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 discuss all available options with your attorney. 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. Many lump-sum settlements are considered income and must be claimed on tax returns. Funds received from an annuity are tax-free as long as the plaintiff does not control the funds.
- Plaintiffs who receive lump-sum settlements often spend everything within five years. Afterwards, many become dependent on the government for their support. With a structured settlement, the funds are preserved throughout the time of plaintiff's disability.
- Annuity funds must be managed by a professional. Proper financial planning will help make sure plaintiffs have enough funds to cover future 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 that guarantee the obligations of a bankrupt insurer will be covered.
- 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 allow parties who are far apart in their settlement negotiations to close the gap and reach an agreement acceptable to both the plaintiff and the defendant.
- If a plaintiff retains too much control over the structured settlement proceeds, the IRS may look at the situation and decide that the tax break must be forfeited.
- 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.
- Sometimes, an annuity is placed with brokers who do not have sufficient protection for insolvency (when financial obligations outweigh assets).
- Insurance companies are usually reluctant to disclose how much they will have to pay to buy an annuity covering the amount of the settlement. A structured settlement frequently costs insurance companies much less than it would to make a lump-sum settlement. Without this information, however, the plaintiff's attorney may not be able to make a complete assessment of the benefits and drawbacks of a settlement offer.
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 your best interests.