Institute for Divorce Financial Analysts™ (IDFA)
Family

Are structured settlements considered property or income in divorces?

By Lisa Gelman

The Ontario Court of Appeal has clarified whether a structured settlement obtained in a personal injury case is considered property or income during the process of property division and equalization. The court ruled that structured settlement funds should be treated as income in divorce proceedings.

What happened?

The parties were married in December 1995. It was a second marriage for both spouses, and each had children from their previous marriages. They had no children together. At the date of marriage, the wife worked as an office assistant and the husband as a millwright.

In August 1996, while grocery shopping, the wife was hit by a loaded grocery cart and suffered significant injuries. She was unable to work, lost her job, and was unable to return to work thereafter. The wife sued the supermarket. Her lawsuit included a claim by the husband for damages for loss of care, guidance, and companionship.

The structured settlement

The parties settled the case in 1999 and received $571,383, payable to both of them. They ultimately decided to allot almost $200,000 for the benefit of the family, including the husband. The remainder of the money was used to purchase a structured settlement for the wife. A structured settlement is an option in personal injury cases that allows those receiving a settlement to obtain the money on a specific schedule (for example, a payment once a month), rather than in a lump sum.

The plan that was ultimately agreed upon included a monthly payment of $1,290 for the rest of the wife’s life, as well as lump-sum payments of $15,000 every five years (up to a maximum of four such payments).

The wife began to receive the payments in December 1999. The husband retired in September 2009. The parties separated in October 2011, when the wife was 57 and the husband was 62. All children were independent adults by that point and had moved out of the family home. At the date of separation, there were 13 years of guaranteed monthly payments and three lump-sum payments remaining in the structured settlement the parties had agreed to.

During negotiations over division of property and equalization, the question of how to treat the structured settlement arose, and the issue ultimately went to court.

The original trial decision

At trial, the wife argued that the structured settlement payments should be treated as income, or be considered “excluded property” under the Family Law Act (FLA). In the alternative, she sought an unequal division of net family property.

The husband argued that the entire amount of the settlement money had been received during the marriage, and therefore, should be considered property. Since it represented future income loss, it was not excluded property under the FLA.

The original trial judge found that the structured settlement payments were property and were not excluded under the FLA. The money was not to be treated as income for the purposes of spousal support.

The structured settlement was akin to a pension plan because there had been no pre-conditions for its receipt, and it was payable for the duration of the wife’s life. Even if the wife were to get a job in the future, she would continue to be entitled to the remainder of the structured settlement payments. The structured settlement, therefore, was a form of savings intended to replace loss of future earnings for the wife. She had received these payments before the parties separated and she was therefore obligated to share the value of the settlement post-separation, just as she would if she were receiving a pension. It formed part of the wife’s property and was subject to equalization. The wife appealed this decision, and the matter went before the Ontario Court of Appeal.

The Court of Appeal decision

The Court of Appeal allowed the appeal, set aside the original trial decision, and made an order declaring that for the purposes of the Family Law Act, the structured settlement money is to be treated as income paid to the wife, and not as property.

The Court of Appeal found that the payments received from a structured settlement are analogous to disability benefits, and should, therefore, be treated as income. With respect to disability payments, the court noted a previous decision, which stated, about disability payments in family law:

…the purpose of the disability payments is to replace in whole or in part the income that the person would have earned had he or she been able to work in the normal course.” This makes disability benefits “more comparable to a future income stream based on personal service” than to either a retirement pension plan (explicitly included in family property by s. 4(1)), or to a future stream of payments from a trust (held to constitute property in Brinkos). … disability benefits replace income during the working life of the employee and therefore are appropriately treated as income for purposes of equalization and spousal support. As Aitken J. put it at para. 115, “a disability pension is simply the flip side of employment or self-employment income.

In this case, the structured settlement gave the wife financial support because she could not work due to injury. In that sense, they have the same nature as income that she would have earned had she not been injured. The structured settlement is not like a pension plan since pension plans accrue with service.

The Court of Appeal rejected the idea that the structured settlement payments should be treated as property because the wife had a fixed entitlement to them. This was also addressed in the decision on disability payments in family law:

It might be argued that the husband’s permanent disability pension, payable for life, should be included as property as it is a fixed entitlement, apparently not contingent on the husband establishing disability on an ongoing basis. I would reject this argument. It seems to me preferable from the perspective of clarity and predictability to treat all disability benefits the same whether they are calculated strictly in terms of lost income or as compensation for impairment to earning capacity.

Lessons learned

Married spouses who decide to separate are legally entitled to a division of the property that they amassed while they were married. This is known as “equalization” of net family property. As this case illustrates, division of property is not always straightforward and is subject to a number of complications.

Under the FLA, the right to equalization is triggered when the marriage dissolves. At that time, each spouse is entitled to one-half of the value of the property accumulated during the marriage.

Each spouse must disclose the value of their assets and their liabilities on a) the date of marriage, b) the date of separation, and c) the current date. Each spouse’s family lawyer will then calculate the total assets and liabilities of each to determine what the value of the spouse’s “net family property” (NFP). Based on this calculation, one spouse might be obligated to pay the other spouse an “equalization payment” intended to equalize the value of each spouse’s NFP.

In terms of equalization, “property” could include any number of things, including land, real estate, stocks, pensions, bank accounts, RRSP’s, vehicles (cars, boats, etc.) and other such assets. Some assets, “excluded property” are not included in the calculation of a spouse’s NFP. Excluded property can be assets such as monetary or other gifts from family, inheritances, and similar.

Under the FLA, any benefits considered “income” are not necessarily subject to equalization, but are considered when determining quantum of spousal support.

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