structured settlement from injury
Get Legal Help Today
Secured with SHA-256 Encryption
structured settlement from injury
My son will receive his first payment on a structured annuity that was set up by the court when he was a minor. He is to reveive part when he turns 21 and the balance at 25. Is this taxable?
Asked on May 23, 2009 under Personal Injury, Washington
MD, Member, California Bar / FreeAdvice Contributing Attorney
Answered 11 years ago | Contributor
They are usually not taxable. Read the following from freeadvice.com and then go to the additional links below:
My personal injury attorney is encouraging me to take a structured settlement rather than a lump sum for a permanent injury. What is a structured settlement and why might it be better for me than a lump sum payment?
Most minor to moderate injury cases are settled with a lump sum payment to the injured party. More serious injuries, however, including those that require future treatment, or those resulting in permanent disability, are often settled with what is referred to as a "structured settlement". You do have a choice. A structured settlement is a tool that is used to compensate the injured person with a moderate to large amount of money by way of payments over a long period of time rather than one large payment all at once. More and more claimants are choosing structured settlements.
Popularity of Structured Settlements
Tax Free Income
Most structured settlements come in the form of an annuity, which is sold by a third party, often, a life insurance company. Sometimes they are invested in U.S. Treasury Securities. Annuities (and treasury securities) grow the money, but are completely tax-free both at the state and federal levels. They actually work to expand the size of your total recovery. Not so with a lump sum of cash. The sum itself is tax-free, but for any investment you make, the proceeds (dividends, interest) will be taxed by both your state and the federal government. Over time, you will end up with more money if you take a structure, than if you take a lump sum. (See example below)
In addition, structured settlements can be very flexible. Suppose you have some large medical bills that need to be paid right away. You can structure your annuity to pay the bills directly or pay a large sum to you up front to cover the bills, with the balance of the money paid out to you over a set number of years (Designated Period Annuity) or for the rest of your life (Life Annuity). Or, if you know you have a large expense coming up in a year or two, you can design it so that you get small payments now, a larger sum a year from now, and then return to small payments for the balance.
There are many different options. Structured settlements are a low risk way of investing your money (many are government insured) and the payments are predictable--no surprises.
What’s the downside?
Probably the biggest negative is that once you agree to a structured settlement and "sign on the dotted line," there is no way to change it. You cannot decide down the road that instead of payments, you want all the money. You cannot change the payment schedule, the amounts per payment, the frequency, the term, or anything else about the settlement. Additionally, if you want the annuity that is paying those predictable payments to somehow keep up with inflation and give you a cost of living increase from time to time, it will not, unless that was built into the payment schedule at the outset with a specific figure.
As indicated above, structures are low risk, but they are not risk-free. If the entity responsible for making the payments goes belly-up, there is the potential risk of losing the unpaid balance of your money. One other important factor is that unless the funds, as you receive them, are placed in a qualifying protective vehicle, such as a custodial account, you could be barred from receiving certain public benefits down the road, like Medicare and Medicaid. (Consult an accountant or a financial advisor for this information.)
Suppose you have to make a choice between a structured settlement and a lump sum. Notice the difference in the total after 10 years. These figures are just examples and are hypothetical and unrelated to any particular settlement or case.
Lump Sum of $75,000
$25,000 fee to attorney
$20,000 paid to medical providers.
Of the $30,000 left, you put $10,000 in your checking account, which earns no interest, and $20,000 in your money market account, which is paying 5% interest.
If the interest is compounded daily, you will have $20, 524 after a year
After 10 years, you will have about $33,000
You will pay taxes on the dividends in an amount that is determined by your tax bracket.
Your attorney is paid his fee up front by the insurance co.
Your medical bills are paid up front by the insurance co.
The insurance company offers to purchase an annuity for 25,000
The structure you agree to provides you with payments of $600 a month for the next 10 years (total of $72,000)
You pay no taxes on this income.
IMPORTANT NOTICE: The Answer(s) provided above are for general information only. The attorney providing the answer was not serving as the attorney for the person submitting the question or in any attorney-client relationship with such person. Laws may vary from state to state, and sometimes change. Tiny variations in the facts, or a fact not set forth in a question, often can change a legal outcome or an attorney's conclusion. Although AttorneyPages.com has verified the attorney was admitted to practice law in at least one jurisdiction, he or she may not be authorized to practice law in the jurisdiction referred to in the question, nor is he or she necessarily experienced in the area of the law involved. Unlike the information in the Answer(s) above, upon which you should NOT rely, for personal advice you can rely upon we suggest you retain an attorney to represent you.