Not many people are aware of all the benefits and advantages that structured settlements can bring. In truth, not many people are aware of structured settlements to begin with. If you were offered a structured settlement deal versus a lump sum of cash on winning a court case, and you chose the lump sum, you clearly don’t know head or tail about structured settlements. In order to benefit from all that these settlements have to offer, you need to make sure you understand what they are and how they can be utilized as a good financial scheme for your future.
What’s in a Structured Settlement?
If a person has suffered a personal injury, they can avail of this arrangement that allows them to receive money at regular periods of time. This is much better than settling for a lump sum of cash as cash in hand tends to be spent much faster than cash that comes in at regular intervals.
Having first begun in Canada, these settlements are now being used on a large scale for personal injury or product liability cases. They can also be provided through the purchase of annuity to generate your future payments.
These settlement are mostly used in personal injury or cases of wrongful death. The best part is that they can be designed to meet the individual’s needs and thus, can be seen as an efficient mode of financial security for one’s lifetime.
Why Choose Periodic Payments over Cash?
Naturally, the first question that will come to your mind is – why do we need periodic payments? Here’s the simplest reason why. When you opt for structured settlements, your after-tax earnings are converted and thus provide you with tax free return. So if you received $200,000 in a personal injury case, it would be tax free. However, the moment you invest this amount, the earnings from that would be taxable. So by choosing a structured settlement that makes payments over a period of years, you are assured to receive fully tax free payments.
“Long term security and tax benefits” are the main reasons why structured settlements are better than lump sum cash. The structuring of your money over a longer period of time will certainly provide you with a better future assurance of money than a lump sum of cash would.
When do people receive Structured Settlements?
There are three main cases in which the plaintiff, that is the person who has been wronged, can become a recipient of a structured settlement. These are:
- A Personal Injury Case – When someone has been harmed by another and demands money from him, it can be given in the form of a structured settlement so as to help the harmed individual cover medical expenses and the like.
- A Case of Worker’s Compensation – Workers who get injured on the job are usually paid a certain amount to help meet their medical expenses and other costs, during and after the recovery period. This can be given in the form of structured settlements. The money can also be utilised as wage replacement since the injured employee will be unable to work and earn for a while.
- A Case of Wrongful Death – A structured settlement can also be given to compensate the family of a person who was subjected to a claim of wrongful death. Through structured payments, the family is able to receive tax free payments over a specified period which can be used to replace the income that would have been earned by the member that passed away.
The Process of Structured Settlement
Now that you have understood why you should opt for a structured settlement, here’s how you go about doing it. When you choose a structured settlement on winning a case, a trained consultant is provided to both sides to discuss the amount that should be given and other requirements of the plaintiff. The consultant will then make use of the money to buy annuity.
It is important to note that the annuity should always be handled by a company that is completely unknown to the party at fault. Going in for annuity helps protect the money from the many risks that are associated with any investment, including the fluctuations in the market. Once this is done, the plaintiff shall begin to receive scheduled payments at the specified periods.
Job of a Structured Settlement Broker
A structured settlement broker is the person that you need to consult when your case reaches its settlement. A broker will assist you in ensuring you meet all the requirements and are able to get a good deal. Depending on which insurance company you choose to provide you with the annuity, they usually pay the broker a commission to do his job.
The best part about a structured settlement however, is their flexibility. This allows you to come up with a settlement structure that suits your needs. So you could choose to receive joint payments for you and your spouse or you could ask for the payments to begin after a couple of years, so that it can be used as a smart retirement option.
All you need to do to get the deal you desire, is decide on these issues before you sign the settlement. You can even choose just a part of it as a settlement and ask for the rest in cash. This is why you need to ensure that you choose a good broker so that you are able to set up a proper arrangement that caters to your needs.
Categories of Structured Settlements
Based on tax exemption, structured settlements can be divided into two main categories. While there are certainly exceptions, these settlements are either qualified for tax exemption or are considered unqualified.
Even the traditional settlements that are given for personal injury cases, need to fulfill certain criteria in order to be exempt from taxing. This means, the amount of the settlement has to have fixed payments and should be made into an annuity. At the same time, the amount and the time of payment should be determined beforehand. The payments needs to be paid to the insurer and no change can be made in this structure. Then and only then, will the settlement be considered as qualified for tax exemption.
On the other hand, an unqualified settlement is when the claim falls out of the normal scope of cases. These include claims of sexual harassment, racial discrimination, wrongful termination and so on. The tax benefits here differ based on the different types of transactions and they are usually not exempt from taxation.
Structured Settlements for Divorce
If you are getting a divorce, it is highly probable that your structured settlement will have to be split between you and your spouse when dividing your assets. However, the ultimate say will depend on how the respective state handles asset division.
If the state believes in equitable distribution of assets after marriage, and you took the settlement before your marriage, you will certainly be able to keep it for yourself. Even when dividing the assets, the task doesn’t imply that the settlement money is going to be divided. Instead, the person who doesn’t choose to receive the settlement money will be compensated with some other asset that will balance out the amount.
Guaranteed Payments – A Better Alternative
Before you sign or agree to the terms of the structured settlement, you need to check whether you are being offered a Guaranteed Payment or a Life Contingent Payment.
The reason Guaranteed payments are more commonly chosen is because this stipulates that the settlement continues to be paid, irrespective of any other factor. So even if the person who is supposed to receive the payments passes away, the money will continue to be paid to the heir designated by them.
Life Contingent payments, on the other hand, rely upon the person who is the recipient of the settlement, being alive during the entire tenure. Thus, in this case, if the person passes away, the insurance company will cease to provide the payments that the person is supposed to get. This is why, opting for the guaranteed payments is a smarter option. By simply designating an heir, your family will continue to benefit from the money of the payments which is rightfully yours.
Weighing the Pros and Cons
While these settlements are quite flexible, once the agreement is made the terms can’t be changed. This is why, many people hesitate when it comes to opting for structured settlements. It is always best to structure only some amount of the money received and not every nickel. Some of the main advantages that you can obtain from structured settlements are:
- If the recipient suffers a premature death, the tax free money continues to be paid to the heir of the recipient.
- Scheduling of payments is completely in the hands of the recipient. You can defer them for a couple of years, begin them instantly or even ask for a lump sum payment at a future date.
- The best advantage however is that these settlements are not victim to market fluctuations so the regular payment of money is guaranteed by the company that has provided the annuity.
However, on the flip-side, there are a number of reasons why people aren’t so keen to take on structured settlements. These are:
- One is not able to access these funds, even if an emergency surfaces.
- The terms cannot be altered after finalizing them, even if they no longer meet your needs. There is absolutely no scope for renegotiation of the terms.
- The lump sum amount cannot be invested into other investments offering higher interest rates.
- If you want to tap into the settlement payment, without selling it, you will incur surrender charges as well as IRS penalties, particularly if you wish to withdraw an amount before the age of 59.
Is It Possible to Sell Structured Payments?
As mentioned earlier, once the agreement is made, there can be no changes made to it. However, if an emergency befalls you and you are in urgent need of the money, you can sell the payments to meet your financial needs.
A secondary market for structured settlements emerged a while back mainly for this purpose – because people whose long term plans suddenly changed and those who were faced with sudden emergencies, needed some way of getting their hands on the money. The only option that they could think of was selling their payments for a lump sum of cash. This led to the creation of companies that are now engaged in buying your structured settlements from you and giving you cash in return.
Given that this is still a big change in the norms of structured settlements, there are state and federal regulations that need to be met. In addition to that, the request has to go through a judge to ensure that selling structured settlement is in the best interest of the person concerned. A structured settlement buyer will assist you in filing all the right documentation and paperwork so that your case can go to the judge. There is no reason to worry about the procedure as it is put in place only to ensure that there is nothing fishy with the transaction being conducted. Most of the time, the cases go swiftly through and the settlement is allowed to be sold.
How to Find a Good Structured Settlement Buyer?
Now that you know that selling your structured settlements is completely legal, you need to be very cautious when picking the company that you wish to sell your settlements to. Given the urgency of the situation, most people pick the first company they hear of and this can be very dangerous as there are numerous unscrupulous companies that aim to rob people of their settlement payments. This is why, when choosing a buyer, there are certain factors that you need to keep in mind.
- Do not trust a buyer who rushes you to sign without answering all your queries and letting you think upon it.
- If the buyer insists that you misrepresent yourself when filling the details of the form or asks you to lie on the settlement form, leave and find yourself a more reliable buyer.
- Make sure you read everything that is written on the contract before you sign it
- A good buyer will usually handle issues relating to your structured settlement in a personalised manner and will not leave you to conduct your transactions with an automated machine.
Furthermore, they will always ensure you are clear about the entire selling process and all the terms and conditions associated with it. So only when the buyer gives you ample time to examine the contract and answers all your queries without rushing you to sign, will you know that you are in the hands of a reliable buyer.
When dealing with the buyer, ensure that no compliance fees or even attorney fees are passed on to you. Whatever amount is supposed to come to you, according to the quote, you need to make sure you get that exact amount and not a nickel less.
Handling Structured Settlements of Minors
When a certain case involves a child or children, the court usually tries to account for their long term financial stability. A child can become a recipient of a structured settlement if a parent met with an accident and was severely injured, passed away or if some injury was caused to the child directly due to medical malpractice or birth injury.
The main difference between an adult handling a settlement and a minor doing so is that the child has almost no control in the setting up of their periodic payments. At the same time, the parents or guardians of the child are required to spend the money only in the way specified by the court. Providing the child with a continuous series of payments makes it easier to ensure that the child’s current as well as future needs are met.
Selling of Structured Settlement Issues to a Minor
Given that a minor is in no position to make decisions for themselves, with regard to any aspect of their structured settlement, the selling of the payments to the minor will also be laced with far more regulations of federal and state level that need to be met.
The main necessity is requiring sufficient documentation that can prove that there is urgent need for the money that is being given out in payments. In addition to this, the moment the request is made, the judge usually appoints a Guardian Ad Litem to look into the case. This person will go over the sale of payment and will then decide whether selling the payments for lump sum cash is really in the best interest of the person concerned.
Thus, not only are structured settlements an efficient option when it comes to getting tax benefits but they also provide you with spendthrift benefits and asset protection. The best part is they can be tailored in any way by the injured person so as to provide financial security for a couple of years.