When a legal case settles for a large sum of money, a structured settlement may be used so that it may be paid over time instead of a lump sum. This device is often used in personal injury and workers’ compensation cases. A defendant (or its insurance carrier) purchases one or more annuities to guarantee future payments to the injured person. Alternatively, the defendant may delegate its obligation to a third party who in turn purchases an annuity and makes payments directly to the plaintiff.
Considerations for the Creation of a Structured Settlement
Based upon the parties’ needs and requirements, almost any payment schedule can be devised. For example, a settlement could be paid in monthly or annual installments, in equal amounts or varying amounts, or payments could be made in periodic lump sums.
A person entering a structured settlement should take into consideration the fact that he may have specialized long-term needs such as the need for medical equipment or the modification of an automobile to accommodate a physical disability. Money may also be needed to try medical treatments that develop in the future.
Other factors that should be considered are the date upon which payment begins, the plaintiffs’ current age and life expectancy, the plaintiff’s monthly expenses, and retirement plans.
Generally speaking, structured settlements are not subject to taxation. If payments are made to an estate, estate taxes, but not income taxes, apply. Federal and state laws control the structured settlements closing process. Federal law requires a court order to be entered so that tax liability is not incurred. Thirty six states have laws regulating the manner in which this court order must be obtained.
Once a payment schedule is decided, it should remain unchanged to avoid the imposition of tax liability.
Advantages to a Structured Settlement
One of the primary advantages is that a structured settlement ensures that a person does not have access to all of the settlement funds at once. Another significant advantage is that of tax liability avoidance. A minor child may benefit from a structured settlement that provides for certain expenses during childhood and for later college educational expenses.
As well, it might be beneficial for a settlement to be structured in such a way as to provide periodic payments and lump-sum payments for immediate medical expenses and medical equipment needs.
Disadvantages to a Structured Settlement
A potential disadvantage is that some people who wish to make a substantial purchase such as a home are unable to do so while only receiving periodic payments. If a person maintains a large degree of control over the annuity, the IRS may impose tax consequences. Another disadvantage is that future inflation and economic conditions could shrink a structured settlement’s overall “value.”
A plaintiff should consider having annuities purchased from one or more insurers in the event that an insurer becomes insolvent. Some states have special funds set up to protect individuals in the event of insolvency.
Selling a Settlement
Some individuals dislike receiving periodic payments and choose to sell their settlement to a company for a lump sum buyout. Two-thirds of the states have laws regulating the manner in which settlements are purchased. Some states require a court to approve a structured settlement buyout before the buyout can occur.
A structured settlement is a device used to pay a legal settlement over time. It is commonly used for personal injury and workers’ compensation cases. A structured settlement has distinct advantages and disadvantages that must be considered before entering such a settlement.