If you are considering accepting structured payments or lump sums payment, you are in the right place. Lump sums payments used to be the order of the day in lawsuits involving personal injury and wrongful deaths. A lump-sum settlement implies that the defendant offers the plaintiff a once and for all payment. In some cases, it is the defendant’s insurance company that will make this payment. However, things started turning around in the 1980s due to new taxation laws in the US. Please keep reading for Structure Settlement, What is it?
These laws exempted structured payments in lawsuits from taxation. Hence, this arrangement became more appealing. Plaintiffs began to agree to structure settlement to receive payment gradually. Usually, the plaintiff gets part of the agreement as a lump sum and has the rest structured over a period. In some cases, courts structure settlement such that the claimant receives lifetime payments. In this complete guide, you will learn how structured payments work and the pros and cons of accepting them.
Structure Settlement: Common Situations
Once the parties involved in personal injury lawsuits reach an agreement earlier, there will not be a trial. So, many defendants prefer to structure settlement over a period rather than risk jail terms. Besides, imprisonment for the defendant will not take away the sufferings of the plaintiff. Therefore, most people prefer to settle for structured payments rather than elongate the litigation process. Structured settlements ensure that the plaintiff receives money payment to discontinue any further legal action.
Since structured payments offer the plaintiff a regular stream of income, they are often attractive forms of settlement. These agreements are especially helpful when the individuals suffer a serious and permanent injury. Such a catastrophic injury will make life harsher and challenging to cope with for the plaintiff. So, accepting that the defendant structure payment for extended periods will compensate for the plaintiff’s sufferings. Typically, the defendant’s insurer funds an annuity policy for the plaintiff. The annuity will generate a continuous stream of income for the plaintiff over the course of the settlement.
Although personal injuries and wrongful deaths are the most common cases involving structured payments, they are not restricted. In some divorce cases, the parties involved accept structured settlements to bury hatchets. Lawsuits regarding medical malpractices are also often settled with the defendant agreeing to pay the plaintiff a specific amount. The report of the Internal Revenue Service shows that structured settlements received annually in the US are over $6 billion. You can expect this form of settlement to assume an upward trajectory in the long run.
Structure Settlement: How does it Work
You must understand how annuity contracts work to leverage them effectively. They can be quite complex to cater to a variety of expenses. If you have an agreement with the defendant to structure settlement, you will not get the payment directly. The defendant or the defendant’s insurer will transfer the payment to a different insurer. The new insurance company is an insurer that specializes in handling structured settlements. You have to be careful at this point because nothing is set in stone. You may not get the money if something goes wrong.
To avoid having issues later, ensure that the insurance company is reputable for transparency, consistency, and fidelity. You cannot afford to let an insurer that has a history of bankruptcy or corruption handle the payment. There is no way to get the structured payment again if the insurance company does not play its role effectively. Therefore, you should be careful and think twice before accepting this arrangement. Indeed, there is an element of risk in structured settlements that you should not ignore. Moreover, you should not allow the defendant to force an agreement on you.
You can negotiate various aspects of the settlement. Negotiate the length of the structure and the frequency of the payment. You can receive payments monthly, annually, or bi-annually. Suggest the amount of money you want to receive for each payment. Besides, you can also request a lump sum at the beginning or towards the end of the contract. Let the defendant know whether you want payments to end if you die before the agreement ends. By negotiating, you can have the payments continue to your heir if you die before the contract ends.
Structure Settlement: How to Calculate the Amount
You may find it strange that we are discussing how to calculate structured settlements. However, there are some technicalities involved that you need to understand. If you agree to structure settlement without a good grasp of what you are entering, you are preparing for regrets. Imagine that you have an agreement with the defendant to structure settlement for 20 years. The plan is that you will receive $100,000 per year for the duration of the contract. Let’s assume that the agreement includes continuing the payment to your heirs within the settlement’s term.
You and your heirs are supposed to receive $2,000,000 over the 20 years. Nonetheless, things are not that straightforward. In reality, the defendant will pay much less than that amount to fund the settlement. Why? This is because a structured payment is under the category of a future income stream. You cannot calculate this category of income in terms of its current value. The present value involves calculating the value of a future income stream as though it is in a bank already. It is a little tricky, right?
The defendant will pay the amount that should be in the bank, accruing interest, to pay you $100,000 annually. By using this approach, the insurer will need significantly less than $2,000,000 in a bank today to cover the cost. This calculation is quite complex, and it is better to leave it to financial experts. Typically, your lawyer will hire an economist to handle this aspect of the contract. The attorney will receive the financial expert’s advice to evaluate if the agreement is the best for you.
Structure Settlement: Pros
When you agree to structure settlement, there are many benefits you stand to enjoy over a lump sum payment. Here are some of them:
Structured payments can be combined with a lump sum payment to cater for expenses such as rehabilitation costs and debt. Under the US Tax Code, structured settlements are non-taxable. Therefore, this arrangement offers you a stream of income that is tax-free. Nonetheless, there are exceptions in which some portions of the payment become taxable. For example, an award of punitive damages will attract tax.
Stable Stream of Income
When you agree to structure settlement, you can be confident of receiving payments over a fixed time frame. The parties involved structures annuities in catering to the plaintiff’s future needs or contingencies.
Secure Financial Future
Structured payments ensure that you secure your future financially. You can exhaust a lump sum payment in no time and become vulnerable later. However, when you agree to structure settlement, you can always look forward to a sure means of revenue. Besides, state insurance laws protect annuities, thereby ensuring that insurers perform obligations. In the event of bankruptcy, the home state’s guaranty association often pays the annuities.
Unlike a lump sum settlement, it is easier for the plaintiff and defendant to reach an agreement with structured settlements. Plaintiffs are confident that they will get their payments eventually, albeit gradually. Meanwhile, defendants will not be under pressure to pay a considerable amount of money immediately. So, parties that are far apart in their settlement negotiations can draw the curtain faster with structured payments.
Structure Settlement: Cons
You should think twice before you agree to structure settlement because it has some disadvantages. They include:
It is Restrictive
A structured settlement enforces a saving and investment culture. You cannot withdraw the funds once and for all to lavish it meaninglessly. Nonetheless, it can become too restrictive in the long run. You cannot withdraw it to cover immediate expenses, and this can be frustrating. Some people end up regretting the arrangement and sell the payment at a discount eventually.
Tendency for Debts
You may find yourself in a cycle of debts and settlement with structured payments. During moments when you need to cover an urgent need, you may need to borrow to cater to the need. You may find yourself in this same sequence for a while.
Prone to Unprecedented Economic Changes
You may regret settling for a structured arrangement due to unexpected economic changes. The value of the annuities may become too small to cover your expenses during such unfortunate occurrences.
Favors the Insurer More
Insurers prefer structured settlements to lump-sum payments in lawsuits. Insurance companies will spend less to cover the cost when you structure settlement, unlike a lump sum payment.
Structure Settlement: Verdict
Lawsuits can be emotionally demanding, time-consuming, and physically exhaustive. Therefore, most people will prefer an out of court settlement. Nonetheless, if you find yourself in this situation, you have to make the best of it. As the plaintiff, you cannot afford to rush if you have to choose between a lump sum and structured payments. Each of these options has benefits and disadvantages that you have to weigh before you decide.
You do not want to make a choice that will leave you vulnerable and in regrets in the future. If you have the discipline to save and invest your payment to keep you floating, accept a lump sum payment. Nonetheless, a lump sum payment puts a lot of pressure on you to manage the funds effectively. You may be in trouble if you do not have the right people around you. It can become tough to foot your medical bills if you sustain a catastrophic injury in the long run.
So, you should choose to structure payment to have a secure future financially. It is in your best interest to discuss with a personal injury attorney and tax attorney before the agreement. You should also speak to a certified public accountant to explore the consequences of a verdict. A decision like this is not something you should make without professional guidance.
Structure Settlement: Selling Your Payment
This section will interest you the most if you already agree to structure payment but want to sell it. We are all capable of making mistakes. So, you are not alone if you feel that you should not have agreed to structure payment. However, reversing the decision comes at a price. You will have to sell your structured payment at a discount. There are structured settlement buyers that can offer you a lump cash payment for your right. These purchasers are factoring companies. You will be able to find these companies across different locations in the US.
You should not be frivolous with this process because it can be frustrating when you contact the wrong buyer. Therefore, you should research a factoring company before contacting it for a free quote. Besides, you should ensure that you know the company’s discount rate before accepting the offer. The discount rate is how much the company will deduct from the total payment. A high discount rate means that you will earn less from the sale, and vice versa. So, you should accept the contract that offers the lowest discount rate. The whole process takes between 40 to 90 days. Note that a court must approve the transaction before the deal can be successful.
It is evident that you have many benefits to enjoy by agreeing to structure settlement. Nevertheless, structured payments also have demerits that you cannot ignore during the decision process. Therefore, you should bid your time to think things through before deciding. However, if you make a choice and you want to reverse it later, it is possible. You will have to contact a reputable factoring company for the transaction. Nonetheless, you will have to let go of some parts of the settlement to get a lump sum payment. The sacrifice is worth it if the decision will improve the quality of your life.
Bendian, Marc (September 2005). Structured Settlement Payments and Periodic Judgements. Law Journal Press.