Table of Contents
- Periodic Payment Settlement Act of 1982
- What is a Structured Settlement Annuity?
- How do structured settlements work?
- Types of structured settlement cases
- Structured Settlements for Minors
- Should You Opt for a Structured Settlement or a Lump Sum?
- Understanding The Annuity Contract, Lump Sum Settlement, and Taxes
- Benefits of Structured Settlement Payments
A structured settlement is defined as a settlement reached from a civil suit won by a party or a company. A settlement usually includes a lump sum of cash upfront (cash advance) to cover immediate expenses, followed by taxable guaranteed periodic repayment tailored according to the requirements of the Settlement winner in addition to compensation.
Periodic Payment Settlement Act of 1982
In 1982, the federal government enacted the Periodic Payment Settlement Act of 1982 to protect those who receive awards or settlements from personal injury claims and wrongful death lawsuits.
The law was passed in an effort to protect those who are awarded verdicts and settlements by providing financial stability via tax-free payments over a period of years, if not for their entire lives.
What is a Structured Settlement Annuity?
Often, the defendant in a wrongful death or personal injury case will purchase an annuity for payouts on verdicts or settlements. Doing so can be beneficial to both parties, as the defendant is able to transfer the responsibilities of managing periodic payments and analysis to insurance companies that have experience handling these types of financial matters and the plaintiff (injured party) gains long-term financial stability.
How do structured settlements work?
Legal settlements can be paid in one-off lump sums or structured settlements where periodic payments are done through structured settlement annuities. The key differences between these two are taxation and long-term financial security.
Where a structured settlement annuity provides income through the life of the annuity and all the interest earned on the annuity can be paid without penalty, when paid in one lump sum, the payment can be spent immediately before any type of long-term financial plan is established.
Also, any interests and dividends earned on a lump-sum investment would be taxable, whereas growth on structured settlement annuities is not taxed.
Types of structured settlement cases
The most common types of structured settlement cases are:
- personal injury cases
- car accident injury claims
- workers compensation cases
- medical malpractice cases
- wrongful death cases
- maritime injury cases
- railroad accident cases
Structured Settlements for Minors
When a minor-aged child is seriously injured by a product, device, accident, or medication, they may also be awarded a verdict or settlement. Unlike adults though, a minor is not able to make financial decisions or have control of a structured settlement.
Another difference is that the payments are typically meant to fulfill the needs of the child until they reach the age of majority. Until then, the child’s parents must abide by the orders of the court on how the structured settlement money is to be spent.
Should You Opt for a Structured Settlement or a Lump Sum?
Many things should be considered before deciding whether to take a lump-sum payment or a structured settlement including the size of the settlement, your financial management acumen, and your understanding of taxes.
Your best bet is to seek legal advice from your personal injury attorney. They will be able to help you understand your options.
Understanding The Annuity Contract, Lump Sum Settlement, and Taxes
There are pros and cons, advantages and disadvantages with both lump-sum payouts and structured settlement payment plans. Before deciding how to receive your settlement or award money, speak with your attorney.
Experienced personal injury attorneys are well versed in settlement structures, and you can always speak with a financial manager about any concerns you may have. Either one will offer a confidential relationship, that takes a deep look at your current financial situation, and whether a one-time lump sum would be in your best interest or if a series of periodic payments would be best for your financial security.
Financial Management Experience and Know-How
If you are unsure of how to secure and properly grow your money while limiting your tax burden, then a large lump sum payout could be risky. Structured settlements allow you to avoid the challenges of administering large sums of money.
Know your tax obligations
Whether your award or settlement is taxable depends on the type of award. Generally, compensatory damages for injuries or illnesses are not taxable, but punitive damages are.
Depending on how you set things up, you may have tax obligations on either payout type. A tax attorney or financial advisor would be able to help guide you on these decisions.
Are You a Spender or a Saver?
Receiving a considerable sum of money when you don’t have experience handling large sums of money is risky. Where some may plan for their futures, others may not even realize how quickly they are spending it. While some may need the security of future payments, others may be facing challenges today.
If you are someone who has a tough time resisting a good sale or the latest gadget, then receiving your money through structured settlement payments may be a sound financial strategy. But if the settlement isn’t large, then a one-time payment may be better.
What Will the Settlement Money Be Used For?
Receiving a large settlement or award comes with more challenges than just money management. Friends and family may come to you for financial assistance when things get tough. Receiving tax-free guaranteed periodic payments means you won’t have large sums of money readily available for the needs of others.
As needs must, a structured settlement can be set up in numerous diverse ways. For instance, you can negotiate:
- the length of time you want to receive money from the structured settlement
- payment schedule, such as monthly payments, yearly, or bi-annually, etc.
- the sum of each periodic payment
- final lump sum payment amount
- payments that increase or decrease over time
- delayed payments that don’t start until a major event, such as retirement.
Your attorney can help you determine how to best structure your settlement for your individual circumstances.
Benefits of Structured Settlement Payments
In recap, some of the benefits of structured settlement annuities including receiving tax-free income as compensation for personal injury and wrongful death cases are federal and state tax-free according to Section 104 (a) of the Internal Revenue Code.
Compensation for non-physical injuries may be tax-deferred. The growth of that money may also be tax-deferred.
Payments are guaranteed income for an established period and the schedule of payments, and how long the payments are to be received are each determined at the onset.
Structured settlement annuity payments aren’t susceptible to market volatility, while the tax treatment and lack of fees make structured settlements competitive with traditional investment vehicles.