A “structured settlement” can be one of the best ways to safeguard and grow part or all of the money received in a lawsuit. A settlement or verdict recipient has a number of options in how they receive part or all of the money received in a lawsuit. They could take all of it in one lump sum or they could elect to “structure” part or all of that settlement or verdict. A structured settlement is where a plaintiff elects to take part or all of the settlement in the form of future payments.
While the technical requirements for setting up a structured settlement are very technical and complex, essentially, the Defendant purchases a specialized annuity for the benefit of the plaintiff with some or all of the settlement or verdict amount. The plaintiff decides how much they want to put into this structured settlement and how the future payments are to be made.
One common concern for many plaintiffs is that they not be reliant on the Defendant for the settlement amount to be paid out through the structured settlement payments. With a structured settlement, this is not an issue. The plaintiff instructs the defendant to purchase a structured settlement annuity from one of a number of the most financially secure insurance companies in the Country. It is then the insurance company that is obligated to make the future payment or payments.
Structured Settlements receive tax benefits that a plaintiff would not otherwise get if they take the amount in a lump sum at the time of settlement. The preferential tax treatment, ability to grow and safeguard the money are all reasons for the popularity of structured settlements continues to increase.
Based on the given facts of a case, any amount received may be partially or entirely tax-exempt or partially or entirely taxable. Structured settlements can be utilized in certain types of both tax-exempt and taxable cases.
For example, if a plaintiff takes the entire settlement or verdict amount of a tax-exempt settlement in a lump sum and then invests that lump sum, they will get the original lump sum as tax-exempt, but as soon as they invest it or put it in the bank any return on that amount is taxable income. With a structured settlement in a tax-exempt case, not only is the initial amount put into the structured settlement tax-exempt, but any growth, profit, or return is also tax-exempt.
A structured settlement can be set up to provide almost any combination of future payments that a plaintiff would desire. A common example is where a plaintiff decides to structure their settlement whereby payments will be made to them of the original amount plus the return on that amount in equal payments over the next 10 years so that they have a steady stream of money every month. Other examples are where someone would forego monthly payments for one payment sometime in the future representing a return of the original amount used to purchase the structured settlement plus the return on that amount. Yet another example, could be where someone wants to put a certain amount in a structured settlement that would enable them to receive 4 years of consecutive payments during the period of time a child or children are attending college for tuition.
In some cases where the settlement or verdict is taxable, a plaintiff can still elect to structure part or all of that money. The tax benefit in a “non-qualified” structured settlement is that the taxes are deferred until the plaintiff actually receives the payments from the structured settlement. The result is not only deferred taxation, but preserving a larger amount upon which to earn a return until the money is paid out.
It is very easy for someone, even seasoned structured settlement brokers, to fail to comply with all of the very technical requirements that must be followed in order to sell and set up a proper structured settlement. There is also a very strict sequence of events that must be followed. For example, the structured settlement must be set up prior to finalization and payout of the settlement or verdict or it will be defective.
One of the reasons that we began to offer structured settlements, as a structured settlement broker, is because we were being brought in to try and fix defective structured settlement sold by just a salesman who didn’t understand how to set them up. Plaintiffs attorneys were also concerned that the salesman, trying to sell the structured settlement, did not how to properly set them up to comply with the IRS requirements. Most of the time, if anything is done incorrectly, it is fatal to the structured settlement and cannot be fixed. This results in losing the tax benefits, having money locked into a structured settlement that doesn’t provide the desired benefits, and can result in the loss of substantial amounts of money.
As a former plaintiff’s attorney, tax attorney with an LLM in Taxation, and specializing in the tax treatment of settlements and verdicts; we don’t think that anyone can safeguard you and provide you with the level of skill, advice, knowledge and expertise in this area.
DISCLAIMER: DO NOT RELY ON ANYTHING ABOVE AS LEGAL ADVICE OR TAX ADVICE FOR YOUR SPECIFIC CASE. THE EXPLANATION ABOVE IS AN OVERVIEW OF A VERY SMALL PORTION OF THE TAXATION OF SETTLEMENTS AND VERDICTS AND STRUCTURED SETTLEMENTS. THIS DOES NOT APPLY TO YOUR SPECIFIC CASE. EVERY CASE IS DIFFERENT. THE ANALYSIS OF TAX TREATMENT OF SETTLEMENTS AND VERDICTS IS VERY COMPLEX. WE WILL NOT STAND BEHIND ANYTHING WRITTEN ABOVE AS LEGAL ADVICE, TAX ADVICE OR STRUCTURED SETTLEMENT ADVICE. DIMARIA LAW DOES NOT SELL STRUCTURED SETTLEMENTS UNDER IT LAW LICENSE OR GIVE INVESTMENT ADVICE UNDER ITS LAW LICENSE.