Since the 1980s, structured settlements have been a go-to for plaintiffs who receive a settlement or jury award from a personal injury or workers compensation claim. That’s because the benefits of a structured settlement for the plaintiff are many, namely custom-tailored planning, guaranteed future payments that extend the settlement monies over time, and the tax benefits of spreading out that income, which all help set the stage for future financial stability.
The security and tax implications of structuring are extremely valuable to many plaintiffs who receive a settlement. As a newer alternative, investment-backed structures are a strong solution for some plaintiffs who are to receive periodic payments, as they are a tax-free settlement design that can offer substantive expected growth based on market activity.
A Market-Based Alternative to Plaintiffs’ Traditional Structures
Receiving guaranteed payments over time is often a critical component to a plaintiff’s settlement plan. Spreading a large settlement into increments over time helps meet future needs in the long term while offering a lighter tax burden each spring. With a market-based structured settlement solution, claimants can obtain tax-deferred or tax-free future periodic payments with the potential for higher rates of return.
By utilizing an investment-backed structure composed of a diverse investment plan, clients can grow their funds for years, reaping the benefits of both their settlement monies and the tax-free growth of the investment. Utilizing an open architecture platform allows the claimant to choose investment strategies, either choosing a diversified portfolio offered by a master custodian or choosing a customized portfolio managed by their own personal financial advisor.
There is more risk associated with a professionally managed investment-backed periodic payment obligation, but there is also more reward, making it a particularly viable option for younger clients who have discretionary settlement dollars and/or are afforded the time to take more of a risk.
Average market activity over the course of ten years indicates seven to nine percent growth on average, but no future returns are ever guaranteed. The periodic payments a plaintiff receives are tax-free, and the growth on the account is tax-free. A plaintiff’s customized settlement plan can make future payments in predetermined increments — quarterly, semi-annually, annually, possibly also with a lump sum now and/or later — depending on what is best for the unique needs of the individual.
Market-Based Options for Attorney Wealth Management
Attorneys can also benefit from market-based investments for their own financial planning. Like structured settlements, attorney fee deferral has been around since the 1980s. Under Richard A. Childs, Et al. v. Commissioner of Internal Revenue, attorneys who elect to structure contingency-based fees do not have to pay taxes on those payments until the year the income is received. So, fee deferral allows for the spreading of income, thus preventing a large tax burden in one year.
Like plaintiffs, attorneys can use the open architecture of an investment-backed deferral plan to invest their fees in any listed security or investment. They can choose their level of risk and reward, and they can involve their own financial advisor in the process. A unique advantage of participating in Milestone’s settlement design is the availability of a one-time, no-fee hardship provision.
The Bottom Line
Traditional fixed-annuity-based structured settlements are still a viable option for plaintiffs. When the time and place are right, market-based structures could act as a supplement, resulting in greater growth when discretionary dollars from the settlement are available. The structured settlement industry continues to evolve, and with it, so does wise investment advice and settlement planning strategies. Each case is unique, and a market-based solution is not always appropriate for every claimant. A comprehensive settlement plan, when used in combination with a future payment plan, is often key in addressing future needs while providing market-based investment growth for discretionary settlement dollars. If you’d like to learn more, please give us a call today.
This content should not be viewed as an offer to buy or sell any of the securities mentioned or as legal or tax advice. You should always consult an attorney or tax professional regarding your specific legal or tax situation. Milestone Consulting, LLC, is not engaged in the practice of law or accounting. Different types of investments involve higher and lower levels of risk. There is no guarantee that a specific investment or strategy will be suitable or profitable for an investor’s portfolio. There are no assurances that a portfolio will match or exceed any particular benchmark. Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses.