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How Personal Injury Structured Settlements Work
When a personal injury case settles, the injured party can choose to receive their compensation through structured payments. According to Nolo’s legal resources, the process typically follows these steps:
- The plaintiff and defendant agree on settlement terms, including the payment schedule
- The defendant’s insurance company transfers funds to a qualified assignment company
- This company purchases an annuity from a life insurance company
- The annuity makes guaranteed payments to the plaintiff according to the predetermined schedule
This arrangement must be established before finalizing the settlement agreement, as it cannot be implemented retroactively. Structured settlement annuities can be arranged for settlements as low as $10,000, making them accessible for cases of various sizes.
Tax Benefits of Structured Settlements
One of the most significant advantages of structured settlements is their favorable tax treatment. Under Section 104(a)(2) of the Internal Revenue Code, all payments received from a personal injury structured settlement are 100% income tax-free. This includes:
- The initial settlement amount
- Any interest or growth accumulated over time
- All periodic payments received by the claimant
This tax advantage was established by the Periodic Payment Settlement Act of 1982 and represents a substantial financial benefit compared to receiving a lump sum that might generate taxable investment income.
Customizing Your Structured Settlement
New York Life Structured Settlements explains that these arrangements can be tailored to meet specific financial needs through various options:
- Regular Income Stream: Consistent payments to cover ongoing living expenses
- Larger Future Payments: Increasing payment amounts to account for inflation or anticipated needs
- Educational Funding: Payments timed to coincide with college or other educational expenses
- Medical Care Coverage: Payments structured to cover anticipated medical treatments and expenses
- Combination Approach: Partial lump sum for immediate needs with structured payments for long-term security
Structured Settlements vs. Lump Sum Payments
When deciding between a structured settlement and a lump sum payment, consider these key differences:
Structured Settlement Advantages
- Guaranteed income stream for life or a specified period
- Tax-free growth and payments
- Protection against poor investment decisions or spending pressure
- No management fees or expenses
- Safeguard against market volatility
Lump Sum Advantages
- Immediate access to the full settlement amount
- Flexibility to invest or use funds as desired
- Ability to address large immediate expenses (medical bills, debt)
According to Sage Settlements’ FAQ resources, structured settlements are particularly beneficial for plaintiffs who:
- Have long-term medical needs
- Require income replacement over many years
- May be vulnerable to financial pressure from others
- Have limited investment experience
- Need to preserve government benefits
Special Considerations for Disabled Plaintiffs
For personal injury victims with disabilities, structured settlements offer additional benefits. The Special Needs Alliance highlights how structured settlements can be combined with special needs trusts to:
- Preserve eligibility for means-tested government benefits like Medicaid and SSI
- Provide supplemental funds for needs not covered by government programs
- Ensure lifetime financial security
- Protect vulnerable individuals from financial exploitation
By directing structured settlement payments into a special needs trust, plaintiffs can maintain their eligibility for essential benefits while still benefiting from their settlement.
Selling Structured Settlement Payments
While structured settlements are designed for long-term financial security, life circumstances may change. Some recipients may consider selling future payments for an immediate lump sum. However, this decision comes with significant considerations:
- Selling typically results in receiving 50-80% of the payments’ actual value
- Many states require court approval for such sales to protect recipients
- The tax-free status of payments may be affected
- Once sold, the financial security of guaranteed future payments is lost
Working with Settlement Consultants
Working with Settlement ConsultantsA structured settlement consultant can help navigate the complex decisions involved in setting up a personal injury settlement. These professionals:
- Design payment schedules tailored to individual needs
- Coordinate with attorneys to ensure proper documentation
- Help address potential complications like liens or benefit preservation
- Provide information about the financial strength of annuity issuers
Importantly, structured settlement consultants are typically paid by the insurance company issuing the annuity, not by the plaintiff or their attorney.
Structured Settlement FAQs
What is a personal injury structured settlement?
A personal injury structured settlement is a financial arrangement where compensation from a personal injury case is paid out as a series of periodic payments rather than as a single lump sum. This setup provides long-term financial security, tax advantages, and ensures funds are available for ongoing medical care and living expenses.
How do personal injury structured settlements work?
When a personal injury case settles, the plaintiff and defendant agree on settlement terms, including the payment schedule. The defendant's insurance company transfers funds to a qualified assignment company, which then purchases an annuity from a life insurance company. This annuity makes guaranteed payments to the plaintiff according to the predetermined schedule. This arrangement must be established before the settlement agreement is finalized.
What are the tax benefits of structured settlements?
Structured settlements offer significant tax advantages. Under Section 104(a)(2) of the Internal Revenue Code, all payments received from a personal injury structured settlement are 100% income tax-free. This includes the initial settlement amount, any interest or growth accumulated over time, and all periodic payments received by the claimant.
How can a structured settlement be customized?
Structured settlements can be tailored to meet specific financial needs. Options include a regular income stream for ongoing expenses, larger future payments to account for inflation, payments timed for educational expenses, coverage for medical care, or a combination approach with a partial lump sum for immediate needs and structured payments for long-term security.
What are the advantages of a structured settlement over a lump sum payment?
Structured settlements offer a guaranteed income stream for life or a specified period, tax-free growth and payments, protection against poor investment decisions, no management fees, and a safeguard against market volatility. In contrast, a lump sum payment provides immediate access to the full settlement amount, flexibility to invest or use funds as desired, and the ability to address large immediate expenses.
Can structured settlement payments be sold for a lump sum?
Yes, structured settlement recipients can choose to sell their future payments for an immediate lump sum. However, this typically results in receiving 50-80% of the payments' actual value, and many states require court approval to protect recipients. Selling may affect the tax-free status of payments and result in the loss of the financial security provided by guaranteed future payments.
