Integrated Family Community Services 3370 South Irving Street, Englewood, CO 80110-1816 Ph: 303-789-0501

What You Need To Know About Structured Settlements

Suppose you have brought a personal injury claim, and now the party who damaged you, or more likely that party’s insurance company, makes what seems like a reasonable offer to settle the case. Up to that point, you may have been so focused on what would be needed to prove your case and on preparing for trial that you may have given little thought to how to handle whatever compensation the case might eventually bring. But before you snap up the settlement offer, give some careful thought to your options.

Traditionally, personal-injury plaintiffs who received settlements for their medical or other damages got a single lump-sum payment. While that may sound like the answer to your prayers, it can actually have drawbacks. First, you may have a physical condition that will require continuing, perhaps life-long, treatments or care, or that limits your ability to be self-supporting. Or you may need to deal with obligations – such as children’s education – perhaps many years in the future. If so, whether a one-time lump-sum payment will enable you to meet such needs will depend in large part on whether you have the financial planning and management savvy to ensure settlement funds don’t run out while they are still needed. Unfortunately, those skills are far from common, and financial missteps could find you too quickly exhausting the settlement funds.

In addition, if you get a large one-time payment, a significant share of those funds soon will likely pause only temporarily in your pocket, before traveling on to the welcoming arms of the Internal Revenue Service, and maybe to a state tax agency as well. You’ll wind up paying income taxes (probably at rates far above what you ordinarily pay) when you get the lump-sum settlement, and then may pay ordinary income or capital gains taxes on whatever income you manage to derive from investing that nest egg.

But instead of receiving a settlement in one lump sum that will be highly taxed and may not last as long as needed, what if there were an alternative capable of providing you with regular payments, with greater certainty and free from taxes? Structured settlements can fill that bill, by providing periodic guaranteed, tax-free payments. If correctly set up, a structured settlement can use funds from the settlement to buy an annuity or other financial assets to be paid to you over time. Instead of a one-time lump-sum payment, you get a steady, predictable stream of income. Better yet, that income can be fully tax-free, since laws enacted by Congress and most states encourage structured settlements as a dependable way to provide a stream of regular payments to individuals who have been seriously injured and their families.

It’s very important to consider future needs carefully before setting up a structured settlement, since terms typically cannot be amended later on (although the recipient of a structured settlement may be able to sell some or all of it in a secondary market, to speed up payments). A properly drawn structured settlement can also protect the recipient from losing eligibility for means-tested government benefits programs such as Medicaid.

It is far from simple to determine whether a structured settlement might fit your specific situation and, if so, how to best design one fully in compliance with complex legal requirements. If you have received an offer to settle any claim, you should first explore in depth with your legal representative these and other issues about a structured settlement before you decide on the offer.

Zane Schwarzlose is a writer at Fahrenheit Marketing, an Austin web design firm. Zane is glad he doesn’t have a structured settlement.

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IFCS’ Tax ID # 84-0579740