A structured settlement is a settlement that is paid out in periodic payment, usually over a period of years, rather than being paid as a lump sum.
When a plaintiff settles a case for a large sum of money, sometimes the defendant, the plaintiff's attorney, or a financial planner consulted in association with the settlement, will propose paying the settlement in installments over time rather than in a single lump sum. When a settlement is paid in this manner it is called a structured settlement. Often the structured settlement will be created through the purchase of one or more annuities, which guarantee the future payments.
A structured settlement can provide for payment in pretty much any schedule the parties choose. For example, the settlement may be paid in annual installments over a number of years, or it may be paid in periodic lump sums every few years.
Structured settlements may provide a variety of financial, tax, and asset protection benefits to injured parties, including:
Reduction of Tax Exposure - One significant advantage of a structured settlement is tax avoidance. When a settlement includes funds that are taxable to the plaintiff, with appropriate set-up, a structured settlement may significantly reduce the plaintiff's tax obligations, and may in some cases render the settlement tax-free.
Preservation of Assets - A structured settlement may protect a plaintiff from having settlement funds dissipated. That may be particularly important when settlement funds will be needed to pay for future care or needs.
Sometimes a structured settlement can help protect a plaintiff from himself. Some people simply aren't good with money, or can't say no to relatives who want to "share the wealth", and even a large settlement can be rapidly exhausted.
Financial Planning - Minors may benefit from a structured settlement, such as a settlement that provides for certain costs during their youth, an additional disbursement to pay for college or other educational expenses, and then one or more disbursements in adulthood.
An injured person who has long-term special needs may benefit from receiving periodic lump sum payments with which to purchase medical equipment or modified vehicles.
In some situations, rather than entering into a lump sum or structured settlement, it will be better for a severely disabled plaintiff to set up a special needs trust. Any plaintiff who is receiving, or expects to receive, Medicaid or other public assistance, or the guardian or conservator entering into a settlement on behalf of a disabled ward, should consult with a disabilities financial planner about their situation before choosing any particular settlement option or structure.
Some people who enter into structured settlements feel trapped by the periodic payments. They may wish to purchase a new home or other expensive item, yet be unable to muster the resources because they can't borrow against future payments under their settlement.
Some people will do better by accepting a lump sum settlement and investing it themselves, as compared to receiving the return typically available from a structured settlement. Many standard investments will provide a greater long-term financial return than the annuities used in structured settlements.
If you have a structured settlement, you may have been approached by a company interested in purchasing your settlement, or may be curious about selling your settlement in return for a lump sum buyout.
Roughly two thirds of states have enacted laws that restrict the sale of structured settlements. Tax-free structured settlements are also subject to federal restrictions on their sale to a third party. Also, in order to discourage the sale of structured settlements, some insurance companies will not assign or transfer annuities to third parties. As a consequence, depending upon where you live and the terms of your annuities, it may not be possible for you to sell your settlement. You may have to go to court to get a judge to approve the buyout.
The companies that buy structured settlements intend to profit from their purchase, and sometimes their offers may seem quite low. If you are interested in selling your settlement, in order to make sure that you obtain the highest payoff you may benefit from approaching more than one company in relation to the sale of your settlement.
You also want to be sure that the company that wants to buy your settlement is established, well-funded, and reputable. You don't want to work with a fly-by-night outfit that may obtain the rights to your annuities but then disappear or go bankrupt before paying you the buyout money.
To protect your interests, it is usually a good idea to consult with a lawyer before entering into an agreement to sell your settlement, and to have the purchase contract reviewed by your lawyer before you sign it.
Any person entering into a structured settlement should be on guard for potential exploitation in relation to the settlement:
Annuities can be highly profitable for insurance companies, and they often carry very large commissions. When setting up a structured settlement it is important to ensure that the commissions charged don't consume an inappropriate percentage of its principal.
After negotiating a particular settlement figure, sometimes the defense will overstate the value of a structured settlement. As a result, in accepting the settlement, the plaintiff may obtain a structured settlement that has a significantly lower dollar value than the amount agreed upon.
Some defendants will pay the full amount of the settlement to be applied to the purchase of annuities, while later receiving significant rebates from the annuity companies used to structure the settlement. As a condition of entering a structured settlement, a plaintiff may want to make it a condition of the settlement that the defendant will actually pay the full value of the settlement in setting up the structured settlement, and that any rebates received by the defendant for annuities included in the settlement be payable to the plaintiff.
Plaintiffs should approach a variety of insurance companies, and should compare the fees and commissions charged for similar settlement packages available from a range of companies to make sure that they are in fact getting full value.
In some unfortunate cases, the plaintiff's lawyer will also be in the insurance business. The attorney may set up a structured settlement on behalf of a client without disclosing that he is purchasing the annuities from his own business, or that he is pocketing a large commission on the annuities.
Similarly, in some cases the plaintiff's attorney will refer the client to a particular financial planner to set up a structured settlement, without disclosing that the financial planner will pay the attorney a referral fee based upon the size of the client's account.
Make sure that you know what financial interest your lawyer has in relation to any financial services sold or recommended by the lawyer. Ideally the answer will be "none". Although self-dealing is unethical and can lead to potential the attorney's suspension from practice or disbarment, it nonetheless occurs.
It is unfortunate, but many people who receive large personal injury or workers' compensation settlements will have a shortened life expectancy as a result of their injuries. It is important to consider life expectancy in association with any structured settlement, and to consider whether it is appropriate to enter into an annuity where payments will cease upon death.
Sometimes it will make sense to insist upon an annuity that pays a minimum number of payments, or one that will pay a balance into the plaintiff's estate if the plaintiff passes away before receiving the full settlement, such that the value of the settlement is not lost to an insurance company upon the plaintiff's untimely death.
Using Multiple Insurance Companies
For larger settlements, it often makes sense to purchase annuities for a structured settlement from several different companies, dividing the settlement between those companies. Splitting the settlement between insurance companies can provide you with protection in the event that a company that issued annuities for your settlement package goes into bankruptcy. Even in the event that one of the companies defaults in part or in full on your settlement payments, you will still receive payments from the other companies.