Fri. Jun 2nd, 2023

structured settlement disability benefits

Structured Settlement Disability Benefits

A structured settlement is a series of tax-free payments that help injured people cover their medical bills and living expenses. These payments are typically part of a personal injury or wrongful death lawsuit.

In addition to providing a continuous stream of tax-free income, structured settlements can preserve a plaintiff’s eligibility for means-tested government benefits. Often, this is done through the use of a special needs trust.

Tax-Free Income

A properly designed structured settlement can generate tax-free income under Internal Revenue Code SS104(a)(2), which states that “Gross income does not include damages received by suit or agreement and as lump sums or periodic payments on account of personal physical injuries or physical sickness.” This exemption applies to amounts received for a variety of cases including claims for injury or illness resulting from a car accident, trucking accident, medical malpractice, slip and fall accidents, and workers compensation.

Structured settlements for personal physical injury claims have long been endorsed by the nation’s top attorneys, disability advocacy groups, and claims professionals. With future cash flows that are tailored to your unique anticipated needs, these settlements have been helping individuals secure their futures for more than 30 years.

However, the IRS and state governments are barred from taxing most structured settlement income — whether paid all at once or in installments – under the federal Periodic Payment Settlement Act of 1982. This law remains in effect today to protect the valuable tax-free advantages that structured settlements offer.

Another important benefit of structured settlements is that payments are not taxable in the event of death, unlike lump sum settlements of disability benefits. The recipient’s heir can receive the remaining payments tax-free, as well.

If you are receiving a lump sum structured settlement payment as part of a lawsuit settlement or an agreement with your insurance company to accept reduced payments now in place of monthly payments, it is critical to speak with a qualified tax professional about how the lump sum payment would be taxed. This is a complex and sensitive area of tax law that is best left to the experts.

The money you receive from a structured settlement is tax-free as long as it is received in the form of a structured settlement annuity or Treasury bond. It is not tax-free if sold or invested in stocks, real estate or any other investment type.

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Because of this, it is crucial that you plan accordingly for the financial security of yourself and your family. Having a trusted attorney review your case and discuss the implications of a lump sum structured settlement with you is the most effective way to ensure that you are making the most informed decision for your future.

Personalized Income Stream

A properly structured settlement can offer a disabled client a steady stream of income that is tax free, available regardless of their financial acumen, and designed to preserve their eligibility for Social Security and Medicaid benefits. Depending on the structure of your payout, this could be a sizable sum that will last you well into retirement.

There is a plethora of structured settlement benefits, many of which can be tailored to the needs of your specific situation. The best way to understand your unique needs is to meet with you and your financial advisers to formulate a plan that will help you get the most out of your settlement while providing you with peace of mind.

The most interesting structured settlement benefit is probably the money saving tax breaks you may qualify for. In Australia, for example, a structured settlement of $750,000 or more is eligible for a tax break of up to 30 percent.

In addition to the tax break, structured settlements come with a number of other benefits that may not be readily apparent. For example, if you’re a caregiver for a loved one with a disability, structured settlements can pay you to be your own boss while you care for your injured family member.

Having a properly structured settlement could also save you from having to take out a high interest loan. As a result, you can enjoy your hard-earned lump sum without the stress and anxiety associated with trying to come up with an emergency fund on your own.

Streamlined Administration

Structured settlement disability benefits are designed to offer a steady stream of income to individuals with disabilities. These benefits allow the injured party to design payments tailored to their needs for a period of years or their lifetimes. This provides the injured party with a safety net that gives them peace of mind and confidence to move forward in life.

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Moreover, these benefits provide clients with the security of knowing they can continue to receive payments, even when they are unemployed or have limited money management skills. In addition, these settlements preserve a client’s eligibility for Social Security Disability and Medicaid benefits.

If you decide to receive structured settlement disability benefits, it is important to consult a tax advisor before signing the agreement. This will ensure that you are receiving the best tax advantage possible for your situation and that any public benefits you are relying on in the future, such as Medicare or Supplemental Security Income (SSI), do not disqualify you.

Many injury victims find that their medical expenses can quickly eat up their settlement funds and cause serious financial problems. These costs include surgical procedures, prescription medications, therapy, home modifications and skilled nursing care.

As a result, it is essential to work with an experienced special needs planning attorney when choosing a structured settlement for a client with disabilities. This attorney can work with the plaintiff’s lawyer and the structured settlement broker to identify a customized strategy for the client that will help ensure the settlement is not rapidly dissipated and will continue to provide them with a steady stream of income.

A structured settlement can also be designed to administer a substantial initial payment to pay for major expenses. This can be a great option for people who are newly disabled and need a large upfront sum to help pay for bills, home improvements or the purchase of big-ticket items like a car.

The structured settlement can also be designed to provide supplemental payments for exceptional costs, such as college tuition. These payments are often set up to be higher than the annual income amount so that the injured person can still afford to pay for things like education and specialized equipment.

Tax-Free Payments

When you receive a structured settlement from your injury or disability, the payments are tax-free under federal law. This is because the government views these payments as restorative, and not income. Additionally, these payments do not affect your eligibility for public benefits, including Social Security Disability Benefits and Medicaid.

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However, it is important to understand that structured settlements are irrevocable and not reversible. You should consider a consultation with a professional in financial planning or an experienced attorney before settling for a lump sum payment.

Structured settlements offer an excellent way to manage the cash flow of a disabled person’s recovery. They can be set up to administer a substantial initial payment, followed by lesser succeeding payments that are designed to pay for monthly living expenses and big-ticket purchases, such as a car or home.

They can also be designed to pay for exceptional costs, such as college tuition or medical bills. They may be adjusted annually for cost of living increases.

One concern with lump sum payments from structured settlements is that they might disqualify a disabled individual from need-based public benefits, such as Supplemental Security Income and Medicaid. If this is the case, establishing a Special Needs Trust or Supplemental Needs Trust (SNT) with payback provisions can preserve the disabled claimant’s eligibility for such benefits.

If you do choose to receive a lump sum payment from your structured settlement, it is essential that you consult with a qualified tax professional to determine the potential impact on your public benefits. A skilled West Palm Beach disability lawyer can help you structure a recovery that will maintain your eligibility for public benefits and support your overall planning objectives.

You should also be wary of companies that offer to sell you a portion of your settlement in exchange for a lump sum of money. This is referred to as “factoring.” In most cases, these sales are given the same tax treatment as your periodic payments, but beware of unscrupulous factoring companies.

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.