When you win or settle a lawsuit, there are a lot of decisions to make. One of the most pressing decisions for many plaintiffs is whether to receive their settlement money as a lump sum or a structured settlement. When there are large sums of money in the balance, it is important for plaintiffs to carefully consider all options available to them to maximize the benefits of their settlement payments.

Structured settlements provide plaintiffs with financial security, offering a streamlined payout process while helping to maximize long-term financial benefits. Let’s explore how structured settlements work and how this payment structure can set plaintiffs up for sustained financial stability after resolving a lawsuit.

How do structured settlements work?

When a plaintiff wins or settles a lawsuit, they are often presented with the choice between receiving a lump sum payout or opting for ongoing payments on a pre-negotiated schedule. This latter payment structure is known as a structured settlement. Structured settlements are customizable, providing recipients with a dependable source of income tailored to their specific needs and preferences.

The administration of structured settlements is typically managed by an insurance company that invests the total settlement amount and then distributes an agreed-upon portion of the total to the plaintiff on an ongoing basis. Recipients can opt to receive a portion of their settlement as an upfront lump sum while the remainder is paid out in regular monthly or annual installments. Alternatively, plaintiffs may choose to delay the receipt of all payments until a specified time, thus enabling them to use their settlement funds as a source of future or retirement income.

This flexibility and adaptability make structured settlements an attractive option for many plaintiffs, as the payment structure and timeline can be tailored to suit the individual financial goals of recipients and their families. Additionally, receiving funds on an ongoing basis can help plaintiffs make more sound and responsible financial decisions that will benefit them for years beyond the initial settlement date.

What kinds of cases result in structured settlements?

There are some different legal contexts in which a structured settlement may serve as a form of compensation. A few types of cases that typically result in structured settlement options include:

• Personal injury lawsuits: In cases where an individual has sustained physical or emotional harm due to another party’s negligence, he or she may opt to receive their personal injury damages in the form of a structured settlement.
• Workers’ compensation claims: When an individual is injured on the job, they may be entitled to workers’ compensation from their employer. This may come in the form of a structured settlement agreement.
• Wrongful death lawsuits: In the event of a wrongful death, victims’ families can receive their settlement money on an ongoing basis rather than as one up-front payment from the party deemed liable for the wrongful death.
• Medical malpractice lawsuits: If a patient sustains harm due to a medical professional or institution failing to meet the accepted standard of care, a structured settlement can be used to compensate the patient for any expenses and pain and suffering.

When weighing your settlement options, it is important to consult with your attorney to ensure you have the information you need to make an informed decision.

What are the tax implications of structured settlements?

In addition to flexibility and adaptability, structured settlements offer significant advantages, including potential tax benefits. Settlement payments from personal injury or wrongful death claims are generally not considered taxable income under U.S. tax law. However, any profit derived from investing one’s settlement payout would be taxable. For example, if you are awarded a sum of $250,000 as the result of a personal injury lawsuit and opt to receive that money as a lump sum, you would be required to pay taxes on any profit you made by investing that money, i.e. in the form of earned interest, capital gains or dividends.

In contrast, when you opt for a structured settlement, the total settlement amount is placed into an annuity, which a life insurance company manages. The insurance company technically owns the annuity and is responsible for investing the funds to generate the scheduled payments, thus absolving the beneficiary of any tax liability associated with interest generated by the annuity. It is important to note that not all cases resulting in structured settlements are subject to the same taxation structure. You need to consult with qualified professionals like tax attorneys or CPAs when assessing the tax liability associated with your settlement payments.

What are the drawbacks of structured settlements?

As we’ve discussed, a wide range of benefits are associated with structured settlement agreements, but there are still many things to remember when determining whether a structured settlement might be right for you. The most significant and commonly cited downside to a structured settlement arrangement is that it is, by definition, fixed. Once a settlement is structured, recipients are extremely limited in terms of the changes they can make to their payout schedule. This means that, in an emergency, recipients are precluded from accessing funds beyond their agreed-upon payment amounts. If a plaintiff needs immediate access to a large sum of money, they may prefer to take their settlement money as a lump sum or partial lump sum rather than placing the total settlement amount into an annuity.

If a plaintiff opts for a structured settlement but later faces financial strain, they may consider selling all or part of their annuity to a structured settlement buyer. Generally speaking, the beneficiary of a structured settlement will be asked to sell their future payments at a discounted rate in exchange for money upfront. While this arrangement can provide immediate liquidity, it generally comes at a cost: recipients usually receive less money than they would have if they had kept the structured payments. Additionally, if a payment beneficiary sells their structured settlements and chooses to invest the lump sum payout from that sale, they may face tax liability for any resultant investment income.

Is a structured settlement right for you?

If you suffered injuries in an accident or medical malpractice, consult with an attorney to determine your settlement agreement options. The Knoxville-based team at Banks and Jones may be able to provide the support you need for your case. Reach out today to schedule your free consultation and to discuss how our experienced legal team can help you.