Wed. Jun 7th, 2023

structured settlement and divorce

Structured Settlement and Divorce

When it comes to divorce, there are many issues that need to be resolved. Asset division, alimony, child support, insurance, and tax issues can all come up during the proceedings.

Some of these issues can be complicated, and often involve the use of a structured settlement to resolve them. This article will go over what a structured settlement is, how it works, and how it can impact the divorce process.

Payouts are tax-free

When a person is awarded compensation for injuries or damages in a court case, the money is usually structured into a series of tax-free payouts. This is a safety net for the individual and their family, and it can be used as a tool to protect them from falling into financial difficulties in the future.

The law encourages the use of structured settlements for compensatory damages because they help to prevent injury victims from losing their income and relying on public assistance. The payouts are also a way for the plaintiff to build up his or her savings and provide long-term financial security.

A structured settlement is a contract between a plaintiff and defendant that provides a stream of regular payments that last for a set number of years. These payments can be made through annuities or in other investment vehicles, depending on the type of settlement that is being received.

Structured settlements have been a popular option for injury victims because they offer them a steady flow of income that can replace lost wages and cover basic living expenses. They can also be a way for a plaintiff to receive money for special needs, such as college tuition.

However, it is important to note that some payments from structured settlements can be taxable. This is especially true if the payout is not a lump sum or if it is transferred to nonexempt investment vehicles.

One exception to this rule is when a portion of the settlement is used to pay for a life insurance policy that has a death benefit, which is treated like a payment of the deceased’s policy. In that case, the proceeds are not taxable, and any dividends or capital gains from the sale of the policy will not be subject to taxation.

Another example is when a settlement is used to settle a wrongful death claim. Under the Periodic Payment Settlement Act of 1982, damages awarded for emotional distress or mental anguish resulting from physical injuries are typically not taxable.

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On the other hand, punitive damages or awards for emotional distress originating from nonphysical injuries or diseases are generally taxable. The IRS determines whether a settlement is tax-exempt by examining the purpose of the award and what it replaced.

They are a safety net

A structured settlement may be a good option for plaintiffs who do not have the money or the skills to manage a large lump sum payment. It can also be a safe haven for plaintiffs who have been injured and are not sure how to invest the funds or plan for their future needs.

The first thing to consider when deciding on the right structure for your structured settlement is what your current and future goals are for the payouts. Then, decide if the benefits of a structured settlement are worth the risks involved.

For example, if you have young children and are concerned about paying for their education, you might want to request larger payments in the early years of your settlement to cover those costs. Similarly, if you are a divorced parent who wants to leave your children with a secure financial foundation, you might choose annuities that provide a stream of payments for life.

In most states, annuities are insured through insurance guaranty associations that protect you from the risk of a company going out of business. These guaranty associations typically limit their liability to the amount of the annuity contract.

Another important consideration is how much interest the annuity will earn. It is possible to receive more than a lump-sum payout in terms of interest on a structured settlement, and you should be aware of any tax ramifications that might arise.

If you are interested in receiving structured settlement payments, you should consult with an attorney and a trusted financial advisor to ensure that the payouts will fit your current financial situation and long-term goals. This may require a detailed analysis of your financial history and your future plans.

Lastly, it is essential to consider the possibility of an inheritance from your structured settlement. If you die before your structured settlement has been fully paid, you can bequeath the annuity to your family members.

Choosing a structured settlement is a wise decision for many plaintiffs who have been injured in an accident and are not sure how to deal with the payout. It provides a safety net and long-term income for the recipient, while allowing them to manage their money with ease.

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They are a way to handle asset division

A structured settlement can be a great tool for divorce, and it can be used to help resolve property division disputes. They can also be used as an alternative to alimony.

If you have received a settlement because of a personal injury or medical malpractice case, it is important to know how the settlement will be handled in a divorce. How it will be treated depends on whether your state uses the equitable distribution or community property approach to asset division.

* If your state uses the equitable distribution approach, it is more likely that you will keep the structured settlement. However, if your state takes the community property approach, it is more likely that you will share the structured settlement with your spouse.

Some states use a combination of the two approaches to asset distribution, meaning that both equitable and community property can be divided. This can cause problems if the structured settlement is considered separate property by your state, but marital property by your spouse’s state.

You can protect your structured settlement from being subject to these types of asset divisions by incorporating it into a divorce agreement and setting up it in a way that makes it less likely to be divided in a courtroom. This can be done by establishing an annuity that is paid out over a set period of time and by ensuring that the payments are backed up by a guarantee company.

This will ensure that your settlement will continue to be able to be disbursed and that your loved ones will never have to worry about their money being stolen by creditors or a lawsuit being filed against you for not paying an obligation.

Another good thing about structured settlements is that they are tax-free. This is because the IRS views them as restorative, not income.

Structured settlements are a great way to handle asset division, especially if you and your spouse have significant assets. They can be used to pay for a large lump sum of income for a specific period or as a retirement fund, for college costs, or to cover medical expenses. This can make the division of assets much easier than a traditional divorce, and it can be more beneficial for both parties.

They are a way to avoid alimony

A structured settlement is a great way to avoid alimony in a divorce. These agreements are typically made before the marriage is legal, and can help ensure that you don’t have to pay it if your divorce goes through.

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If you’ve been paying alimony, it’s a good idea to review your situation with a qualified family law attorney. They can help you produce compelling evidence that you should not be required to pay it or that the amount you’re paying is too high.

One option is to negotiate a lower alimony payment that decreases over time. This is a more permanent solution than just dropping the alimony amount.

Another method is to have a termination date written into the agreement. This will let you know when alimony is going to end, which will allow you to take steps to make it happen as soon as possible.

However, it is important to note that you will need to negotiate a reasonable term in order to get this done. For example, you might negotiate a 5-year term or even a 3-year term.

You should also consider whether it would be better for you to negotiate a lump sum alimony payment instead of paying monthly payments. This option can provide long-term financial security, and the payout is tax-free.

In addition, the lump sum can be used to cover your medical bills and other expenses related to your injury. You can also use it for retirement purposes.

These options are all great ways to reduce or eliminate alimony. If you have a strong case, they can help you save money in the long run.

One of the most common reasons that a spouse asks for alimony reduction or modification is when they lose their job. Many people suffer corporate downsizing that results in their income decreasing dramatically.

Jeffrey Augers
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By Jeffrey Augers

Jeffrey Augers is a highly skilled and experienced financial analyst with over 12 years of experience in the finance industry. He has a proven track record of delivering exceptional financial insights and recommendations to clients, empowering them to make informed decisions and achieve their financial goals. Jeffrey holds a Bachelor's degree in Finance from the University of Michigan, and an MBA from the Wharton School of Business.