Structured settlements or Structured Payments are an innovative way of compensating injury victims over time. Even though the current Federal tax laws fully exempt all monies received by victim in the form of Structured Payments, it is still a completely voluntary payment arrangement between the injury victim and the defendant.

When a victim agrees to be compensated under a "structured settlement," he/she does not receive the entire compensation for his/her injuries in the form of one lump sum amount. In stead, he/she receives it in the form of a predetermined stream of tax-free periodic payments -the amounts, and various terms are usually mutually agreed upon by both the claimant and the defendant after taking into consideration the living needs and desires of the Injured party.

The Injured Party and the Defendant may privately agree on the terms of their structured settlement, or it may be crafted in accordance with the directives as stipulated in a court order. It is not uncommon for both the parties agree to an out-of-court (pre-trial) structured settlement. However, in the cases involving minors, the court almost always dictates the terms of any such judgements/settlements.

The legislative intent behind their support of structured settlements was primarily due to the fact that the use of a structured settlement arrangement creates an economic benefit. The said economic benefit in the structured settlement arrangement (as compared to a settlement for a lump sum amount) arises because the Federal government forgoes taxation of the earnings component of each year's annual payment for any such settlements.

It is this tax subsidy that makes the use of structured settlement arrangements so beneficial for the victims.

Now just in case you are thinking there is a holistic component to such a governmental "generosity," let us look at the following rationale:

If all victims were to receive lump sum settlements, there is a reasonable chance that many (if not a majority) of them may (intentionally or not) mismanage their funds so that they would then have to be supported through one or more of Federally funded medical care programs -such as Medicaid or Medicare.

To minimize the chances of this happening on a massive scale, our congress came up with this bright idea of providing 100% tax exemption to all those that take the less-risky route of receiving their compensation awards broken up in small yearly payments -i.e. structured settlement annuities.

In short, what the tax code says is this: if you go the route of (more risky) lump sum payment, you will be subjected to a significant amount of tax liability. If you take the more secure (safer) route of being paid annually, you get tax exemption because by doing so, you are greatly reducing the probability that you will need to rely on one or more of those taxpayer funded government programs.