The Structured Settlement
What Is a Structured Settlement?
sometimes when a plaintiff settles a case for a large sum of funds, 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 than in a single lump sum. When a settlement is paid in this manner it's called a "structured settlement". Often the structured settlement will be created through the purchase of two or more annuities, which guarantee the future payments.
two significant advantage of a structured settlement is tax avoidance. With appropriate set up, a structured settlement may significantly reduce the plaintiff's tax obligations as a result of the settlement, & may in some cases be tax-free.
A structured settlement can provide for payment in much any schedule the parties select. For example, the settlement may be paid in annual installments over some of years, or it may be paid in periodic lump sums every few years.
Benefits of a Structured Settlement
In some situations, it will be better for a severely disabled plaintiff to set up a special needs trust, than entering in to a lump sum or structured settlement. Any plaintiff who is receiving, or expects to get, Medicaid or other public assistance, or the guardian or conservator entering in to 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.
Potential Disadvantages of Structured Settlements
A structured settlement can protect a plaintiff from having settlement funds dissipated, when they are necessary to pay for future care or needs. sometimes a structured settlement can help protect a plaintiff from himself - some people basically aren't lovely with funds, or can't say no to relatives who require to "share the wealth", & even a large settlement can be rapidly exhausted. Minors may benefit from a structured settlement as well, such as a settlement which provides for certain costs during their youth, an additional disbursement to pay for college or other educational expenses, & then two or more disbursements in adulthood. An injured person who has long-term special needs may benefit from having periodic lump sums with which to purchase medical equipment or modified vehicles.
Some people who enter in to structured settlements feel trapped by the periodic payments. they may wish to purchase a new home, or other pricey 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, & investing it themselves. lots of standard investments will give a greater long-term return than the annuities used in structured settlements.
Selling a Structured Settlement
Keep in mind that companies which buy structured settlements intend to profit from their purchase, & sometimes their offers may seem low. You may benefit from approaching over two company in relation to the sale of your settlement, to make sure that you receive the highest payoff. You also require to be sure that the company which wants to buy your settlement is established, well-funded, & reputable - you don't require a fly-by-night outfit to receive the rights to your annuities but to disappear or go bankrupt before paying you the buyout funds. You may have to be going to court to receive a judge to approve the buyout. it's usually a lovely idea to consult with a lawyer before entering in to an agreement to sell your settlement.
Special Considerations
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. About two thirds of states have enacted laws which restict the sale of structured settlements, & tax-free structured settlements are also subject to federal restrictions on their sale to a third party. Also, some insurance companies will not assign or transfer annuities to third parties, to discourage the sale of structured settlements. As a consequence, depending on where you live & the terms of your annuities, it may not be possible for you to sell your settlement.
Excessive Commissions - Annuities can be highly profitable for insurance companies, & they often over large commissions. it's important to ensure that the commissions charged in setting up a structured settlement don't consume an inappropriate percentage of its principal.
Any person entering in to a structured settlement should be on guard for potential exploitation in relation to the settlement:
Overstated Value - sometimes, after negotiating a particular settlement figure, the defense will overstate the value of a structured settlement. As a result the plaintiff, in accepting the settlement, in fact obtains a significantly lower dollar value than was agreed on. Some defendants have nominally paid the full amount of the settlement, knowing that they would later receive significant rebates from the annuity companies they used. Plaintiffs should consider compariing the fees & commissions charged for similar settlement packages by a variety of insurance companies, to make sure that they are in fact getting full value. A plaintiff may wish 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, & that any rebates received by the defendant for annuities included in the settlement be payable to the plaintiff.
Self-Dealing - there's been cases where the plaintiff's lawyer is also in the insurance business, & sets up a structured settlement on behalf of a client without disclosing that the attorney is purchasing the annuities from his own business, or is pocketing a large commission on the annuities. Similarly, there's been situations where the plaintiff's attorney has referred the client to a particular financial planner to set up a structured settlement, without disclosing that the financial planner will be paying the attorney a referral fee in relation to the client's account. Make sure that you know what financial interest, if any, your lawyer has in relation to any financial services sold or recommended by the lawyer.
Life Expectancy - it's unfortunate, but lots of people who get large personal injury or workers' compensation settlements will have a shortened life expectancy as a result of their injuries. it's important to consider life expectancy in association with any structured settlement, & to consider whether it's appropriate to enter in to an annuity where payments will cease on death. sometimes it will make sense to insist on an annuity that pays a maximum number of payments, or two that will pay a balance in to the plaintiff's estate, such that the value of the settlement is not lost to an insurance company on 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. This can provide you with protection in the event that a company that issued annuities for your settlement package goes in to bankruptcy - even in the event that two of the companies defaults in part or in full on your settlement payments, you would still get full payment from the other companies.
