A structured settlement is a financial arrangement in which an individual or entity is issued a series of payments until the total amount of the settlement has been received. Settlements of this type are normally very detailed, and include a payment schedule that leaves no doubt as to when payments are to be received. This type of arrangement is sometimes used by insurance companies to settle claims, or in legal situations where paying a lump sum in a judgment would result in what the court considers extreme financial hardship for the party ordered to pay the settlement.
The structured settlement serves as a viable alternative to the straight or lump sum settlement model. With a straight settlement, the recipient is issued a single payment that is large enough to settle the entire amount of the judgment or insurance claim. The structured model allows for periodic payments that are scheduled for disbursement within a specific time frame. Many property insurance agencies, as well as providers of casualty insurance, often favor this model, since it allows them to honor the terms of the coverage while still maximizing their cash flow.
Recipients of settlement funds can also receive some benefits as the result of a structured settlement. One of the most obvious advantages has to do with the paying of taxes. In countries where the money obtained from a settlement would be subject to taxation, receiving the series of payments often leads to less of a tax obligation over the course of the year. As a result, the recipient will pay fewer taxes on the total sum of the settlement, since it is incrementally received in more than one tax period.
Along with benefits, a structured settlement comes with some responsibilities. There are nations where the tax tables that apply to this type of settlement are different from the tables used to calculate taxes due on other forms of income. In other countries, there is no such distinction, but the inclusion of the periodic payments in calculating general income can place the taxpayer in a higher bracket, resulting in an increased tax debt. Financial advisors who are acquainted with the current status of tax laws within a given country can advise a client how to arrange his or her financial affairs so as to legally minimize the tax debt and obtain maximum benefit from the receipt of the settlement payments.
Not every country around the world allows for structured settlements. Over the years, more nations have included the provision for this type of settlement in their tort laws. The United States, Australia, the United Kingdom, and Canada are notable examples of countries where the concept of the structured settlement is recognized and often employed when it comes to settling claims and other types of legal actions.