When it comes to large lump-sum recoveries, trial lawyers and their advisers (like us here at Milestone) spend an immense amount of time trying to figure out how to protect their clients from the new challenges that suddenly arise. Enter, the structured settlement.
How Does This Work?
A structured settlement is a mechanism that allows the injured party the ability to defer a portion (or all) of their settlement, receiving the proceeds when desired as opposed to all at once. For example, you may take part of your settlement as cash to cover immediate expenses. The remainder of your settlement recovery can then be used to purchase an annuity through a highly-rated life insurance company, which then provides you with a series of guaranteed, tax-free payments to meet your future needs.
This process was first made possible in 1982, when a bipartisan coalition of legislators in Congress came together to pass laws that amended the federal tax code. The Periodic Payment Settlement Act of 1982 (Public Law 97-473) was a means of formally recognizing and encouraging the use of structured settlements in physical injury and wrongful death cases.
You can elect to receive a structured settlement if you are settling a personal injury or wrongful death lawsuit. The decision to structure must be made before accepting the settlement proceeds in order to ensure tax- free benefits. You cannot accept the proceeds in cash now, and then later elect to create a structured settlement.
What Are The Benefits?
Structured settlement payments are tax-free, guaranteed income. Although lump-sum cash settlements are also initially tax-free, the interest earned on investing that money is fully taxable. Also, unlike structured settlements, the return on any investment you make with a cash settlement is speculative and will vary over time. A structured settlement eliminates the burden of dealing with a lump sum settlement. Although most people believe they will be able to manage a large sum of cash, studies prove that most people spend 95% of their money within the first five years after settlement. Cash settlements are often depleted when recipients lend or give money to family and friends, make risky or volatile investments, or purchase expensive items.
A structured settlement is designed to ensure that your immediate and future needs will be met. Many people depend on their settlement for daily living expenses. You may design your structured settlement to include a monthly check with sufficient funds for food, clothing, transportation, and housing. Additionally, your structured settlement can be used to fund your children’s educational needs or provide income for you when you retire. The fixed nature of structured settlements provides assurance, peace of mind, and a lifetime of financial security.