When a plaintiff sues a defendant for a personal injury, wrongful death, or illness, the defendant often offers the plaintiff a settlement to avoid going to trial. Structured settlements are an option that many plaintiffs choose in order to better manage their money and avoid extra taxation. Structured settlements are most beneficial for large settlements.
Structured settlements have many variations, most of which you can customize to fit your needs and plans. Here are some popular structured settlement choices among plaintiffs:
- One large initial payment with smaller payments later: This option is for people who may want to make a big purchase, such as a car or a down payment on a home, up-front with the proceeds from the settlement.
- High initial payments that decrease over time: This allows you to make up for lost income while you recover from your injury or illness and to maintain a small, steady supplementary income once you go back to work.
- Low initial payments that increase over time: This option works best for people who anticipate a decrease in employment income over time.
- Delayed payments that don’t pay out until the plaintiff reaches retirement: To ensure a comfortable retirement, the money will stay out of reach and incur interest in order to grow the total amount.
Unlike lump sum settlements—where the payment is initially tax-free, but all interest is fully taxable—many structured settlements are exempt from taxation. However, there are some exceptions to the tax-exempt rule: structured settlements that result from emotional damage or employment discrimination, for example, are taxable. Settlement proceeds that result from breached contracts are also taxable. Lastly, in order to structure your settlement at all, you must request it prior to accepting the defendant’s offer.
If you think you may benefit from a structured settlement, reach out to one of our structured settlement consultants to discuss your options.