Physical Injury Settlements
Structures for Attorneys
Non-Qualified Structured Settlements
When most people receive unexpected cash, their first impulse is to spend it. Whether a person wins the lottery, receives an inheritance, is offered early retirement benefits or settles an insurance claim, odds are that, unless something is done to protect it, the cash will soon disappear. To help safeguard personal injury settlement recipients from bad investments, unscrupulous friends or family, and unwise or frivolous purchases that can quickly deplete settlement funds, a concept entitled Structured Settlements was developed in the late 1970s. Shortly thereafter Congress authorized federal income tax incentives to encourage the use of structured settlements through enactment of the Periodic Payment Settlement Act of 1982 (Public Law 97-473).
“When most people receive unexpected cash, their first impulse is to spend it. Whether a person wins the lottery, receives an inheritance, is offered early retirement benefits or settles an insurance claim, odds are that, unless something is done to protect it, the cash will soon disappear.”
With a structured settlement, a Defendant, or the Defendant’s insurance carrier, agrees to pay an injured party a sum of money over a set period of time for his or her future financial needs. To fund the structured portion of the settlement, an annuity is purchased from one of the highly-rated life insurance companies in the U.S. who offer the product. The life insurance company, in turn, takes over the obligation to pay the injured person from the Defendant and/or its insurance carrier, and makes the scheduled periodic payments to the injured person. Government-backed Treasury securities can also be part of the mix.
“Payments from a structured settlement are exempt from state and federal taxes. The interest that accrues on the annuity funds is also exempt from being taxed.”
Payments from a structured settlement are exempt from state and federal taxes. The interest that accrues on the annuity funds is also exempt from being taxed. The interest component combined with the length of the tax-free benefits equate to an overall payout to the injured party which is greater than the initial settlement amount placed into the structured annuity.
Structured annuities can be designed to meet virtually any type of future need – lifetime payments, ongoing medical needs, retirement planning, college tuition, or other financial concerns. Structured settlements are beneficial in a wide variety of cases and settlement dollar amounts.
Typically, structured settlements are also recommended for claims involving minors. Without a structured annuity, a child is legally entitled to all the funds from a settlement when he or she reaches the age of majority. Structured annuity payments can safeguard against a young person making immature decisions that could quickly deplete the settlement funds. The structure can be designated for college tuition and living expenses and other major life expenses such as purchasing a home, or buying a car.
“Regardless of what happens to the stock market, the economy or interest rates, payments from a structure are guaranteed. “
One of the most important benefits of a structured settlement is the peace of mind they offer. Regardless of what happens to the stock market, the economy or interest rates, payments from a structure are guaranteed. Additionally, because a structured settlement is a source of compounded, tax-free funds, it is very difficult for even a sophisticated investor to match consistently the rate-of-return generated by a structured annuity.
Security for the future
The guaranteed annuity payments may be made for virtually any length of time, even for the recipient’s lifetime. In the event of the individual’s death, a guaranteed portion of the settlement may be paid to the estate or a named beneficiary, including a spouse or child. Concerns about inflation can be countered by including periodic percentage increases (cost of living adjustments) in benefit payments or providing lump sums at future dates.
Note: Information is not legal or tax advice. Buyers and Sellers will need to consult with an attorney or tax advisor on whether an installment sale is right for them and how best to structure each sale.