A considerable number of accident and personal injury lawsuits never make it to trial because the parties agree to the terms of a settlement before the case proceeds to trial. Typically, a settlement requires the plaintiff (person bringing the lawsuit) to discontinue any further legal action in exchange for receiving a money payment from the defendant or the defendant’s insurance company. In most cases, settlement payments are usually paid in a lump-sum (all at once), but some cases, oftentimes those involving minors or those involving very severe injuries, are paid out through structured settlements (predetermined payments made over a period of time).
A structured settlement is an arrangement that provides the plaintiff with a series of payments over a specified period or for the rest of the plaintiff’s life. They are especially useful when the plaintiff suffers a serious and permanent injury known as a catastrophic injury. With a structured settlement, a defendant’s insurer typically funds an annuity policy for the plaintiff. An annuity produces a continuous stream of income over the term of the structured settlement. Annuity contracts can be quite complex to cover a variety of expected expenses. Annuity contracts also provide great flexibility in terms of the amount of benefits the annuity will pay, and period of time over which the payments will be made. Obviously, the higher the settlement amount, the more creative one can be with the income stream.
In the event of the plaintiff’s death prior to the payment of all benefits under a structured settlement, plaintiff’s designated beneficiary(ies) would receive the balance of the funds per the periodic payment schedule provided in the contract. Before accepting any settlement agreement you should discuss all available options with your attorney. Below are some pros and cons you should consider before selecting a structured settlement.
Pros
A structured settlement may provide a plaintiff with a substantial tax benefit. Settlements for personal injury claims are generally not taxable. However, income generated as interest on the receipt of a lump sum settlement is taxable. Funds received from an annuity (which include interest) are tax-free as long as the plaintiff does not control the funds.
Plaintiffs who receive lump-sum settlements often spend everything within five years. Afterwards, many become dependent on the government for their support. With a structured settlement, the funds are released only in accordance with the periodic payment schedule so if the plaintiff burns through all his/her money, he/she will have to wait until the date of the next scheduled payment to obtain additional funds.
Annuity funds must be managed by a professional. Proper financial planning will help make sure plaintiffs have enough funds to cover future expenses.
Parties may tailor annuities to cover a plaintiff’s specific needs and all sorts of future demands or contingencies.
In most states, annuities are protected by state insurance laws that guarantee the obligations of a bankrupt insurer will be covered.
Often times structured settlements for young children can be a great way to ensure that the child will have sufficient funds in place for college, to purchase a home, business, or a combination thereof. Structured settlements for minors also allow the plaintiff’s parent or guardian to avoid Probate Court involvement, which can be time-consuming and costly.
Cons
If a plaintiff retains too much control over the structured settlement proceeds, the IRS may look at the situation and decide that the tax break must be forfeited. A well-designed structure can avoid this.
A plaintiff may fear that, no matter how the settlement protects against negative economic conditions such as inflation or recession, unknown changes in the economy could make the annuity payments too small.
Sometimes, an annuity is placed with brokers who do not have sufficient protection for insolvency (when financial obligations outweigh assets). This too can generally be avoided with proper due diligence.
Insurance companies are usually reluctant to disclose how much they will have to pay to buy an annuity covering the amount of the settlement. A structured settlement frequently costs insurance companies much less than it would to make a lump-sum settlement. Without this information, however, the plaintiff’s attorney may not be able to make a complete assessment of the benefits and drawbacks of a settlement offer. Wise plaintiff’s attorneys hire their own structure consultant to determine how much the settling insurer’s is paying for the structured settlement annuity.
In many circumstances, a settlement may be a faster, cheaper, and less stressful alternative to trial. An experienced personal injury attorney can discuss the facts of you case with you and help you decide whether a structured settlement would be your best interests.