The Structured Settlement

What Is a Structured Settlement?

Sometimes when a plaintiff settles a case for a large sum of money, 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.

Benefits of a Structured Settlement

One 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, and may in some cases be tax-free.

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 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. 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, and then one 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.

In some situations, it will be better for a severely disabled plaintiff to set up a special needs trust, rather than entering into a lump sum or structured settlement. 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.

Potential Disadvantages of Structured Settlements

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. Many standard investments will give a greater long-term return than the annuities used in structured settlements.

Selling a Structured Settlement

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, and 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 upon where you live and the terms of your annuities, it may not be possible for you to sell your settlement.

Keep in mind that companies which buy structured settlements intend to profit from their purchase, and sometimes their offers may seem quite low. You may benefit from approaching more than one company in relation to the sale of your settlement, to make sure that you obtain the highest payoff. You also want to be sure that the company which wants to buy your settlement is established, well-funded, and reputable - you don't want a fly-by-night outfit to obtain the rights to your annuities but to disappear or go bankrupt before paying you the buyout money. You may have to go to court to get a judge to approve the buyout. It is usually a good idea to consult with a lawyer before entering into an agreement to sell your settlement.

Special Considerations

Any person entering into a structured settlement should be on guard for potential exploitation in relation to the settlement:

Excessive Commissions - Annuities can be highly profitable for insurance companies, and they often carry very large commissions. It is important to ensure that the commissions charged in setting up a structured settlement don't consume an inappropriate percentage of its principal.

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 upon. Some defendants have nominally paid the full amount of the settlement, knowing that they would later obtain significant rebates from the annuity companies they used. Plaintiffs should consider compariing the fees and 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, and that any rebates received by the defendant for annuities included in the settlement be payable to the plaintiff.

Self-Dealing - There have been cases where the plaintiff's lawyer is also in the insurance business, and 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 have 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 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, 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. This 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 would still receive full payment from the other companies.

Additional Resources

Selling Your Structured Settlement - The costs and benefits of selling a structured settlement.
Cash Payment For Your Structured Settlement - What should you consider before selling your structured settlement?

Structured Settlements - What are they?
Many people have been compensated for injuries sustained in an accident Until 1982, such compensation was usually accomplished by payment in a lump sum. A change in Federal law that year created what are now known as structured settlements, an alternative to lump-sum payments where the injured party receives monthly or annual payments over a period of time.

A structured settlement can offers several advantages over a one-time, lump sum payout. With a structured settlement, the security of long-term income is guaranteed. If the victim is confined to a wheel chair or needs constant bed rest and nursing attention, a structured settlement can make certain that sufficient funds will be in hand to pay for the care. This allows the patient and/or their family to concentrate on health care without having to be overly concerned with the machinations of investing a lump-sum payment.

Structured Settlements allow income to be spread over time, which is safer than a lump sum payment. Studies have shown that some 30% of those who receive lump-sum payments as compensation for accident or injury spend the money within two months, and some 90% have spent the money within five years.

A lump-sum payout must be invested and administered. Unless the victim or their family has experience investing large amounts of money, they will have to hire a financial advisor to handle the sum. Any returns on the invested money are taxable, and there is always the risk of handing the investment to the wrong person and having the money simply disappear due to theft or mismanagement.

A structured settlement can prevent this. The income from a structured settlement is tax-free, both at the Federal and state levels. Because the money is handed out in smaller increments, there is less need for a financial advisor. And with no financial advisor, there is less of a chance of theft or loss of the funds, which would leave the victim without financial aid or income.

Structured settlements are often ideal under the following circumstances:

Guardianship cases where the victim dies and leaves minor children. A structured settlement can insure that funds are available for food, housing and education for the surviving family members.
Workers compensation cases where the injured party is unable to work for a protracted length of time. A structure will allow steady income to insure that the victim and their family will continue to have steady income.
Disabilities of a temporary or permanent nature that require extensive health care or recovery time.

The party that pays in an accident or injury case can benefit from payments over time, as they can set up an annuity to pay the funds over time. The funds are invested with the payments coming out of the proceeds. It’s “hands off” for the paying party, and they typically pay out a smaller amount of money in present dollars than if they paid in a lump sum.

There are many things to consider if you are in a position to receive a large amount of compensation for injury or accident. One of the options may involve payments over time. Before you act, you should learn as much as you can about structures in order to determine if such an agreement is right for you. As always, should you find yourself in such a situation, you should consult with a financial advisor and/or a competent attorney. The last thing you want to do is deal with a crisis without adequate help.

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Saturday, June 6, 2009