Structured Settlement Knowledge

First let’s confirm what we mean when we speak of a structured settlement

A structured settlement is a negotiated way to settle a legal dispute that includes elements of cash and a customized stream (or streams) of future periodic payments. For example, payments can start immediately or have a deferred start date. Payments can be (1) level, (2) increasing by a fixed percentage, (3) increasing by the changes in the S&P 500 index with a 5% cap (and no downside), include guaranteed lump sum payments at specific milestones or every x years. Payments can be life contingent, or guaranteed to be paid whether or not the payee survives the entire payment schedule.

Generally the future periodic payments are funded with special type of annuity that can incorporate multiple payment streams in a single contract. They can also provides that periodic payments can be funded with obligations of the United States government.

Benefits of Structured Settlements

1. Structured settlements provide stable core income. This is helpful to someone whose earnings have been partially or fully impaired by their physical injury, or sickness,or if a bread winner has been lost due to a wrongful death.
2. Structured settlements provide the ‘know now what you will get then” comfort so that you can feel safe and confident that there will be sufficient money to achieve quantifiable goals without investment volatility associated with other investments.
3. If the structured settlement payments represent damages on account of physical injury, physical sickness, wrongful death, or workers compensation and qualify under IRC 104(a)(1) or IRC 104(a)(2), the payments are income tax free in the United States.
4. Structured settlements can generally be medically underwritten so that the annuities that fund the future payments are priced to fairly account for factors affecting the annuitant’s life expectancy. The rated age savings can be allocated for other needs or increase benefits.
5. Income is generated without the risk, ongoing costs and the associated stress of do it yourself money management or paying someone to do it.
6. Parents can help protect their children from wasteful dissipation by not giving them all their settlement proceeds at age 18.
7. With proper design a structured settlement can help navigate around the risk of a settlement impairing or disqualifying a child from FAFSA related student loans.

Limitations of Structured Settlements

1. Structured settlements must be established at the time of settlement prior to constructive or actual receipt of settlement proceeds in order to achieve the tax benefits. Some may not be ready to make any decisions and feel frozen. in such cases it may be helpful to seek the assistance of a Sudden Money Advisor.
2. Payments cannot be changed once established
3. One cannot predict everything that will happen in life is fixed and determinable. Work with a settlement planner who can help make an appropriate allocation between structured settlement and cash.
4. Liquidity can be expensive down the road. The structured settlement protection acts require court approval of any transfers of structured settlement payment rights for cash. Unlike the individuals that help you get into structured settlements who have to be licensed and comply with state insurance laws, the sales practices of companies that operate in the structured settlement secondary market are completely unregulated.