What are Structured Settlements?

Imagine you have a friend named Melanie who has been severely injured in a car accident. Unfortunately, she ended up losing her ability to work for the rest of her life. After going to court, the judgment was made to award her $3.5 million in compensation. She worked closely with an experienced lawyer who advised her to opt for a structured settlement, which looked like this:

• Lump-sum amount: $500,000 will be paid to her immediately to cover her legal and medical expenses.
• Deferred payments: The remaining $3 million is invested in an annuity, providing Melanie with regular payments to cover her living costs. She chooses to receive $6000/month, totaling $72,000 annually. This plan allows her to receive payments for approximately 41.6 years, ensuring a long-term comfortable financial cushion.
• Inflation adjustment: This plan includes inflation adjustments to maintain her living costs accordingly.

It sounds like an amicable solution, but there’s a lot that’s gone on behind the scenes to ensure that Melanie’s case was resolved this way. For starters, what exactly is a structured settlement? What makes people take this specific route, and are there other ways to organize them? What about the potential downsides? Let’s explore their mechanics, advantages, and potential limitations to better understand this strategy.

Understanding structured settlements

A structured settlement offers a periodic payment spaced out over time. The plaintiff agrees to dissolve the claim by receiving a certain ongoing amount on an agreed-upon schedule for their personal injury.

The payment schedule is structured in several ways to meet the injured party’s requirements, including:

• Over a period of time
• Lifetime
• Or held until the claimant reaches a certain age

The plan applies only to personal injury or wrongful death victims to provide them maximum financial security, especially when they are unable to work due to the injuries.

When do claimants choose structured settlements?

Structured settlements work best when someone has sustained severe and long-term injuries because they cover medical expenses and the cost of living when debilitating injuries don’t allow them to work, such as in car accidents, workplace injuries, or medical negligence claims.

Additionally, structured settlements are advantageous in wrongful death cases to support the deceased’s family and, in minors’ cases, to financially secure their future once they reach a certain age. The aim is to help claimants financially maintain their quality of life and cover other expenses that arise due to injury.

Different structured settlement payment options

Structured settlements offer flexible payment methods to cater to the various needs of the claimant. Among the payment plans available are:

• Lump sum distribution: A chunk is paid to the claimant to cover legal costs and other financial expenses from the day of the incident to the settlement agreement, with the remainder to be paid over time.
• Deferred payments: Payments are processed after a certain period to help claimants settle their previous engagements.
• Lifetime payments: Claimants are paid as long as they live.
• Periodic lump sums: Payments are made in agreed-upon, scheduled distributions (e.g., every two years).
• Increasing or decreasing payments: The payments increase or decrease over time according to the nature of the cost and to cover expected expenses.
• Payments for life with a specific period: These payments are for life, but if the claimant dies early, a beneficiary receives the remaining amount for a certain period.

To better understand your options and make an informed choice, it’s highly recommended that you consult your legal or financial advisor to determine the best payment method for your specific circumstances.

Advantages of structured settlements

Structured settlements prove to be highly beneficial for the claimants in the following ways:

• Financial security: Structured settlements are paid at a specific time, ensuring financial security for the claimant. This means they always have the means to comfortably cover their medical expenses and other necessities.
• Tax exemption: Structured settlements are well codified in US law and are exempted from taxes according to the Periodic Payment Settlement Act of 1981 and Internal Revenue Code (IRC) 104(a)(2). In fact, the claimant is not even liable to pay taxes on the interest incurred on the payment over time.
• Customized settlements: The payment plan can be customized according to the needs of the claimant.
• Guard against poor money management: Since the money is paid in a certain amount, there is less risk of poor money management or impulse spending, which can occur with a lump sum amount.
• Inflation-proof: Lump sum amounts are volatile and incur inflation risk, whereas structured settlements become inflation-proof.

It is essential always to consult a lawyer to determine whether settling an injury claim with a structured settlement is a workable option in the long run.

The tax benefits of structured settlements

Structured settlements are codified in US law to protect injury victim rights. According to the Periodic Payment Settlement Act of 1982, the amount paid in settlement is tax-free for the claimant. Additionally, Internal Revenue Code (IRC) 104(a)(2) clearly states that the settlement amount received in personal injury cases is exempt from taxation, whether it is received in full or in a structured settlement. The tax exclusion from IRC also applies to the interest received on the settlement amount. However, the victims are liable for taxation if the settlement money is invested somewhere.

Thus, these tax legislations provide full financial benefit to the injured party without tax liability, ensuring the victims have secure support for their long-term recovery and can manage their quality of life.

Disadvantages of structured settlements

While structured settlements often offer many benefits, there are some pitfalls to be aware of, including:

• Risk of inflation: While structured settlement plans often attempt to account for inflation adjustments, they are ultimately estimates. Unforeseen economic changes can affect living expenses, and the claimant may need more than the decided amount to maintain their quality of life.
• Inflexible arrangement: After a structured settlement has been legally decided, altering the terms becomes quite challenging. This lack of flexibility makes these arrangements undesirable for some claimants.
• Accessibility to the funds: Structured settlements are divided into periodic payments and cannot be accessed in case of emergency or unforeseeable events, which sometimes pose problems for the claimant in the future.
• Eligibility for public benefits: A structured settlement can put a recipient at risk of losing eligibility for public benefits.
• Insolvency of insurer: There is always a potential risk of the insurance entity providing a structured settlement becoming insolvent, affecting the payout for the claimant.

The disadvantages must be carefully weighed against the advantages to make a truly informed decision. Consulting a personal injury lawyer and a financial advisor is critical so the injured person can reach a payment plan that best suits the unique situation.

Considering a structured settlement for your personal injury claim?

Structured settlements are an excellent strategy to redress your injury and financial losses, such as medical expenses, lost wages, and damage to property. In a structured settlement, you can receive future financial security for a specific period.

However, understanding the nuances of structured settlement can be tricky, and it is highly recommended to consult a lawyer before making any decision. An excellent personal injury attorney can help clarify the process, documentation, and court proceedings for you.

At Pat Maloney: Accident & Injury Attorney, we have been helping the citizens of San Antonio, Texas, for 70 years to make informed legal decisions based on their particular circumstances. If you’re unsure about your structured settlement, don’t hesitate to consult a personal injury lawyer at Pat Maloney: Accident & Injury Attorney today. Call our offices at 210-796-3906 or fill out our online contact form for a free case evaluation.