How are Structured Settlement Funds Treated in Equalization?

woman holding jar of saving money representing structured settlement funds being treated as income

Written on behalf of Shariff & Associates

When a personal injury case is settled, the claimant may be compensated through a structured settlement. This is an arrangement where settlement funds are paid to the injured party through scheduled payments over a period of time. This can, however, raise issues for parties with family law claims and courts have specifically considered whether the funds constitute property that is subject to division under the Family Law Act upon divorce.

Husband Argues Wife’s Annuity Payments Should be Treated as Property

In Hunks v. Hunks, the Court of Appeal for Ontario had to decide whether annuity payments from a structured settlement should be treated as property or income. During the marriage the wife was injured in an accident and the proceeds from the settlement of her personal injury claim were used to create the structured settlement annuity which continued to make payments to the wife. Section 4(2) of the Family Law Act excludes certain property from a spouse’s net family property, including:

“Damages or a right to damages for personal injuries, nervous shock, mental distress or loss of guidance, care and companionship, or the part of a settlement that represents those damages”.

The appellant wife argued that the annuity payments should be treated as income and not as property. She pointed out that the annuity arose because she suffered a serious injury that was caused by a third party that impacted her personally and was “independent of the marriage partnership”. Moreover, the annuity was funded by the settlement of her personal injury claim and not through savings. Ultimately, she argued that the annuity payments were “comparable to a future income stream based on personal service” and could not be viewed as property within the Family Law Act.

On the other hand, the respondent husband argued that the annuity was property the appellant owned on the valuation date, as she received the settlement funds, including a lump sum for future income loss, during the marriage and then used the funds to purchase the annuity. Therefore, for the respondent, the remaining annuity payments should be viewed like a pension and regarded as property.

Recipient Not the Owner of the Structured Settlement Annuity

The Court of Appeal disagreed with the respondent, in part because the annuity arose from a structured settlement. As the Court noted, a structured settlement occurs when funds from a personal injury settlement are deposited with a life insurance company “in exchange for guaranteed tax-free payments for a specific number of years or for the recipient’s lifetime”. Further, a structured settlement is a special type of annuity. The Canada Revenue Agency’s Interpretation Bulletin explains that the insurer must “report as income the interest element inherent in the annuity contract while the payments received by the claimant represent …non-taxable payments for damages”.

In this case, there was no dispute that the annuity arose from a structured settlement. Consequently, the appellant never received the part of the settlement funds that were used to buy the annuity, since the insurer purchased the annuity and directed the issuer of the annuity to make the payments to the appellant. In other words, although the appellant received payments from the annuity, she does not own it. Nor did she receive all of the settlement money during the marriage. Instead, funds were used to create the structured settlement that entitled her to the annuity payments.

Annuity Payments Are Comparable to a Future Income Stream

The fact that the payments arose from a structured settlement did not completely answer the question of whether the payments should be treated as income or property. However, for the court, the payments from a structured settlement are “analogous to disability benefits and, therefore, should be treated as income”.

In the case of Lowe v. Lowe, the Court accepted that disability payments replace income that a person would have earned if they had been able to work, which make disability benefits “more comparable to a future income stream based on personal service” than to a retirement pension plan. As Justice Sharpe noted in Lowe, disability benefits replace income an employee would have otherwise earned and are, therefore, treated as income for equalization and spousal support purposes.

Similar to the benefits in Lowe, the structured settlement annuity payments replaced income that the appellant would have earned if she had been able to work. Therefore, the payments were not like a retirement pension, but instead, were comparable to a future income stream based on personal service. The Court concluded that the settlement payments that were received after separation, to replace future wages, were not shareable as property.

Annuity Payments Treated as Income Not Property

In Phelps v. Childs, the parties appealed the results of a trial that dealt with the equalization of shares. The respondent was involved in a car accident and received funds from the settlement of a personal injury claim. The respondent’s father also loaned the parties money to purchase the shares. For purposes of equalization, the respondent claimed that her portion of the shares were purchased with funds traceable to damages for personal injuries and constituted property excluded from equalization. The trial judge ordered that the value of the shares should be equalized between the parties.

During the appeal, the decision in Hunks was released. The respondent suggested that Hunks was distinguishable, as the annuity was purchased from funds paid as damages for loss of future income, while in this case, the annuities were purchased from funds that were paid for the costs of future care. However, the Court did not accept that argument.

Annuity Payments Treated as Family Income

The evidence in the case did not establish that the funds were paid as damages for future care costs. Instead, the funds were paid in lump sums without any breakdown for the various heads of damages, such as pain and suffering, loss of income, or future care costs. However, the respondent claimed that it was fair to infer that the annuities were purchased with funds paid for future care costs. The Court disagreed, as it was not consistent with how the annuity payments were spent. All the income the respondent received was treated as family income and she spent less than $200 each month on health-related expenses.

It was also important to note that in Hunks, the Court of Appeal did not find that the annuity was purchased from money paid for loss of income. Reviewing the decision, the Court held that the source of the funds used to buy the annuity is irrelevant to the issue of whether the annuity is income or property. What was important was that the annuity was used to provide an income stream to replace income she lost, instead of “focusing on what part of the settlement proceeds paid for it”.

Court Finds Shares Were Paid For With Income, Not Property

Overall, there was nothing that distinguished the annuity in this case from the decision in Hunks. Here, the funds received from the annuities were being used as a stream of income used to repay the loan that was used to purchase the shares, so the shares were paid for with income and not property.

Fixed Entitlement to Annuity Does Not Automatically Make it Property

Courts have determined that when settlement funds from a personal injury are used to purchase a structured settlement, the funds the recipient receives are considered to be income, and not property being subject to property division. Parties who have received a settlement should obtain legal advice to ensure that they understand how potential family law claims could impact their assets.

The Markham Family Lawyers at Shariff & Associates Help Clients Navigate Complex Property Division and Equalization Matters

The experienced family lawyers at Shariff & Associates help clients navigate the uncertainties associated with complex family property division disputes and address issues involving hidden assets and incomplete financial disclosure to ensure our clients can make informed decisions every step of the way. We encourage clients to engage in collaborative resolution processes, however, if litigation is necessary, we strongly advocate for our clients’ interests in court to ensure they receive their fair share of net family property. To learn more about collaborative family law options or to discuss your property division concerns with a member of our team, contact us online or call us at 905-591-4545.