This article was last updated on May 4
I received a letter in the mail the other day from some legal firm saying that they were on the verge of winning a class action suit against a large medical corporation and that I could be entitled to part of their structured settlement; if I could prove I had used a particular cholesterol drug. Personally, I don’t remember using this drug and I think I wasn’t the intended recipient, but my interest got perked by the term structured settlement. Being a finance aficionado, I hate not knowing what a particular concept is, so I did some research on this topic. Wikipedia defines a structure settlement as “ …a financial or insurance arrangement, including periodic payments, that a claimant accepts to resolve a personal injury tort claim or to compromise a statutory periodic payment obligation.”
Not very clear I agree. But basically a structured settlement is a way to settle financial payments from a legal case (settlement) that are made over a period of time (structured). It offers several advantages over a one-time, lump sum payout. This includes the money lasting longer, with studies showing that the majority of those who receive lump-sum payments as compensation for an accident or injury spend the money within five years. A structured settlement on the other hand is like an annuity (think life insurance) than can be spread out over decades, or a lifetime.
Another big advantage of a structured settlement is that the income is tax-free, both at the Federal and state levels. Structured settlements are often ideal under the following circumstances:
– Guardianship cases where the victim dies and leaves minor children. A structured settlement can insure that funds are available for food, housing and education for the surviving family members over a long period of time.
– Workers compensation cases where the injured party is unable to work for a protracted length of time. A structure will allow steady income to insure that the victim and their family will continue to have steady income.
However, remember that once in place, can structured settlements cannot be traded back for a lump sum settlement. Because you are given special tax treatment with regard to structured settlements’ proceeds, you cannot then take that in a lump sum fashion.
Why do parties choose structured settlements over a one off lump sum payout? The party that pays in an accident or injury case can benefit from payments over time, as they can set up an annuity to pay the funds over time. The funds are invested with the payments coming out of the proceeds. It’s “hands off” for the paying party, and they typically pay out a smaller amount of money in present dollars than if they paid in a lump sum.
There are many things to consider if you are in a position to receive a large amount of compensation for injury or accident. One of the options may involve structured payments over time because using a tailored stream of payments, provides long-term tax- free income, often for a lifetime. Before you act though, you should learn as much as you can about legal settlement payment options in order to determine if such an agreement is right for you. As always, should you find yourself in such a situation, consult with a financial advisor and/or a competent attorney.