Who Owns the Annuity in a Structured Settlement?

A structured settlement is a financial arrangement for receiving periodic payments, rather than a single lump sum, to resolve a personal injury claim or other settlement. This method often uses an annuity as the financial instrument to provide these payments. Understanding the ownership of this underlying annuity is important for recipients.

Structured Settlements and Annuities Explained

A structured settlement is an agreement to provide a series of payments over time, rather than a one-time cash payout, for a legal claim. This approach is frequently used in personal injury cases where long-term financial support is necessary due to ongoing medical costs or lost income. The payment schedule can be customized to meet specific needs, potentially including payments for life or over a set number of years.

The funding mechanism for these periodic payments is typically an annuity, a financial product issued by a life insurance company. An annuity represents a contract where, in exchange for a lump sum or series of payments, the insurer agrees to make regular payments to the annuity owner. In the context of a structured settlement, the annuity is specifically purchased and designed to match the agreed-upon payment schedule, ensuring the consistent and timely delivery of funds to the recipient. This financial product serves as a distinct asset purchased to fulfill the settlement obligations.

The Assignment Company and Annuity Ownership

In most structured settlements, particularly those involving personal physical injury or sickness, a “qualified assignment” process is utilized. This process, defined under Internal Revenue Code Section 130, allows the original defendant or their insurer to transfer their obligation to make future periodic payments to a third-party entity. This third party is known as an “assignment company” or “assignee.”

The assignment company then legally owns the annuity that funds the periodic payments. This structure offers several advantages, including tax benefits for the claimant, as payments received for physical injuries are generally tax-free under Internal Revenue Code Section 104(a)(2). The qualified assignment also releases the original defendant or insurer from ongoing liability. This helps ensure the independence and security of the payment stream, as the obligation is transferred to a company whose primary function is to manage these long-term payment responsibilities.

Receiving Structured Settlement Payments

While the assignment company holds legal ownership of the annuity, the claimant, or injured party, is the designated payee and directly receives the periodic payments. The claimant possesses a beneficial interest in these payments, meaning they are entitled to receive the funds as scheduled. However, they do not have direct ownership or control over the underlying annuity contract itself.

This means the claimant cannot sell, surrender, borrow against, or otherwise alter the annuity’s terms. The payments received are excludable from gross income, making them tax-free. This arrangement ensures a steady and predictable income stream for the claimant without the complexities of managing the annuity asset or incurring taxes on the growth of the funds.

Protecting Future Structured Settlement Payments

Multiple layers of security safeguard a claimant’s future structured settlement payments. The financial strength and regulatory oversight of the life insurance companies that issue these annuities provide a primary level of protection. These companies are highly rated by independent financial rating agencies, indicating their ability to meet long-term obligations.

An additional safety net is provided by state guaranty associations. All states, the District of Columbia, and Puerto Rico have these associations, which offer protection to policyholders in the event an insurance company becomes insolvent. While coverage limits vary by state, annuity benefits are typically covered up to at least $250,000 per contract. The framework of structured settlements and qualified assignments is designed to provide long-term financial security for the recipient, ensuring payments continue as agreed.