A structured settlement is essentially an agreement regarding a compensation package between a plaintiff and a defendant in a court case.
What happens is that when the case is settled for a large amount of money in favor of the plaintiff, the defendant or his attorney may propose to pay the settlement over time in installments, instead of paying all at once.
Settlements that are paid in this way are known as “structured settlements”, and are often created by the defendant purchasing something called an annuity, which acts as a guarantee that the installments will be met.
The two parties involved are free to schedule the settlement payments in just about any manner they can agree upon – for example, the plaintiff may receive annual payments for X number of years, or the settlement could be paid out in lump sums once every five years.
Structured Settlement Benefits
One of the biggest advantages of structured payouts is that plaintiffs can avoid paying tax on their payout.
So long as the structured settlement company or whoever is organizing the details sets it up appropriately, the plaintiff’s tax obligations can be reduced significantly, or the settlement may even be completely tax-free.
Another advantage is that settlements offer protection to plaintiffs from their payout dissipating, for example when they need to pay for healthcare needs or some other unforeseen expense in the future.
Alternatively, these settlements are also able to protect plaintiffs from themselves – not everyone is as good at managing their money, and there is also the danger of relatives and friends trying to leech off your new-found wealth. Even large amounts of money can be rapidly exhausted if the plaintiff is not careful.
Minors too, can benefit from settlement payments – they can be used to pay for educational costs while children are growing up, like college fees and other disbursements as and when these are required.
Someone who has sustained a serious injury that prevents them from working will also benefit. The settlement will assist them with their living costs which cannot be met on state benefits alone, and additionally they can be used to purchase specialist medical equipment, pay for medical treatment, or even something like a modified vehicle so they can still get around.
Sometimes, especially in the case of a plaintiff who has been severely disabled, it may be better if a special needs trust is set up, as opposed to a settlement.
However, any plaintiff that receives Medicaid or another kind of healthcare benefit should consult with a financial planner for persons with disabilities before agreeing a particular kind of settlement structure.
Structured Settlement Disadvantages
There are a few issues to consider before agreeing to a settlement. Sometimes, people can feel trapped by the regular payouts of the settlement, especially when it comes to large purchases or investments.
They may want to buy a new home for example, but will be unable to do so because they do not have the financial resources to put a down payment on one, and they learn that they cannot borrow against their settlement’s future payouts.
Some people are also better at managing their finances, and will do well to accept a lump sum settlement and then use this to invest.
There are many investments schemes available that offer much better long-term gains than you can get from settlement annuities. What's the best decision for you? I'd be glad to help you talk through it and decide.
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