Personal injury plaintiffs who win or settle their cases can often choose to take their winnings as a one-time lump sum or as a series of payments over a period of time. This series of payments is called a structured settlement. Whether you should opt for a lump sum payment or a structured settlement will depend on many factors, including your tax liability, how you plan to spend the money, and whether you need assistance in managing a large sum of money.
Below you can learn how a structured settlement works and review some of the things you should consider when deciding to take a structured settlement or a lump sum payment if you win or settle your lawsuit.
How a Structured Settlement Works
If you agree to take your award as a structured settlement, instead of receiving one large amount from the plaintiff, you will receive periodic payments over the course of a fixed number of years. For example, if you win $500,000, your structured settlement may require the defendant to pay you $50,000 every June for ten years.
You can design a structured settlement so that it provides money when you need it most. Here are a few options.
Large initial payment. Say you’ve been unemployed for some time and your bills are mounting. You can design the structured settlement to provide a large initial payment so that you can pay overdue bills, pay off a mortgage, or purchase needed items like a new car. The smaller subsequent payments could then act as a substitute for lost income.
Additional amounts for extraordinary expenses. Some settlements are designed to provide a yearly income, with additional amounts allowed to pay extraordinary expenses like college tuition.
Payments increase over time. Structured settlements can also be designed to step up payments over the years — starting relatively low and ending higher.
Payments decrease over time. Structured settlements can also start high and decrease over time. This might be of benefit if you expect your income to increase over time.
Delayed payments. Some plaintiffs even choose to delay payment of their awards until they reach retirement.
Structured Settlement as an Annuity
To carry out these periodic payouts, the defendant will often purchase an annuity from an insurance company. That way, the defendant can remove your obligation from its books and transfer the responsibility for payment to a company with expertise in managing periodic payments.
Some experts argue that placing the annuity with an insurance company is a more stable alternative than relying on the financial health and stability of defendant corporations.
Should You Opt for a Structured Settlement or a Lump Sum?
The choice between a lump sum payment and a structured settlement can have long term tax and personal consequences. Here are some of the issues to consider. Be sure to discuss these with your attorney or financial adviser.
What Is Your Tax Obligation?
Whether your award is taxable or tax-free will depend on whether it is intended to compensate you for physical injuries or sickness or whether the damages are punitive (meaning they are intended to punish the defendant for its actions). (Learn more about damages in personal injury cases.) The form of the payment — lump sum or periodic payments — can also affect your tax obligation. The law is complicated so check with a tax attorney or tax professional. (Learn about taxes and personal injury awards.)