Tax Issues in Structured Settlements and Periodic Payment Judgments
A structured settlement is a series of periodic payments that an injured person receives from a defendant in a personal injury lawsuit. These payments provide increased financial security for the claimant and assistance to pay medical bills or other needs.
A settlement can be structured to start immediately or deferred for as long as a person desires. A structured settlement annuity often yields, in total, more than a lump sum payout would because of the interest that the annuity may earn over time.
Legal Issues
Structured settlements are a popular option for victims of personal injuries because they provide the same benefits of a one-time lump sum payout, but with the added benefit of providing long-term financial security. These payments are also typically excluded from taxation.
However, there are some important legal issues that need to be considered before deciding whether or not to structure a settlement. These include whether a structured settlement can be effective for obtaining damages for the injured party, and how structured settlements work in conjunction with other elements of the claim.
First, plaintiffs and their attorneys must determine whether they should opt for a structured settlement or not. They should do this by weighing their own needs against the possible risks and rewards associated with a structured settlement.
They should also consult with an experienced structured settlement lawyer or financial advisor before entering into a structured settlement, since these professionals can help determine whether a structured settlement would be appropriate for the claimant and provide a roadmap for how to structure the settlement.
Second, a structured settlement can protect the injured victim against judgments and creditor claims that are related to the injury. Because these claims could eat up a portion of the recovery amount, it is important to protect the injury victim’s assets with a structured settlement.
Finally, a structured settlement can also be helpful in compensating families of wrongful death victims. These payments are generally exempt from taxation, and can be used to replace income as the family adjusts to life without their loved one.
The legal issues involved in structured settlements and periodic payment judgements are complex, but the result is a beneficial financial package that provides an injured person with the assurance of ongoing compensation and peace of mind for the future. Despite these challenges, structured settlements have become an essential part of personal injury and wrongful death cases in the United States. Moreover, many state legislatures have enacted legislation to prevent abuse of structured settlements and protect the interests of victims and their families.
Financial Issues
Structured settlements and periodic payment judgements can be an effective way to resolve personal injury lawsuits. These payments are typically made over time and provide increased financial security for the plaintiff. However, there are some issues to consider when receiving structured settlement payments.
Depending on the circumstances of your case, you may need to decide whether a one-time payment or periodic payments is best. A tax attorney or financial planner can help you make the right decision for your situation.
The first and most important issue to consider when deciding between a lump sum and a structured settlement is how the money will be used. A lump sum payment can be spent quickly, leaving little to no money for long-term planning and investments.
A structured settlement on the other hand, can be set up in a variety of ways and will typically be more flexible. It can be a stream of income for life that is completely tax-free, or it can be invested into a life annuity that earns interest.
Many states have laws that protect structured settlement annuities from judgments and creditor claims. This can be especially important for injury victims, as the proceeds from their settlement will be protected from creditors.
Another benefit to choosing a structured settlement over a lump sum is the protection from spending temptations that come with a large amount of cash. Often, people who receive a large sum of money are tempted to buy a car, home, or even a new outfit.
As a result, a structured settlement will help keep your spending in check and allow you to focus on other financial goals. Unlike a lump sum, structured settlement payments can be spread out over time so you can reduce your temptation to spend on frivolous items.
Aside from the issues relating to financial security, structured settlements can also be used as part of an estate plan to minimize estate taxes. This is especially helpful for those with high medical bills and other expenses. In addition, structured settlements can be used as a vehicle for receiving public benefits, such as Medicaid.
Insurance Issues
A structured settlement is an alternative to a lump sum settlement that provides financial security to injured victims over time. They provide guaranteed payments that are not impacted by market fluctuations and can be tailored to meet specific needs.
Structured settlements are an effective way to fund ongoing medical and housing expenses, as well as provide a financial safety net for injury victims. They are favored by judges, legislators and disability advocates because they provide an extra measure of comfort and assurance to injured people who may not be able to fully recover financially.
The payments in a structured settlement can be tailored to meet virtually any need, including known future expenses like a child’s college education or retirement. They can be paid out in monthly increments to mirror a plaintiff’s paycheck, or in one-time lump sums to cover upcoming expenses like a mortgage payment or car loan.
While a structured settlement is often preferable to a lump sum payout, it does carry some risks. For example, a structured settlement can be difficult to renegotiate once the settlement agreement is finalized.
In addition, an insurance company can refuse to buy a structured settlement annuity, which can have an adverse impact on a defendant’s ability to make periodic payments. In some cases, an insurer can assign the annuity to another company that will purchase it and then pay out the periodic payments. In other cases, the annuity can be purchased directly by the defendant.
A structured settlement is funded through a financial investment tool called an annuity, which can be purchased from a highly rated life insurance company. The annuity funds the periodic payments, which are then distributed to the injured plaintiff.
Many states have Insurance Guarantee Funds that can protect the underlying annuity contract if an insurer fails to make payments. Some annuities are indexed so that the periodic payments increase over time, making them more attractive to injury victims.
The benefits of a structured settlement can outweigh the risks, but there are some insurance issues that should be considered before signing a structured settlement agreement. These include:
Tax Issues
The tax issues involved in structured settlements and periodic payment judgements are complex, involving various federal rules. In addition to the Internal Revenue Code, a number of state statutes govern how these types of settlements are treated. The most important issue is whether the settlement proceeds are qualified for tax benefits.
Under the IRS’s Periodic Payment Settlement Act of 1982, the value of many annuities issued as part of a structured settlement agreement are exempt from income taxes. This tax benefit is particularly appealing to injured victims who depend on the financial security of a structured settlement.
Structured settlements are often a better option than lump sum settlements because they allow plaintiffs to spread their payments out over time, thereby reducing temptation to spend the money before it arrives. However, structured settlements are also more rigid and can be difficult to change once established.
While some insurers and defense counsel may try to fight any attempts by plaintiffs or their attorneys to structure a settlement, it is possible to protect your rights to structured settlements by ensuring that the language in your release specifically reserving the right to structure future payments is clear at the time you reach a final agreement.
The tax rules governing these payments can be complicated, but they are generally considered tax-free as long as the annuity is not used for other purposes (e.g., a retirement plan or to pay for health insurance).
There are two main ways that defendants or their insurers can transfer the obligation to make structured settlement payments: an “assigned case” and an “unassigned case.” In an assigned case, a third-party assignment company collects the funds from the defendant, then purchases an annuity from a life insurance company that is responsible for funding the annuity’s periodic payments.
Currently, the largest annuity issuers for structured settlements are Pacific Life, Berkshire Hathaway BRK.B +1.5% and MetLife MET +1.4%)
If you have a claim and would like to learn more about the tax issues involved in structured settlements, we recommend that you consult with an experienced attorney who can guide you through the process. Our team can assist you in establishing the right financial strategy and ensure that you get the best possible results from your settlement.
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