Savage Truth: Structure Your Settlements
Terry Savage
02/25/07 - 10:30 AM EST
We've all heard the stories of lottery winners who wind up broke a few years later. Even worse is the situation in which a multimillion-dollar award is given in a personal injury lawsuit.
All that money can't compensate for the real loss -- whether it is awarded to survivors of an airline crash or a young child who will be severely handicapped for life. In those cases, it's even more important to plan for the best use of the money.
Tax considerations are key in planning for these huge sums of money. Lottery winnings are taxable -- whether you take a lump sum or payments over your lifetime. Lawsuits and settlements may or may not be taxable, depending on the situation. Money paid on account of physical injury or wrongful death is
not taxable. But other legal settlements -- such as for discrimination, breach of contract, sexual harassment or punitive damages --
are taxable to the recipient.
Planning must take into consideration both the tax consequences and the ability of the recipient to deal wisely with such huge and unexpected sums of money.
Lottery-winners typically have a choice: Take all the cash now, or take it in regular payments over 20 years. Taxes are immediately subtracted from the distribution, which is a fixed amount whether taken as a lump sum or over the longer term.
For those who receive awards from a lawsuit, there is another, far better option than just taking the money and paying the taxes. It's called a "structured settlement." This is an arrangement to pay out the money, help manage the money and ensure that the funds will be handled wisely.
In cases of nonphysical injury, in which the settlement is taxable, a structured settlement also will provide tax-
deferral, allowing the money to continue to grow until it is paid out in the future.
A structured settlement
must be created at the time the case is settled and the award is made. It must be written into the settlement documents. But some lawyers fail to advise their clients of the potential of structured settlements. They figure that they've won the case and taken their fees, and so they leave it up to the client to deal with managing the money.
In our litigious society, there are multimillion dollar awards given out every month. Even if you're not involved, you may know someone who is, so this information about structured settlements could come in handy.
The key factor is that the actual structure must be purchased
before the settlement is paid. This structure is purchased by the
defendant (the person or company determined to be at fault) on behalf of the plaintiff. The defendant, who has an obligation to make the payments, in turn purchases a structured settlement annuity from the life insurance company.
- A structured settlement is written only through the largest U.S. life insurance companies, which guarantee payment of the full amount, plus any investment gains.
- The money can be paid out according to numerous schedules -- weekly, monthly, annually -- or in any combination of benefit streams. Payments can be made for life, and even include the life of a spouse in some cases.
- A structured settlement can be flexible, and does not require a fixed sum every year. For example, money awarded to a minor child could be structured to provide larger sums for college during the appropriate years.
- If the money is being paid out as a nonqualified (nonphysical injury) award, the money inside the structure is invested to grow tax-deferred, and not taxed until it is paid out. If the money is a tax-free award, all the growth of the money inside the structure is also tax-free.
- If the money is being paid out tax-free (as a result of a physical injury or death claim), and the recipient dies, his or her beneficiaries will continue to receive payments tax-free.
- Because this money is growing inside an insurance contract, it can have a guaranteed rate of return.
Here's the best proof that a structured settlement might be the right tactic for all, or a large part of, a huge settlement: Many attorneys are now "structuring" their fees! As long as this is written into the settlement, it allows attorneys to postpone receiving their share of a settlement, and allow the money to grow tax deferred into future years to help build their own retirement assets.
But not all structured settlements are alike. Kelly Ramsdale of Denver, who specializes in this area, notes that the award recipient should make sure that he or she is dealing with a structured settlement consultant who deals only with plaintiffs. Consultants who work for the defense might try to force the use of a life insurance company related to the defense insurance carrier -- and that might not result in the best terms for the plaintiff.
Ramsdale, who has acted as a structured-settlement consultant in the Pan Am Flight 103 disaster, the Columbine High School cases and many others, has empathy for those who suddenly receive huge monetary awards on top of an incalculable emotional loss: "The aftermath of these situations is traumatic enough. Survivors need help constructing a plan that is structured to their own needs and circumstances."
For more information on how structured settlements work, go to
www.structuredsettlements.info. And if you still need convincing, click on the link
http://www.nssta.com/Resource.phx/public/real-people-real-tragedy.htx
to the section "Big Jackpots, Bigger Tragedies" to see what happens when an unexpected windfall turns into a huge downfall.
In cases of injury or death, receiving a monetary award, no matter how large, is often a bittersweet moment. Still, attorneys and their clients need to understand that the financial settlement is not the end, but a beginning. They need to plan
before the money is distributed. And that's The Savage Truth.
