Structured Settlements: Contractual Agreements

Structured Settlements: Contractual Agreements

Tenth in a series of blog posts dedicated to helping clients decide when a structured settlement should be considered.

Today’s Installment: Contractual Agreements

January 16, 2020 – As the applications of the structured settlement concept continue to evolve, potential clients and practitioners should be aware of the less traditional, but equally valuable, opportunities to satisfy certain contractual agreements (or, more frequently, disagreements) by adapting the nonqualified assignment process we’ve discussed in previous posts.

Business disputes, mergers, acquisitions, divestitures, and a host of other situations may lend themselves to more favorable outcomes for all involved when a nonphysical injury structured settlement is considered.

Key to a successful outcome will be the ability to craft an agreement outlining that one party (the Payor) is obligated to pay future periodic payments to another party (the Payee) in order to satisfy a financial obligation.

Because the Payor will not usually want to remain contingently liable for any future financial commitment, the parties agree to permit the Payor to satisfy its obligation to pay future income by purchasing an annuity or U.S. Treasury-backed obligation and substituting obligors using an independent third party assignment company established for such a purpose.

Since the assignment companies accepting these obligations are not able to handle assignments involving wages, payees CANNOT receive structured settlement payments that are considered W-2 income. As such, all future payments will be processed as 1099 income and will be reported as such.

The Payor and Payee usually have divergent interests when it comes to the income being paid when finalizing contracts.

Paying a single lump sum to satisfy its end of the agreement will leave the Payor in a better position to move forward without any contingencies or encumbrances in dealing with the other party.

The Payee, on the other hand, will usually be better served by spreading the income and corresponding tax liability over a longer period of time.

Ergo, the nonqualified assignment process permits both sides to accomplish their objectives. The parties can settle for a single lump paid by the Payor which is used to purchase a more tax-efficient outcome for the Payee.

Business lawyers, business owners, executives, investors, and others who familiarize themselves with nonqualified assignment structured settlements can create more flexible contractual outcomes than is otherwise possible with the more common single lump-sum or short-term payout agreements.

Although the term has fallen out of vogue in recent years, nonphysical injury structured settlements present opportunities for win-win resolutions and should be explored anytime someone can benefit by receiving money over time.

Photo courtesy of Mari Helen on Unsplash

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