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Money awarded through a lawsuit can be paid out as a single lump sum or as periodic payments through a structured settlement. Structured settlement annuities can be tailored to meet individual needs, but once agreed upon, the terms cannot be changed.
Some civil lawsuit cases never make it to trial in exchange for receiving lump sum payments. A lawsuit payout or structured settlement is an agreement providing a plaintiff with a fixed monthly income over a period of time. Prior to receiving structured settlement payments, individuals should consider all tax liabilities and discuss all payout options with an attorney or financial advisor.
Lump Sum Settlement Considerations
Despite the many options available, many lawsuit payouts from civil cases are still paid out as lump sums. There are two key differences between lump sum payments and structured settlements: long-term security and tax liability.
- By structuring the money over a longer period of time, a structured settlement offers a better future guarantee of money than a single payout, which can be spent quickly.
- Though any kind of settlement for a personal injury case will be tax-free when you receive it, once a lump sum settlement is yours, you’re liable for taxes on whatever you earn by investing it. But interest earned on structured settlements is not taxed, unless they are sold.
Choosing how to receive a cash settlement will have long-lasting personal and tax consequences, and this decision should be made under the advisement of a professional such as an accountant or attorney.
- Tax obligations
- You must be prepared for the extra tax liability that comes with managing a large single payout. However, personal injury lawsuit settlements are tax-free.
- Your financial management skills
- You have to either learn how to manage a large investment portfolio or identify a trustworthy, qualified professional who can do it for you.
- How risky your spending habits are
- Be honest with yourself about how much temptation you’ll feel to spend a large cash payout on expensive things you do not need.
The Flexibility of Structured Settlements
Structured settlements come in many more shapes and sizes than the typical annuities people purchase for retirement income. As part of the settlement negotiation process, a qualified structured settlement broker can design an annuity contract to meet the present and future needs of the recipient and their family.
Start and End Dates
If the settlement recipient requires ongoing medical care and is unable to earn any income, it will make the most sense for the payments to begin immediately.
In other cases, however, the recipient and the broker may agree that it is better for the payments to start at a later time. For example, a recipient may want to defer their payments until they retire, so that the annuity can earn interest faster and continue to grow.
A life only annuity lasts as long as the recipient lives, whether they live 5 years or 50 years after being awarded the structured settlement. The payments are said to be “life contingent” in this case. An annuity can be designed to provide lifelong income for a recipient’s spouse as well, in case the recipient passes away before their spouse does.
A term certain annuity is set to last a certain number of years, no matter how long the recipient lives. This type of annuity provides guaranteed payments. This may pose a risk, however, because if the recipient outlives the annuity, they will have to adjust to living without that source of income. On the other hand, if the recipient passes away before the annuity ends, the beneficiaries specified in the annuity contract will continue to receive the payments for the rest of the annuity’s term.
Payment Frequency and Amount
- Payment Schedule
- A structured settlement recipient can receive payments at any reasonable regular interval, such as monthly, quarterly, annually or even some combination of schedules.
- Increasing Payments
- One of the greatest strengths of a structured settlement annuity is its ability to earn interest, which can allow the payments to be adjusted upward over time to keep up with inflation. In addition, annuity payments can be set to rise even faster according to a certain schedule. This may be necessary if the costs of the recipient’s health care are expected to increase over time.
- Decreasing Payments
- If health-care costs are instead expected to decrease over time as the recipient recovers, the structured settlement payments can be designed to start high and then decrease. There are certain other cases in which decreasing payments can make sense — for example, if the child of an accident victim is awarded a structured settlement through a wrongful death lawsuit, the payments may be set to decrease as the child comes of age and achieves independence.
- Initial Lump Sum
- In many structured settlement annuities, the periodic payments are supplemented by a larger lump sum payment that comes immediately after the settlement is agreed. This is often necessary to cover attorney’s fees and whatever medical bills have accumulated while the settlement was being negotiated.
- Final Lump Sum
- An annuity can also be designed to have a large lump sum payment at the end. A child recipient may receive regular payments while they are a minor and then one large lump sum to pay for their college tuition as soon as they finish high school.
- Periodic Lump Sums
- A structured settlement annuity may even be designed to have special extra payments that occur less frequently than the normal payments. For example, a recipient may receive a payment every month, plus a larger payment every five years to pay for the cost of replacing and upgrading medical devices.
2 Cited Research Articles
- Fazio, W.B. (2010, June 7). Structured Settlements 101, Workers' Compensation. Retrieved from https://elibrary.selangorbar.org/legalnewsroom/workers-compensation/b/workers-compensation-law-blog/posts/structured-settlements-101
- U.S. Government Printing Office. (1999, March 18). Tax Treatment of Structured Settlements. Retrieved from https://www.govinfo.gov/content/pkg/CHRG-106hhrg58892/html/CHRG-106hhrg58892.htm