Structured Settlements: Pros and Cons
Many civil cases, particularly accident and personal injury lawsuits, never make it to trial because the parties reach a settlement agreement earlier in the litigation process. Generally, a settlement requires the plaintiff (person brining the lawsuit) to discontinue any further legal action in exchange for receiving a money payment from the defendant or the defendant’s insurance company. Settlement payments are usually lump-sum (all at once) or structured (regular payments over a period of time).
A structured settlement is an arrangement that provides the plaintiff with regular payments over the course of several years or for the rest of the plaintiff's life. They are especially helpful when the plaintiff suffers a serious and permanent injury known as a catastrophic injury. With a structured settlement, a defendant's insurer typically funds an annuity policy for the plaintiff. An annuity produces a continuous stream of income over the term of the structured settlement. Annuity contracts can be quite complex to cover a variety of expected expenses.
Before accepting any settlement agreement you should always discuss all available options with a tax attorney, personal injury attorney or certified public accountant (CPA) to fully explore tax consequences of a verdict or settlement. Below are some pros and cons of structured settlements for you to consider.
- A structured settlement may provide a plaintiff with a substantial tax benefit because personal injury settlements are considered "tax-free" under the U.S. Tax Code. However, some exceptions apply and can make portions of a settlement taxable, such as an award of punitive damages or interest that accrues on the settlement. Speak to a qualified attorney to learn more.
- Structured settlements offer plaintiffs the certainty of payments over a fixed period of time. However, lump sum payments may be better suited for cases involving minors, as they allow for long-term investing, or those suffering from a debilitating injury that will require future medical expenses.
- Parties may tailor annuities to cover a plaintiff's specific needs and all sorts of future demands or contingencies.
- In most states, annuities are protected by state insurance laws which guarantee that the obligations of a insurer will be covered. Although federal law doesn't allow an insurer to formally declare "bankruptcy," most states have a safety net for insurance companies that become insolvent: insurance companies and policy claims will continue to be covered and paid by the home state's guaranty association, subject to state limits.
- A lump-sum payment may be combined with a structured settlement to meet immediate expenses, such as medical bills, repayment of debts, rehabilitation costs, and the like.
- Parties can dedicate funds of a structured settlement to cover unanticipated advances in medicine so that if medical science develops a miracle cure, the plaintiff can give it a try.
- A structured settlement may help parties who are far apart in their settlement negotiations to reach an agreement acceptable to both the plaintiff and the defendant.
- Certain parts of a settlement, whether a lump sum payment or a structured settlement, can be taxed, including punitive damages, some attorney's fees, purely emotional damages not stemming from physical injury, and more.
- A plaintiff may fear that, no matter how the settlement protects against negative economic conditions such as inflation or recession, unknown changes in the economy could make the annuity payments too small.
- In the past, some insurance companies were reluctant to disclose how much they would have to pay to buy an annuity covering the amount of the settlement. A structured settlement frequently costs insurance companies less than it would to make a lump-sum settlement. Without this information, the plaintiff's attorney was not be able to make a complete assessment of the benefits and drawbacks of a settlement offer. Today, however, most states, such as New York and Florida, have some form of a disclosure law known as a "Structured Settlement Protection Act" (SSPA). These laws require insurers to be upfront about their costs.
In many circumstances, a settlement may be a faster, cheaper, and less stressful alternative to trial. An experienced personal injury attorney can discuss the facts of you case with you and help you decide whether a structured settlement would be in your best interests.