Many personal injury cases do not make it all the way to trial. Not because they lack merit, but because the parties are able to reach a settlement early on. This is usually a good thing for everyone involved. When a settlement is reached, the person who was injured (the plaintiff) agrees to dismiss the lawsuit in exchange for monetary compensation. Depending on the amount of the settlement, the payments are made either as a lump sum or a structured settlement. As with everything, there are pros and cons of structured settlements. Before you make a decision, there are a few things to consider.
What is a structured settlement and how does it work?
A structured settlement is a type of payment arrangement where the plaintiff receives regular payments over an extended period of time, possibly for the plaintiff’s life. This type of payment arrangement is particularly appropriate in cases involving catastrophic injuries. The way it usually works is, the defendant’s insurer will fund an annuity policy for the benefit of the plaintiff. The annuity provides a continuous stream of income for the term of the structured settlement.
Some advantages of structured settlements
There are many benefits to receiving a structured settlement payment. Structured settlements provide substantial tax benefits to plaintiffs. Lump sum payments are considered income and are required to be included on tax returns. However, income received from an annuity are tax free, as long as the plaintiff is not controlling that income.
Structured settlements also provide better management of the funds. It is all too common that, when plaintiffs receive a lump sum, it is spent within the first five years or less. At that point, because of the need for continued medical care, they become dependent on government assistance. On the other hand, a structured settlement will serve to preserve the funds so they remain available throughout the plaintiff’s disability, or lifetime. Another advantage is that annuity funds are managed by professionals. So, with proper financial planning, the plaintiff’s future expenses should be covered.
Disadvantages of structured settlements
Despite the tax advantages of an annuity, if the plaintiff retains too much control over the settlement proceeds, the IRS may not approve the tax break. Some plaintiffs are not willing to accept structured settlements because they fear that future inflation or a recession may significantly decrease the annuity payments. Another risk with an annuity is that it may be placed with a broker with insufficient protection against insolvency.
Another problem with accepting a structured settlement is the inability to make an accurate assessment of the appropriateness of the settlement. The reason for this is that insurance companies rarely disclose the amount they actually pay for the annuity. This type of arrangement often costs the insurance company much less than the lump sum payment would. Nevertheless, a settlement may ultimately be a quicker, less expensive and less stressful alternative to trial. Discussing your situation with your personal injury attorney will help you decide whether a structured settlement is your best choice.
If you have questions regarding structured settlements, or any other catastrophic injury issues, call the Cottrell Law Office at (888) 433-4861.