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.
In the case of a structured settlement, the plaintiff and defendant will work with an “assignee,” who comes up with the terms of the settlement (frequency and amount of payments, for example), then purchases the annuity from an insurance company and puts the contract into effect.
When are Structured Settlements Common?
Structured settlements are not very common, as they aren’t typically used in contracts or business law issues. However, they are most common in the following types of cases:
- Personal injury;
- Workers’ compensation;
- Medical malpractice; and/or
- Wrongful death.
These types of lawsuits tend to yield a high compensatory damage amount that can understandably take a longer time to pay out.
Important Tax Considerations with Structured Settlements
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. Untaxed 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.
Do Structured Settlements Offer Better Flexibility?
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 specific 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 for the distribution method, it generally cannot be altered.
Structured settlements can also be helpful when the plaintiff and the defendant have very different figures in mind in terms of monetary compensation to the plaintiff.
Do Structured Settlements Offer Better Financial Security?
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, and avoid the temptation of spending the settlement too quickly.
Structured settlements also often yield more money in total, over time, since interest accrues on the money over years.
Additionally, insurance companies’ payments of annuities are guaranteed. Even if the insurance company declares bankruptcy, there are safeguards in place to insure that the plaintiff continues to receive their annuity payments.
What are Some Disadvantages of Structured Settlements?
While there may seem to be many benefits to a structured settlement, there are some unique disadvantages that you may want to consider:
- Some portions of the settlement, such as punitive damage award and some attorneys’ fees, may be taxable.
- Terms of the annuity can’t be changed once they are negotiated and in place.
- Large sums of money are not available for emergencies. Some settlements may be structured to have both a lump sum up front and then an annuity, in order to pay large costs, such as medical bills.
- There are penalties for withdrawing the money from the annuity early.
- Some insurance companies take large administrative fees for annuities, so it is important to be clear about those fees when establishing an annuity.
What are the Advantages for a Lump Sum Settlement?
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 for a Structured Settlement
When making decisions about how to receive your settlement payment, you should always consult a local attorney to help you design a plan to maximize the benefit of your settlement amount.