The Ins and Outs of Structured Settlements
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What Are the Benefits of Structured Settlements?
When a plaintiff successfully recovers money damages through an out-of-court settlement, they may have the option to choose whether to receive the money in one lump sum, or in periodic distributions over time through a structured settlement.
In some instances, it may be preferable to receive a settlement in one lump sum. However, there are significant advantages to receiving money damages through a structured settlement.
First, the structured settlement comes with valuable tax benefits. When a plaintiff chooses a structured settlement, the total settlement amount is invested in an annuity where it accrues non-taxable interest. Un-taxed payments are then made to the plaintiff over a distribution scheme of the plaintiff’s choosing.
This is distinguished from a lump sum payment. Although a lump sum is similarly non-taxable in its initial payment to the plaintiff, any interest accrued on the lump sum through the plaintiffs subsequent investments is taxable as income. Thus, a structured settlement may be preferable as it provides a sound investment yielding additional capital protected from taxation.
Second, through a structured settlement, a plaintiff enjoys significant freedom in determining the manner in which the settlement amount is distributed over time.
For example, a plaintiff may choose to have the total amount evenly distributed in periodic payments of a specified amount over consistent time intervals (e.g. $5,000 every month). Alternatively, a plaintiff may choose to have the total amount used to cover specified needs as they arise (e.g. medical expenses or tuition payments).
Ultimately, one can contract to have the structured settlement distributed in almost any manner they choose. However, once he or she has contracted the distribution method, it generally cannot be altered.
Third, a structured settlement can provide financial security as it guarantees the plaintiff a series of future money payments. Depending on an individual’s fiscal responsibility, a lump sum payment has the potential to be used inefficiently or squandered. However, through a structured settlement, an individual will enjoy a consistent disciplined stream of income.
Lump Sum Advantages
Despite the many benefits of a structured settlement, there are times when an individual may prefer a lump sum payment based on their specific circumstances. For example, if an individual is in immediate need of a large amount of money or otherwise does not greatly benefit from the advantages noted above, they may choose to take the entire settlement amount up-front.
Seeking Help from an Attorney
When making decisions about how to receive your settlement payment, you should always consult an experienced financial lawyer or financial advisor to help you design a plan to maximize the benefit of your settlement amount.
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Last Modified: 01-28-2015 11:24 AM PST
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