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What Is A Structured Settlement?
A structured settlement payout refers to a financial arrangement between a plaintiff and defendant in a lawsuit, where the former agrees to resolve the charges for settlement received in the form of periodic payments. It differs from the usual, where the payment is often made in lumpsum. The system aims to provide victims of accidents guaranteed long-term income tax-free periodic payments.
The parties involved in a structured settlement are the plaintiff, who is the person who initiates the lawsuit and seeks compensation, and the defendant, who is the party against whom the lawsuit is filed. In the case of a structured settlement, the defendant or their insurance company agrees to pay a settlement amount to the plaintiff over time rather than in a lump sum.
Table of contents
- A structured settlement is a financial arrangement where a plaintiff or claimant receives a series of payments over time as part of a legal settlement or judgment.
- Structured settlements are often used in cases involving personal injury, medical malpractice, or wrongful death, and the payments are typically tax-free.
- Structured settlements can provide a reliable income stream over time, but they may not be the best option for everyone. It's important to consult a financial advisor or attorney to determine the viability.
How Does Structured Settlement Work?
Structured settlements are a common legal solution where the defendant compensates the plaintiff for an injury or loss. For example, after the plaintiff files a lawsuit and takes the matter to court, they can agree to resolve the issue and drop the charges against the defendant in exchange for a monetary settlement.
Plaintiffs are more likely to agree to periodic payments in a structured settlement, as it ensures a regular source of income for them. However, it may have less flexibility and more limitations on the amount spent in a particular period. Furthermore, if the defendant prefers to make a lump sum payment, but the plaintiff prefers periodic payments, the defendant can purchase an annuity for the plaintiff, which will make the regular payments on their behalf. The annuity ensures that the plaintiff receives the promised payments even if the defendant goes bankrupt or cannot make the payments. If the defendant chooses to make an initial lump sum payment, they may make regular payments in decreasing, increasing, or equal installments.
Types
There are several types of structured settlements, including:
- Periodic Payment: This is the most common type of structured settlement in which the plaintiff receives regular payments over a specified period.
- Life Contingent: In this type of settlement, the plaintiff receives regular payments for the duration of their life.
- Lump-Sum Payment: In this type of settlement, the plaintiff receives a large lump sum payment followed by smaller periodic payments.
- Deferred Payment: In this type of settlement, the plaintiff agrees to delay the start of their regular payments for a specified period.
- Joint and Survivorship: This is a settlement in which two or more people receive regular payments, with the payments continuing to the survivor(s) after the death of one or more recipients.
Examples
Here are some examples to understand the concept.
Example #1
Meghan was walking on the sidewalk when Phil lost control of his car and hit her. Meghan suffered a few injuries and a fractured bone. She had to spend $5,000 at the hospital. Meghan filed a lawsuit against Phil. He had to pay $250,000 as a settlement. However, Meghan demanded that she should be paid periodically for ten years. Phil purchased an annuity for this purpose.
Example #2
According to the data in a Forbes article, there has been an increase in structured settlement sales following the COVID-19 pandemic and court closures. One possible example of how this might play out is a personal injury case in which the plaintiff negotiates a structured settlement instead of a lump-sum payment. For instance, a plaintiff who suffers a serious injury in a car accident may receive a settlement of $500,000. Still, instead of taking the money as a lump sum, they could negotiate to receive periodic payments over a certain number of years. It would provide the plaintiff with a more stable income source over time while reducing the risk of overspending or mismanaging the funds.
Benefits
Let's look at the possible benefits of structured settlement payments.
- It can help the plaintiff cover recurring medical expenses or other costs arising from the damage caused by the defendant. They can also provide a regular source of income for the plaintiff over time.
- Structured settlements are usually tax-free, even though they are a form of income. However, any investment returns earned from the settlement amount may be subject to taxation.
- It provides flexibility to the plaintiff by allowing them to receive regular income for life. An annuity can make this process easier, and the plaintiff can also ensure that the settlement passes on to their family or dependents after they pass away.
From the defendant's perspective, structured settlements do not require a lump sum payment, reducing their financial burden. Alternatively, the defendant can purchase an annuity to provide regular payments and avoid the need to make payments directly to the plaintiff.
Structured Settlement vs Annuity
Here are the differences between a structured settlement payment and an annuity:
| Structured settlement | Annuity |
| Defendants pay plaintiffs following a lawsuit for the latter's purpose. | Individuals purchase annuities for themselves and later their survivors. |
| The selling process is quite complicated. Requires court approval. | Easier to sell. Doesn't require court approval. |
| Less flexibility concerning withdrawal. | A small portion can be withdrawn penalty-free. |
| They are generally tax-free in the United States as long as the payments relate to personal injury or illness damage. | Annuities are usually taxable. |
Frequently Asked Questions (FAQs)
One of the main disadvantages of a structured settlement is its lack of flexibility. Once the settlement is established, the plaintiff is generally locked into a fixed payment schedule that cannot be changed or adjusted except in very limited circumstances. It means the plaintiff cannot withdraw or access the money all at once, even if they suddenly need a lump sum of cash. Additionally, the payments received may not keep up with inflation or changing financial needs, such as unexpected medical expenses.
Structured settlements are generally not considered income for tax purposes, and the payments are typically tax-free. However, if the settlement includes punitive damages or the payment is assigned to a third party, it may be subject to taxation.
Selling a structured settlement is a legal process involving several steps. It starts with researching reputable buyers and obtaining court approval for the sale. After obtaining quotes, the seller chooses a buyer and signs a purchase agreement that includes the purchase price, payment schedule, and fees. The buyer then files a petition for court approval and, once approved, funds the purchase, and the seller receives the payment.
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