What Is a Structured Settlement?
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UPDATED: Jul 14, 2021
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A structured settlement is an agreement to pay out money owed from the settlement of a lawsuit in installments rather than one lump sum. Structured settlements usually involve large settlements and are typically created through the purchase of one or more annuities. The payments can be structured in any way the parties choose (monthly, yearly, quarterly, etc.). If you are involved in a car accident and are entitled to a large recovery, you might consider a structured settlement as the vehicle for payment. Structured settlements are also commonly used in workers’ compensation claims.
Structured Settlement Advantages
Why take a settlement in payments rather than one lump sum? There are several advantages to structured settlements. First, there are tax advantages. If properly set up, a structured settlement can reduce your tax liability or, in some cases, come tax-free. Second, receiving a settlement over time can ensure that the money you need will be there when you need it. Receiving one lump sum up front creates the risk of spending it all too quickly, leaving nothing left for a time when you may really need it for further treatment or to purchase new medical equipment. A structured settlement ensures you will not spend it all at once.
Structured Settlement Disadvantages
While some people may find it helpful to have the money metered out over time rather than risk spending the whole amount too quickly, others may feel overly burdened by the periodic payments that leave little room for flexible spending. Still others may find that taking the money up-front and investing it themselves will yield higher long-term returns over the annuities used in a structured settlement. Once in a structured settlement, some people opt to sell their settlement for a lump sum. There are many potential settlement buyers out there. If you have a structured settlement, you may have already been approached by a potential purchaser. There are a number of important things to know before considering the sale of a settlement.
Selling Your Structured Settlement
The sale of a structured settlement is not quite as easy as it may seem. First, you must check your state’s laws. As of March 2006, 44 states and the federal government now have enacted structured settlement protection laws that require court approval for the sale and detailed financial and legal disclosures be given the seller before the transaction can be made. Under federal law, the purchaser of a structured settlement may be subject to a 40% excise tax if they did not comply with state laws. These laws are in place to protect structured settlement owners from fraud or abuse and are designed to make sure a settlement owner gets a fair price. The following states have enacted structured settlement protection laws:
For more information about structured settlement, check out Free Advice’s Structured Settlement Articles.