Savage Truth: Structure Your Settlements

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.