Decision on Structured Settlements Raises More Questions

The Advocate Files: Personal Injury Law | Structured Settlements

Decision on Structured Settlements Raises More Questions

By David Hollingsworth

A recent Ontario Court of Appeal decision that ruled structured settlement payments should be considered income rather than property in equalization discussions during a separation or divorce raises more questions than answers, says Ottawa personal injury lawyer David Hollingsworth.

“This is a bit of a minefield,” Hollingsworth, principal of Ottawa Personal Injury Lawyers, says.

“This is a cautionary tale for practitioners where you need to pay some mind to what is being put aside in a structured settlement. In the event that some or all of it could be considered future income, this decision seems to stand for the proposition that it has to be accounted for in any kind of spousal support payments,” he says.

In some situations, settlements could include future medical needs, physical alterations to a home or the purchase of medical devices, for example, to make it accessible, he explains.

“It is not uncommon for the parties to reach an out-of-court-settlement for an ‘all-inclusive’ amount of money,” Hollingsworth says. “A portion of these funds may be placed into a structured settlement and the funds for the various heads of damage (pain and suffering, income loss, housekeeping, future medical needs and so on) may be co-mingled when placed in a structure. It’s common for these sums not be specifically broken down.”

He wonders if money allotted for care would now be considered income such that in the case of a divorce, the funds allocated for devices, such as wheelchairs, could be subject to division under the Family Law Act.

Appeal Court Justice Eileen Gillese ruled $302,100 of a settlement for injuries a woman suffered was allocated to her future income loss and was used to create an annuity to provide income for the applicant.

“The Structured Settlement Annuity payments give her financial support because she cannot work,” Gillese said in her decision. “They are, therefore, of the same nature as the income that she would have earned had she not been injured. Just as disability benefits are more comparable to a future income stream based on personal service than a retirement pension, so too are the annuity payments.

“Annuities are usually purchased with savings. Not so the structured settlement annuity,” she added. “As we have seen, an individual cannot purchase a structured settlement annuity. Furthermore, structured settlements can only arise from a settlement for a damages claim based on personal injury or death.”

Gillese said the annuity wasn’t purchased from personal savings, nor is it considered savings because the annuity as a structured settlement was designed to provide income to the applicant “that she would have been able to earn had she not been injured.”

Hollingsworth says there are other types of settlements that are placed into annuities that are obviously not income.

“The Gillese decision may now cause lawyers to consider the ramifications of a future marital breakdown on how, or if, settlement funds should be specifically allocated in a structure,” he says. “This is so despite the myriad of reasons why cases are settled on an ‘all-inclusive’ basis, including the unknown future medical and income needs, and the risks of taking a case to trial.”

If a lawyer representing a couple where one of the two suggests part of the settlement be considered income, Hollingsworth questions, “Does it create a conflict when setting up the structure?

“I would like to think not unless it’s always considered income as was the case in this decision. Again, I expect that each decision analyzing the appropriate allocation of settlement funds in the family law context will look at the specific circumstances of the settlement,” he says.

There are two types of property, one that’s to be included in net family assets, like a pension, and the other, which is excluded, such as general damages for pain and suffering, Hollingsworth points out.

He says the ruling raises numerous questions about the need to specifically allocate funds in a structure that will most likely require some clarity from the bench on a case-by-case basis.

“Does this case stand for the proposition that every amount payable under a structured settlement is income?” Hollingsworth asks. “Probably not.”

“Or does it stand for the proposition that in this case, where the $302,100 was placed in the structured settlement, it represents the replacement of income similar to a disability benefit, and therefore it’s considered income for the purposes of the Family Law Act?” he says.

Hollingsworth suggests, based on the facts of this case, the ruling is appropriate, but wonders if in a case with no income component that monthly payments from a structured settlement annuity would be considered income under the Act.

“I don’t know,” he says. “What I’m saying is if there’s a case with a different set of facts, there could be a different outcome.

“If I had to make the argument, I would say there might be a case where money that was placed in a structured settlement was not income but, rather clearly marked for future care needs,” Hollingsworth says.