balance present needs with future security. Common structures include lump-sum front payments for immediate expenses (e.g., home modifications or medical equipment), followed by periodic payments (monthly, quarterly, or annually) for ongoing living costs. For plaintiffs with uncertain life expectancies, life-contingent payments may be appropriate, though these carry the risk of underpayment if the recipient dies prematurely, making guaranteed periods (e.g., 20 years certain) a safer alternative. Inflation-adjusted payments or cost-of-living riders can also be incorporated to preserve purchasing power, though these features may reduce initial payment amounts due to the annuity provider's increased long-term liability.

The selection of an annuity provider is a critical decision, as the financial stability of the insurer directly impacts the plaintiff's future security. Under the Structured Settlement Protection Acts (SSPAs) adopted by most states, the defendant (or their insurer) must purchase the annuity from a highly rated life insurance company, typically one with an A.M. Best rating of "A" or higher, to minimize default risk. Plaintiffs' attorneys should scrutinize the insurer's claims-paying history, as annuity contracts are only as secure as the issuer's ability to meet obligations decades into the future. In some cases, defendants may attempt to use lesser-rated insurers to reduce costs, making it imperative for plaintiffs to demand transparency and, if necessary, petition the court to reject subpar annuity proposals.

With the payment schedule and annuity provider finalized, the parties must draft a settlement agreement that explicitly outlines the terms, including payment amounts, timing, contingencies, and the consequences of default. This agreement must comply with IRS Revenue Rulings 79-220 and 2005-30, which clarify that structured settlements retain tax-free status only if the payment rights are non-assignable and the plaintiff lacks constructive receipt of the funds. The agreement should also address sovereign immunity issues if the defendant is a government entity, as well as Medicare Secondary Payer (MSP) compliance to avoid future reimbursement claims by the Centers for Medicare & Medicaid Services (CMS). Any ambiguities in the contract could lead to disputes, making legal review by an attorney well-versed in structured settlement law essential.

For settlements involving minors or legally incapacitated adults, court approval is typically required to ensure the arrangement serves the claimant's best interests. Judges will examine whether the settlement provides adequate funding for future care, education, or other needs, often relying on guardian ad litem reports or testimony from financial experts. Some jurisdictions mandate that a portion of the settlement be placed into a blocked trust or court-supervised account until the beneficiary reaches majority age, adding another layer of complexity. Failure to secure judicial approval can render the settlement void, leaving the plaintiff without recourse, underscoring the need for strict adherence to procedural requirements.

Once approved, the defendant or their insurer purchases the annuity policy from the designated provider, which then assumes responsibility for making payments according to the agreed schedule. The annuity is owned by the defendant or insurer, not the plaintiff, to maintain tax-free status under IRC § 104(a)(2), though the plaintiff is the irrevocable beneficiary. This distinction is crucial, as any transfer of ownership or control to the plaintiff could trigger taxation under the "constructive receipt" doctrine. The annuity contract should explicitly prohibit assignments or accelerations, except in limited circumstances permitted under the Structured Settlement Protection Acts, such as financial hardship or terminal illness.

Despite the irrevocable nature of structured settlements, plaintiffs occasionally seek to sell future payments for immediate cash, a process governed by state and federal factoring laws. The Victims of Terrorism Tax Relief Act of 2001 and subsequent state SSPAs require court approval for such transfers, with judges mandated to assess whether the sale is in the plaintiff's best interest and whether the factoring company is offering fair market value. Predatory factoring companies often exploit financially distressed plaintiffs by offering steeply discounted lump sums, making judicial oversight a critical safeguard. Attorneys should caution clients against impulsive sales, as the long-term financial impact of losing guaranteed income can be devastating.

Tax considerations extend beyond the settlement itself, particularly if the plaintiff receives punitive damages or emotional distress awards, which are taxable under IRC § 104(a)(2) exclusions. Proper allocation in the settlement agreement is vital—for example, specifying that only compensation for physical injuries or sickness is tax-exempt, while other damages are separately stated. Misclassification could lead to IRS challenges, resulting in unexpected tax liabilities. Additionally, plaintiffs receiving government benefits must structure settlements in special needs trusts (SNTs) to avoid disqualification from Medicaid or SSI, requiring coordination with elder law or public benefits attorneys.

Structured settlements also intersect with workers' compensation claims, where periodic payments are often mandated by state law. However, unlike tort settlements, workers' comp structured settlements may not always be tax-free, depending on whether the payments are classified as wage replacement or medical benefits. The Tax Cuts and Jobs Act of 2017 further complicated matters by eliminating deductions for structured settlement fees in certain cases, highlighting the need for tailored legal advice. Plaintiffs' attorneys must navigate these nuances to ensure compliance while maximizing the client's net recovery.

In cases where the defendant is judgment-proof or underinsured, plaintiffs may explore structured settlement annuities funded by the plaintiff (known as "self-structured" settlements), though these lack the same tax advantages. Alternatively, qualified settlement funds (QSFs) under IRC § 468B can temporarily hold settlement proceeds while the plaintiff decides on a structured payout, though strict deadlines apply. These workarounds require sophisticated financial planning to avoid pitfalls, such as losing tax exemptions or triggering accelerated tax events.