A structured settlement is an arrangement in which instead of a cash sum being given to the plaintiff, a tax-free periodic payment is agreed. Structured settlements are often used in trust cases, workers compensation cases, wrongful death cases and serious injury cases. Studies have shown that the more severe the injury, the more likely it is that structured settlements will be used.
The first thing you might ask yourself is, what are the advantages of taking structured settlements over cash settlements? The first reason is that it offers long-term financial security and protection to plaintiffs. It is estimated that 90% of all large cash prizes are spent within 5 years due to poor money management skills.
The main advantages of a structured settlement are its tax-free payment status and capital growth. For example, suppose the plaintiffs have been awarded a settlement and can take a $1 million lump sum, or $2 million spread over their lifetime. If they choose $1 million, even though that amount itself is tax-free, any interest earned on it will be subject to income tax. However, the $2 million paid during their lifetime will not be subject to income tax.
One of the drawbacks associated with structured settlements is the perceived inflexibility of the structure. For example, it’s not possible to add your spouse’s name to a settlement agreement without a court order waiver. If the claimants are risk averse, they may believe they can create higher returns by investing the money themselves. However, it could also be argued that monthly settlement payments give investors a great way to “dollar cost averaging” their investments.
If you are provided with a structured settlement, there are companies that give you the option to sell structured settlement payments for a lump sum cash fee. In these situations, you should always seek advice from a trusted attorney. In recent years, this type of transaction has become increasingly popular and has resulted in more than 35 state and federal governments increasing consumer protection laws and establishing strict rules and regulations for this type of transaction.
