Lawsuit Essentials: What Is a Structured Settlement?
When individuals sustain personal injuries as a result of another party’s actions or negligence, they often choose to sue the at-fault entity in pursuit of compensation. Those who win their cases, however, may not always seek lump payments. Instead, courts award them structured settlements that act as ongoing income streams.
Structured settlements are unique forms of legal resolution that have grown quite common in modern times. Here are all the basics you need to know.
What Is a Structured Settlement?
In structured settlement arrangements, guilty defendants pay the plaintiffs’ eligible expenses as they come up. Although the at-fault party is still liable for whatever total lump sum the court deemed appropriate, they disburse it in gradual remittances instead of all at once.
Structured settlements can be useful in situations that involve personal injuries, such as car accidents. A crash victim’s medical expenses are likely to be ongoing for some time. Receiving monthly payments as part of a structured settlement may make it easier for them to manage the money correctly and minimize the impact of costs like lost wages during their recovery.
Structured Settlements and Annuities
Many structured settlements incorporate annuities. An annuity is a legal arrangement between an insurer and a buyer who receives periodic payments in exchange for their purchase.
In many structured settlements, defendants buy annuities from third-party financial institutions, and the annuity payments go to the plaintiff. This increases the likelihood that defendants will remain financially stable during the payment period. It also, however, raises the risk that plaintiffs might not receive compensation if the financial institution goes under.
Why Are Structured Settlements Popular?
In the U.S., the modern form of structured settlements dates back to about the 1950s. These arrangements quickly caught on with defendants because they didn’t have to pay large judgment sums all at once.
Many plaintiffs who give up their rights to lump-sum payments in favor of structured settlements discover that defendants are willing to come to an agreement much faster or without trial.  Some attorneys offer discounts on their services for clients who pursue such settlements.
These settlements also appeal to those who don’t want to deal with taxation. Because the IRS and Congress transferred the same total exemption rights traditionally associated with tort damages to structured settlements, they can become a source of long-term, tax-free income.
Are There Risks to Structured Settlements?
Of course, structured settlements aren’t perfect. For example, the payments that a plaintiff receives are predetermined according to their predicted need, and the amount contributed by a defendant may be lowered during months when a plaintiff has fewer expenses. Unfortunately, the payments won’t be increased to compensate for miscalculations that fall below what a plaintiff actually requires during a given time frame.
Is It Smart to Sell?
Another potential hazard lies in trying to waive your settlement rights for compensation. Starting around the 1980s, structured settlement recipients began exchanging the rights to their payments to buyers in exchange for lump sums. For those whose living and personal expenses rose dramatically beyond their initial settlement payment amounts, agreeing to these so-called factoring transactions was seen as a good way to gain financial stability.
Unfortunately, the lump sum payout that a recipient receives is almost always significantly smaller than the remaining value of their settlement. In addition to the profit margin the buyer builds into their reduced payment, you also have to consider that the IRS imposes a significant tax on factoring transaction purchasers. In other words, buyers have to pay you less to generate the same amount of revenue.
Although selling can seem like an effective means of obtaining ready cash, it’s only for those who have absolutely no other options. In many states, there are even laws against selling unless you can prove your need before a court and demonstrate that the transaction will be in your best interest. Also remember that in addition to losing the tax-exempt payments, you may actually incur various tax penalties for the transfer of certain settlements and annuities.