A structured settlement, often referred to as a structured payment or structured settlement annuity, provides recipients with regular, tax-free payments. These financial arrangements are frequently employed in personal injury or legal settlements. By offering tailored annuities, structured settlements provide financial stability and significant tax advantages.
Key Takeaways
- Structured settlements are financial agreements that provide tax-free, periodic payments to individuals who have suffered injuries or damages, typically resulting from legal cases. These settlements offer a secure and stable income stream, distinct from other investment options like stocks, bonds, and mutual funds that can fluctuate with market changes.
- Structured settlements involve a series of guaranteed payments made over time to an injured party. These payments are designed to cover damages or injuries sustained in various legal scenarios, including personal injury, workers’ compensation, medical malpractice, and wrongful death cases.
- Unlike other investment vehicles, structured settlement payments do not vary with market conditions. This ensures a steady and reliable source of income for recipients, providing long-term financial security and peace of mind.
- The periodic nature of structured settlements can help reduce the temptation to spend large sums of money all at once. However, it is crucial to understand that once the terms of a structured settlement are agreed upon and finalized, there is little flexibility for renegotiation.
- Structured settlements are widely used in various legal contexts, including personal injury claims, workers’ compensation cases, medical malpractice suits, and wrongful death settlements. They offer a tailored solution to meet the specific financial needs of individuals affected by these circumstances.
- If you are thinking about selling your structured settlement, it is essential to carefully assess the financial implications. Consulting with a financial advisor can help you understand the potential loss and navigate the process effectively. This ensures you make an informed decision that aligns with your long-term financial goals.
Understanding Structured Settlements
A structured settlement is a financial arrangement in which a court-ordered payment is distributed as an annuity rather than a single lump-sum payment. This method of payout offers significant tax benefits for the recipient and can also lead to cost savings for the party responsible for making the payment.
Structured settlements are fairly straightforward. Often, civil lawsuits end with one party or company paying compensation to another to rectify a wrongdoing. Those found liable for the harm may agree to a settlement willingly or be mandated to pay if they lose in court.
Typically, structured settlements are voluntary agreements between the defendant and the injured party. Both sides generally have input on whether to choose a structured settlement or a lump-sum payment.
For smaller compensation amounts, the injured party might prefer a lump-sum payout. However, for larger sums, a structured settlement annuity is often arranged. Several factors influence this choice, including the recipient’s financial needs and preferences, future financial planning and tax implications, and the overall negotiation between the parties.
In a structured settlement, the responsible party allocates funds to an annuity—a financial product provided by an insurance company that ensures regular payments over time.
The agreement specifies the payment schedule the injured party will receive as compensation for their damages. Distributing the funds over an extended period enhances financial security, preventing the recipient from quickly depleting the funds.
Understanding How Structured Settlements Operate
Structured settlements arise from legal agreements typically paid out through insurance companies. These settlements involve four key parties working together to ensure the settlement process is smooth and effective.
Main Stakeholders in Structured Settlements
Claimant
The claimant is the injured party who files a lawsuit against the person or entity they believe caused their injury.
Insurance Company
The assignment company collaborates with a life insurance company to purchase a structured settlement annuity. The insurance company then issues payments to the claimant according to the terms of the annuity contract.
Assignment Company
To manage the settlement payments, the defendant or their insurance company transfers the obligation to an assignment company. This company takes over the responsibility of making periodic payments to the claimant.
Defendant
The defendant is the party being sued by the claimant. If the defendant loses in court or settles before trial, they may arrange a structured settlement to pay the claimant.
Streamlined Overview of the Structured Settlements Process
Though the process might seem intricate, it is designed to ensure that the claimant receives the agreed-upon compensation over time, closing the loop on the settlement.
Unlike traditional annuities where the recipient owns the annuity, in a structured settlement, the assignment company owns the annuity. If the claimant wants to sell their structured settlement annuity, they generally need to get court approval.
This structured approach to settlements ensures that damages and restitution are paid in a manner that benefits all parties involved, particularly the claimant.
Benefits of Structured Settlements
Structured settlement annuities are ideally suited for many types of cases. While these scheduled payments offer numerous benefits, it’s crucial to understand both the advantages and potential risks when considering any financial investment.
When a plaintiff receives a settlement as a single lump sum, there’s a risk they might spend it too quickly. To address this issue, Congress established the mechanism for structured settlements, encouraging injured parties to receive payments periodically over time. This approach ensures a steady stream of income to cover living expenses and medical needs.
To further promote this method, Congress introduced tax advantages for claimants receiving structured settlements. If a lump-sum settlement payment is invested, any interest and dividends earned would be subject to taxes. However, with structured settlement annuities, the interest and earnings grow tax-free, providing significant financial benefits.
Understanding the benefits and risks of structured settlement annuities is essential for making informed decisions about financial investments. By opting for periodic payments, claimants can secure their financial future and take advantage of the tax benefits offered by Congress.
Advantages of Structured Settlements Include
- Continued Benefits After Death: Even after the recipient’s death, the beneficiary can continue to receive tax-free payments. This provides peace of mind knowing that loved ones will be financially supported.
- Future Lump-Sum Options: There is also the possibility of future lump-sum payouts or benefit increases, offering additional financial flexibility and security.
- Stability and Market Protection: Structured settlements provide financial stability since they are unaffected by market fluctuations. Payments are guaranteed by the issuing insurance company, offering a reliable source of income.
- Higher Total Payout: Often, a structured settlement yields a higher total payout compared to a lump-sum settlement due to earned interest over time. This makes structured settlements a more lucrative option in the long run.
- Tax-Free Payments: One of the most significant benefits is that the payments remain tax-free. This ensures that the recipient enjoys the full value of the settlement without the burden of taxes.
- Discourages Impulsive Spending: By spreading out payments over time, structured settlements help discourage impulsive spending and ensure a steady income stream. This is particularly beneficial for covering long-term care needs and other ongoing expenses.
- Flexible Payment Structure: Structured settlements allow for flexibility in structuring and scheduling payments. Recipients can customize the payment plan to suit their specific needs and circumstances.
One significant benefit of structured settlements is their ability to safeguard recipients — or plaintiffs — from being coerced by friends or family into sharing the settlement money, as explained by Hunter Garnett, managing partner of Garnett Patterson Injury Lawyers in Huntsville, Alabama.
“The plaintiff is far more prone to spend money recklessly or lend it to friends or family,” Garnett shared with Annuity.org. “By structuring the funds, a client can genuinely inform their friends and family that they lack the available cash to provide loans or gifts.”
Drawbacks of Structured Settlements
Structured settlements, while beneficial in providing long-term financial security, come with significant drawbacks primarily due to their inflexibility. Once a structured settlement agreement is in place, you are essentially locked into its terms. This rigidity can severely limit your access to the funds within the structured settlement annuity, making it challenging to respond to unexpected financial needs or opportunities. Moreover, if you decide to sell your structured settlement, you will likely lose a substantial portion of its value, further underscoring the inflexible nature of these financial arrangements.
Disadvantages of Structured Settlements
- Lack of Immediate Fund Accessibility: Annuities can limit your access to funds during emergencies, making it difficult to tap into your money when you need it most.
- Discounted Cash Amounts from Selling Payments: When you sell your annuity payments for immediate cash, the amount you receive is often less than the total value of the future payments, resulting in a financial loss.
- Restricted Flexibility in Terms: Once annuity terms are finalized, modifying them can be challenging, even if they no longer align with your evolving financial or economic situation.
- Missed Investment Opportunities: Opting for annuity payments over a lump-sum payout may prevent you from investing in potentially higher-return opportunities.
- Undisclosed Administrative Fees: In some states, insurance companies aren’t required to disclose all costs, leading to possible financial losses due to hidden administrative fees.
California personal injury attorney Martin Gasparian highlights a significant drawback of structured settlements: their inflexibility.
“If a plaintiff needs immediate funds, accessing them without disrupting the annuity contract can lead to expensive complications,” Gasparian explained to Annuity.org. “Additionally, the interest rate remains fixed, offering a potentially low rate of return that doesn’t adjust over time.”
Structured settlements are commonly awarded in cases involving personal injury, workers’ compensation, medical malpractice, and wrongful death.
Typical Case Types for Structured Settlements
- Personal Injury In personal injury litigation, individuals injured by another party seek compensation through civil lawsuits. Structured settlements are often used to provide financial support for medical bills and related expenses.
- Medical Malpractice When medical professionals’ actions result in patient harm, victims or their families may pursue legal action for medical malpractice, seeking financial compensation for damages incurred.
- Workers’ Compensation Workers’ compensation offers financial relief to employees injured on the job, covering medical costs and providing income replacement during their recovery period.
- Wrongful Death Structured settlements are frequently utilized in cases of wrongful death, where families receive tax-free periodic payments to mitigate financial hardship caused by the loss of a loved one’s income.
Legal Framework: Assigned vs. Unassigned Structured Settlements
“Structured settlements serve dual roles as financial products and legal outcomes. While they operate akin to private assets, they are intricately bound by regulatory frameworks, contingent upon whether the settlement is assigned or unassigned.
In assigned settlements, a third-party assignment company receives funds from the defendant to purchase an annuity from another insurance provider. This annuity then funds periodic payments directly to the claimant. The claimant, or plaintiff, lacks control over the annuity contract, with the third party assuming responsibility for payment.
Conversely, in unassigned settlements, the defendant retains ownership of the annuity and designates the injured party as the payee. This setup places the onus on the defendant to make periodic payments, exposing the claimant to potential risks such as non-payment or default.”
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Structured Settlements Payout Alternatives
When opting for structured settlements, several payout options can be customized to suit your needs. One of the primary decisions revolves around when your payments commence and how long they will last.
Choosing immediate payments can be advantageous if you require urgent medical care or have faced a loss of income. On the other hand, deferring payments to a later date, such as post-retirement, allows your annuity to accrue interest during the interim period.
You also have the flexibility to decide whether the annuity payments will continue for your lifetime or for a specified number of years. Moreover, you can tailor the payment schedule and adjust payment amounts as needed.
Often, plaintiffs find themselves in need of funds for various expenses before their structured settlement payments begin. If you’re facing mounting expenses during this waiting period, exploring pre-settlement funding options can provide crucial financial relief.
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Factors to Evaluate Before Selling Structured Settlements
Selling your structured settlement payments, often referred to as “cashing out,” is a significant financial decision with lasting implications for your financial future. Before proceeding, it’s crucial to carefully evaluate both the advantages and disadvantages to ensure you make an informed choice that aligns with your long-term financial goals.
Advantages & Disadvantages of Selling Your Structured Settlements
Pros
- Opportunity to pay off debts and lower interest payments.
- Accessing a lump sum of cash within months instead of waiting years.
- Investing the lump sum may lead to higher returns compared to periodic payments’ interest.
Cons
- There’s a risk of making poor investments or costly purchases when you have immediate access to a large sum of cash.
- You may require the steady stream of settlement payments in the future.
- You’re selling future payments at a discounted rate, receiving only a fraction of the total amount you would receive over time.
Before opting to liquidate your structured settlement, it’s crucial to assess the potential long-term impact of discounting your payments. Utilizing a structured settlement calculator can provide an estimate of your settlement’s current and future value.
To make an informed decision, consult with a financial advisor or a trusted financial expert regarding the financial and tax ramifications associated with selling your settlement. They can offer insights into whether this option aligns with your financial goals and suggest potentially better alternatives.
Structured Settlements Selling Process
“Discovering the pathway to sell your structured settlement payments involves navigating five fundamental steps. Initially, you’ll embark on finding a reputable factoring company specializing in purchasing structured settlements. Typically, this process mandates securing court approval prior to finalizing the sale.”
Steps to Sell Your Structured Settlements
- Court Approval Process
- Request a Quote from a Factoring Company
- Review the Contract with Legal Guidance
- Receive Your Funds
- Evaluate Your Cash Needs
“Receiving a lump-sum payment from the purchasing company often involves a waiting period. Typically, the court process takes around 45 to 60 days to finalize, though this timeline can fluctuate based on geographical location and court caseload.”
Selecting a Structured Settlements Buyer
When considering selling your structured settlements, it’s crucial to have a clear grasp of your financial situation. This ensures you make informed decisions that align with your long-term goals.
As you search for a reputable factoring company, remember that the process should never rush you into a hasty choice. Distinguishing trustworthy structured settlement buyers from others is essential. Look for firms that prioritize transparency, reliability, and fair dealings.
Key Traits of a Legitimate Structured Settlements Buyer
- Explains a clear timeline for when you will receive money
- Makes a competitive offer
- Advises you to speak with a lawyer or financial professional before making a decision
- Offers a certain amount of cash upfront
- Has transparent discount rates and fees
“The typical discount rate that factoring companies apply when buying structured settlements ranges from 9% to 18%, as reported by the National Association of Settlement Purchasers. If a purchaser quotes higher rates, exploring other options could lead to better deals.”
Tax Consequences When Selling a Structured Settlement
In most scenarios, selling your structured settlement incurs no tax implications, provided the settlement pertains to personal injury, medical malpractice, worker’s compensation, or wrongful death.
According to the federal Internal Revenue Code, payments received from a structured settlement are typically exempt from federal and state income taxes, as well as the Alternative Minimum Tax (AMT), and taxes on interest, dividends, and capital gains.
Normally, if the original structured settlement is tax-free, proceeds from its sale also remain untaxed. This exemption generally applies to settlements directly related to physical injuries.
However, settlements involving defamation, mental anguish, or discrimination might be subject to taxation. Additionally, punitive damage settlements, intended to punish the defendant, are taxable unless they involve wrongful death.
In such instances, it’s advisable to consult with a legal or tax professional to understand the potential tax implications of selling your structured settlement.
Options Aside from Selling a Structured Settlement
When considering alternatives to selling a structured settlement, your options can vary widely based on your financial needs and goals.
Day-to-Day Expenses: If you require funds for daily living expenses, consider tapping into government benefits, upgrading to a higher-paying job, or selling non-essential assets. These alternatives may offer more stable financial support compared to liquidating a structured settlement.
Debt Relief: If your primary concern is managing debt, exploring options like credit counseling, debt management plans, or loan consolidation could offer more sustainable solutions. In some cases, filing for bankruptcy might also provide a strategic financial pathway.
Starting a Business: For those looking to invest in entrepreneurship, exploring avenues such as small business loans or grants should be prioritized over selling a structured settlement.
It’s crucial to consult with a financial advisor or another qualified professional to discuss the alternatives available to you. They can provide insights into how these options compare to selling your structured settlement, ensuring you make an informed decision that aligns with both your immediate needs and long-term financial security.
Origins and Evolution of Structured Settlements in the U.S.
The history of structured settlements in the United States is deeply rooted and traces back to significant legal and medical developments. Originating in Canada during the 1960s, the adoption of structured settlements emerged in response to the thalidomide crisis, where affected children required long-term financial support due to birth defects caused by the medication. Rather than a lump-sum payment, structured settlements ensured ongoing financial assistance to cover extensive medical expenses over time.
In the U.S., structured settlements gained momentum in the 1970s following similar cases. The IRS’s Revenue Ruling 79-220 in that decade provided crucial tax advantages by exempting settlement payments from the recipient’s gross income, thereby relieving them of tax liabilities. This ruling also extended the tax exemption to payments made to the estate after the recipient’s death, solidifying structured settlements as a viable long-term financial solution.
The formal endorsement of structured settlements came with the Periodic Payment Settlement Act of 1982, enacted by Congress to align federal regulations with the IRS’s tax benefits. This legislation prevented state governments from taxing structured settlement income from personal injury cases, further cementing their role in providing financial stability to injury claimants.
In 1985, the establishment of the National Structured Settlements Trade Association underscored the industry’s commitment to supporting injury claimants through education and advocacy efforts. The association’s formation aimed to safeguard the integrity of structured settlements and educate stakeholders about their benefits.
The evolution of structured settlements continued with the passage of the Small Business Job Protection Act in 1996, which refined the criteria for tax-exempt settlements. Under this act, only damages resulting from “personal physical injuries or physical sickness” qualified for tax exclusions, while punitive damages were excluded from these benefits.
Today, structured settlements remain a cornerstone of financial security, disbursing approximately $10 billion annually to more than 30,000 recipients. They continue to provide a structured approach to financial planning, ensuring long-term stability and tax advantages for those navigating personal injury claims.
Common Queries About Structured Settlements
What is a structured settlement and how does it operate?
A structured settlement serves as an alternative to receiving a one-time, lump-sum payment in legal cases involving personal injury. Instead of a single payout, structured settlements involve the defendant making periodic payments to the plaintiff over an agreed period.The result of receiving a structured settlement In legal cases, securing enhanced financial stability for plaintiffs is crucial, ensuring they receive adequate support to cover medical expenses and essential needs.
What sets structured settlements apart from annuities?
“A structured settlement results from legal proceedings, offering a series of payments agreed upon in negotiations between a plaintiff and defendant. On the other hand, an annuity is a financial tool provided by insurance companies that ensures regular payments over time. Unlike structured settlements, annuities do not originate from litigation.”
Locations to Sell Your Structured Settlement Payments?
If you’re looking to sell your structured settlement payments, partnering with a reputable factoring company, also known as a purchasing company, is crucial. To ensure the best deal, it’s essential to conduct thorough research and obtain quotes from several trustworthy settlement buyers.
Cost Breakdown: Selling a Structured Settlement?
“Selling a structured settlement isn’t just a straightforward swap for cash. Companies that purchase these settlements apply a discount rate, usually falling between 9% to 18% of the settlement’s total value. To determine the present cash value when selling future payments, you’ll need to factor in this discount rate, along with the specific dollar amount of each payment and the total number of payments you intend to sell.
Which is preferable: Lump Sum Payment or Structured Settlement?
“Structured settlements offer a tax advantage compared to lump-sum payments. Unlike investing a lump-sum settlement, where taxes apply to earned interest, dividends, and capital gains, structured settlement payments and their accrued interest remain tax-free at both state and federal levels.”
