Juridical act Legal Definition
Let’s say you are negotiating a personal injury claim and the defendant/insurer has proposed a structured settlement that was developed by the defendant/insurer’s structured settlement broker.
The claimant is a 35-year-old male with a 35-year-old wife and a seven-year-old daughter. He was injured in an automobile accident but liability is questionable. Allegedly, the claimant cannot perform the duties of his previous employment and is expected to be a minimum wage performer for his work life expectancy. No future medical care is indicated.
The structured settlement proposed will yield $2,000 per month for his life or 30 years (guaranteed for 30 years to protect his family against his early demise). A college fund of $10,000 will be paid in August of each year in which his daughter will be the ages 18, 19, 20, and 21. Finally, a series of guaranteed lump-sum payments will be paid every five years through the next 30 years. The total payments through the claimant’s 40-year life expectancy is $1.2 million. The annuity needed to generate these benefits would cost a premium of $482,965.
In addition to the structured portion, the defendant/insurer is offering $500,000 up front in cash for all immediate family needs, attorney fees, and past expenses of any nature.
The cover letter accompanying the proposal states that all of the payments of the settlement are tax-free. That would mean that the $717,035 growth in the structured settlement would pass to the claimant without income taxation, which is a significant benefit.
As a lawyer, you have always been intrigued by structured settlements (also known as settlement annuities or periodic payments) but have never consummated one. This one is particularly attractive because it takes care of all of the claimant family’s needs, and the total cost of $982,965 ($500,000 up- front cash plus the annuity premium of $482,965 is within the broad settlement range for this claim. It is extremely important for you to verify that the benefits will be tax-free and to negotiate and document the settlement in a manner that does not jeopardize its tax-free status. It does not matter whether you are the claimant’s lawyer or the defendant/insurer’s lawyer. It is in both parties’ interest to verify and preserve the tax-free status of the structured settlement proposal. Tax-free status enhances the value of the offer and helps to bridge the gap between the litigants.
Related Tax Authorities Juridical act Legal Definition
They were right! In 1979 the IRS issued two Revenue Rulings: 79-220 and 79-313. These Rulings put forward the following requirements for a structured settlement to be tax-free under § 104:
• The claimant is a mere recipient of the benefits.
• The annuity is purchased at the convenience of the obligor/defendant. Juridical act Legal Definition
• The claimant has neither actual nor constructive receipt of the annuity or the economic benefit of the lump-sum amount that was invested to yield the future payments (i.e., the premium).
• The claimant does not have the right to accelerate any payment or increase or decrease the amount of the payments.
The Revenue Rulings settled the tax issue for the claimant, but left the defendant/insurer on the hook for the duration of the obligation as owner of the annuity. Defendant/insurers are accustomed to a complete release once they pay their money, but this result was unattainable in the 1970s.