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  • Structured settlements – examples

    Please note: The amounts quoted below are examples only. Amounts of compensation will vary from case to case. A lawyer will be able to provide advice about personal injury compensation. These examples illustrate the application and components of structured settlements.

    Participants in a typical structured settlement

    Interaction of participants in a typical structured settlement

    Participant

    Negotiates with

    Injured person or their legal personal representative

    • Plaintiff lawyer
    • Life insurance company or state insurer

     

    Plaintiff Lawyer
    (Seeks advice from a financial adviser)

    • Injured person or their legal personal representative
    • Defendant’s lawyer

     

    Defendant’s Lawyer

    • Plaintiff lawyer
    • Defendant

     

    Defendant
    (or their insurer purchases the annuity/annuities from a life insurance company)

    • Defendant’s lawyer
    • Defendant’s insurer
    • Life insurance company or state insurer

     

    Financial adviser

    • Plaintiff lawyer
    • Life insurance company or state insurer

     

    Defendant’s insurer

    • Defendant
    • Life insurance company or state insurer

     

    Life insurance company or state insurer
    (Provides the annuity payments to the injured person or a trustee)

    • Injured person or their legal personal representative
    • Financial adviser
    • Defendant’s insurer
    • Defendant

     

    A structured settlement

    At the age of 19, Paul was seriously injured when a public walkway collapsed under him. Paul's lawyer made a claim for compensation against the public authority responsible for the walkway. After negotiations between the parties, the public authority admitted liability (fault).

    The following settlement agreement was reached between the parties – the public authority will:

    • pay an immediate cash sum of $500,000 to Paul to pay existing debts and costs  
    • purchase a personal injury annuity for Paul from a life insurance company. This annuity will start at $30,000 per year, with payments paid to Paul monthly, indexed to the consumer price index (CPI), payable for as long as Paul lives and guaranteed for the first 10 years.

    The annuity payments will be exempt from tax when received by Paul. The immediate cash sum will also be tax-exempt.

    A structured settlement involving a minor and a trust

    At the age of 10, Chris was in a car accident when the car driven by his father collided with another car. He sustained a serious head injury, resulting in permanent brain damage. Chris is permanently unable to work and his financial affairs need to be managed by a trustee on his behalf.

    A claim for compensation was made against the driver of the other car (the defendant). The other driver was insured, so their insurance company defended the claim.

    Chris's lawyer negotiated a structured settlement agreement in which the defendant's insurance company agreed to pay the following compensation:

    • An immediate lump sum of $420,000 will be paid to Chris's trustee to settle Chris's existing debts and meet some of his future expenses.  
    • The insurance company will purchase two personal injury annuities for Chris from two different life insurance companies  
      • The first annuity will provide periodic payments for Chris, starting at $12,500 per year*, payable in monthly payments, continuing for the term of Chris's life, increasing in line with the CPI and guaranteed for the first 10 years.  
      • The second annuity will provide periodic payments for Chris, starting at $30,000 per year, payable annually, continuing for the shorter of 30 years or Chris's life, increasing at 5% per year compound with no guarantee period.
       

    This settlement agreement was approved by the court (as required under state law because Chris, being under 18 years old, has a legal incapacity). The annuity payments and the immediate lump sum are tax-exempt when received by Chris's trustee on his behalf.

    * The minimum level of monthly support requires that the pension be equal to or greater than the maximum basic rate of the age pension. The payments under the first annuity to Chris were greater than the minimum monthly level of support at the date of the settlement order.

    A structured settlement involving a single personal injury lump sum

    A structured settlement agreement included the following payments:

    • a personal injury annuity of $1,400 per month that satisfies the requirements for providing the minimum monthly level of support - the payments are indexed to increase in line with the CPI and are guaranteed for 10 years from the date of settlement
    • another personal injury annuity paying $15,000 per year for 10 years
    • a personal injury lump sum of $100,000 payable in 15 years if the injured person is alive at that time
    • an immediate cash lump sum of $250,000.

    The personal injury annuity payments and the personal injury lump sum payment including the immediate cash lump sum will be tax-exempt.

    Components of a tax-free structured settlement - a compulsory personal injury annuity or annuities and optional components of other personal injury annuities, personal injury lump sums and an immediate cash component

    A structured settlement involving a series of personal injury lump sums

    At the age of 32, Robert was involved in a motorbike accident and acquired a spinal cord injury resulting in quadriplegia. A motorist failed to stop at a red light and the car hit Robert's bike.

    Robert engaged a lawyer to make a claim for compensation for personal injury against the motorist. The motorist was insured and the insurance company defended the claim on its client's behalf.

    The parties reached the following structured settlement agreement:

    • The insurer will pay Robert an immediate cash sum of $565,000. Robert can use this amount to pay his lawyers, pay off his debts and purchase some equipment.  
    • The insurer will also purchase for Robert a personal injury annuity that will provide him with periodic payments, starting at $2,000 per month and continuing for as long as he lives. The payments are indexed to increase in line with the CPI and are guaranteed for 10 years from the date of settlement. The monthly payments will be used to cover his medical expenses and other living costs.  
    • The insurer will also purchase for Robert a series of personal injury lump sums. These eight payments are spaced out every five years and will be payable if Robert is alive on the agreed payment dates. The agreed dates and amounts are as follows  
      • after five years – $10,000
      • after a further five years – $25,000
      • after a further five years – $40,000
      • after a further five years – $50,000
      • after a further five years – $75,000
      • after a further five years – $100,000
      • after a further five years – $150,000
      • after a further five years – $200,000.
       

    It is expected that Robert will use these payments to replace his wheelchair every five years and to cover other expenses.

    The personal injury annuity payments and the personal injury lump sum payments, including the immediate cash sum, will be tax-exempt.

    Two annuities that together meet the minimum monthly level of support

    Tony was seriously injured because of medical negligence, for which the hospital admitted liability. Tony and the hospital agreed to the following settlement agreement:

    • The hospital will pay an immediate cash lump sum of $500,000 directly to Tony.
    • The hospital will purchase two personal injury annuities from two different life insurance companies. Each annuity starts at $8,500 per year, with monthly payments, payable for as long as Tony lives and indexed to increase in line with the CPI.

    These annuities together total $17,000, which more than meets the minimum monthly level of support requirement. The payments from both annuities and the lump sum payment will be tax-exempt.

    Court deciding liability and no immediate cash payment

    Helen was rendered a quadriplegic as a result of a car accident. A claim for compensation was made against the other driver involved in the accident. The other driver's insurer defended the claim. The parties (Helen and the other driver's insurer) could not agree on who was at fault so the case went to court and a judge made a decision that the other driver was 70% liable.

    The judge indicated that a settlement figure of $1.5 million could be considered appropriate and the case was adjourned so that the parties could consider arranging a structured settlement.

    The parties were able to reach the following structured settlement agreement:

    • The insurer agreed to purchase a personal injury annuity, starting at $35,000, payable monthly, indexed to the CPI and guaranteed for 10 years from the date of settlement.
    • The insurer agreed to purchase a second personal injury annuity, starting at $10,000, payable quarterly, indexed at 4% and with no guarantee period.
    • The insurer agreed to purchase a series of personal injury lump sums, starting at $15,000, payable every five years for as long as Helen lives, and indexed to increase in line with the CPI.

    Note that Helen had a private insurance policy that provided her with sufficient money to pay her debts and set up her living arrangements, so she didn't need an immediate cash lump sum as part of her structured settlement.

    The personal injury annuity and personal injury lump sum payments are tax-exempt. Also, the court is not required to endorse this settlement.

    Defendant pays compensation in the form of an annuity (not a structured settlement)

    Kerry was injured at birth through the negligent use of forceps. The doctor's employer, a local government health authority, admitted liability and agreed to a settlement under which it would pay an annuity to Kerry over her lifetime.

    The doctor's employer is not a life insurance company or a state insurer. As the annuity has not been purchased from a life insurance company or a state insurer, it will not be exempt from tax.

    Effect of a guarantee period

    Geoff is an injured person who is receiving a tax-free personal injury annuity under a structured settlement. The annuity has a guarantee period of 10 years from the date of settlement.

    Geoff's sons Michael and Robin are specified in the annuity contract as the reversionary beneficiaries. Geoff dies five years from the date of settlement.

    Michael and Robin are entitled to receive the payments that would have been payable to Geoff over the remaining five years of the guarantee period, or a lump sum to the value of the remaining payments (less any increases).

    With either choice, the payments would be exempt from income tax.

    Injured person uses a lump sum to purchase an annuity (not a structured settlement)

    David settles a claim against Anne for a personal injury he has sustained. Under the terms of the settlement agreement, Anne is obliged to pay David a lump sum amount. David uses the lump sum to purchase an annuity from a life insurance company.

    The annuity is not a personal injury annuity and therefore will not qualify for the tax exemption. If the settlement agreement had specified that Anne or her insurer would use the lump sum to purchase a personal injury annuity from a life insurance company, the arrangement would be a structured settlement (assuming all the other requirements of the tax legislation were met, including the minimum level of support).

    Court approving a structured settlement for a minor

    At the age of 9, Peter was struck by a car and sustained a serious injury. At the age of 15, his legal personal representative made a claim for compensation against the driver of the car. The driver has insurance and the insurance company defended the claim. The claim was settled. Peter is a minor and considered to be unable to manage financial matters so the settlement involves the establishment of a trust and court approval.

    The settlement agreed to and approved by the court is as follows:

    • The insurer will pay an immediate lump sum of $250,000 to the trustees for investment on Peter's behalf to meet medical costs and other expenses incurred up to the date of settlement.
    • The insurer will buy a personal injury annuity that will pay the trustees $23,000 a year, indexed by the All Groups CPI, payable for the duration of Peter's life and guaranteed for the first 10 years.

    If all the eligibility conditions are met, the annuity will be exempt from tax in the hands of the trustee and also when payments are made to Peter, or applied for the benefit of Peter. The lump sum is also tax-exempt. The exemption does not apply to investment income derived by the trustee from the investment of the lump sum of $250,000.

    Person injured while overseas

    While holidaying overseas, Phil was severely injured in a motor vehicle accident. He has returned to Australia. Phil seeks compensation from the driver of the other car under the laws of the nation where the accident occurred. The other driver is insured and the insurance company reaches an agreement with Phil. Under the terms of the agreement, the insurance company pays an immediate lump sum of $300,000 to Phil and purchases a personal injury annuity of $25,000 per year from an Australian life insurance company. This annuity will be paid monthly and indexed to the CPI.

    The lump sum payment and the personal injury annuity are exempt from income tax. However, if the annuity had been purchased from a foreign life insurance company that was not registered under the Life Insurance Act 1995, the annuity would not qualify for exemption from income tax.

    Where can I find out more information?

    • Division 54 of the Income Tax Assessment Act 1997
    • Taxation Laws Amendment (Structured Settlements and Structured Orders) Act 2002
      Last modified: 27 Jun 2019QC 17073