Structured Settlements
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Settlement Tax Facts You Need to Know
Your life was turned upside down due to personal injury or medical malpractice but you didn’t give up. You took matters into your own hands, filed a lawsuit, stuck it out and were victorious – you secured a great personal injury settlement. Way to go!
Now wouldn’t it be a shame, after your amazing journey, to short change your hard-earned settlement money?
If you are like most people you want your personal injury settlement money to not only last but to grow, right?
If there was a special tax exception only available to personal injury and medical malpractice victims wouldn’t you want to take advantage of it? Then you will want to learn about structured settlements – also called structured annuities.
FAQ
When you obtain a personal injury or medical malpractice settlement you have two options. Your first option is to take your settlement as a lump sum (i.e. a check for the full amount of their settlement). Your second option is to invest some or all of your settlement in a structured annuity that will pay out chunks of money over time at a guaranteed interest rate.
When you opt for the annuity, you enter into a contract with a life insurance company. You give the insurance company a lump sum payment up front. In return, the insurance company provides you regular money distributions at a guaranteed interest rate over a period of time in the future.
Structured personal injury settlements are income-tax free! In 1982, Congress passed legislation that amended the federal tax code. Their action, The Periodic Payment Settlement Act of 1982, formally recognized and encouraged the use of structured settlements. In response, the Internal Revenue Code was modified to exempt personal injury settlements from taxation so long as the proceeds were invested in a qualified structured settlement annuity. By contrast, the investment earnings on a lump sum payment are generally subject to taxation).
Imagine you take your money in a lump sum and invest in stocks. If the stocks you purchased increase in value (what you are hoping for) the interest your earned on your investment is taxable. On the other hand, the guaranteed interest you earn on your annuity investment is tax-free.
As you approach the settlement of your lawsuit, talk to your lawyer about your options. Ask your lawyer to obtain a variety of proposals from a qualified structured settlement company. Discuss the benefits and implications of structuring some or all of your settlement. Until you sign the annuity contract you are free to do as you wish with your money.
Every structured annuity is different depending on various factors including the amount you choose to invest, the pay out timeline you select, your calculated age rating, and the market interest rates at the time of purchase.
As an example, however, let’s look at a structured settlement proposal for a past client of ours. He was in his 40s and opted to invest $200,000 of his settlement in a structured annuity. The option he selected provided him $1,125 per month, guaranteed for 20 years, which will result in a total, non-taxable payout of $270,000.
Could this same client have instead invested the $200,000 and potentially earned more? Sure, but with the great risk everyone knows comes with the stock market. With the stock market, your earnings are taxable and you face the risk of losing your money. Our client’s $70,000 of earnings on his settlement money is guaranteed and non-taxable because of the structured annuity.
A hidden benefit of structured settlements is the protection annuities provide. Annuities protect your settlement from other people getting their hands on your settlement money and from you. Unfortunately, there are many stories of personal injury victims being taken advantage of by people with bad intentions or losing their settlements due to poor investment decisions. Annuities eliminate the burden of managing your cash settlement and prevent others from gaining access to our money.
No. We do not have any financial incentive to encourage you to invest in a structure. We, as your lawyers, do not receive ay financial payment or benefit as a result of your structured settlement. All we gain (and it is important to us) is the peace of mind that your settlement money that we worked hard to obtain is protected.
If you have made it this far and want to learn about what happens after you decide to structure your personal injury settlement please read our related article “You Have Decided to Structure Your Settlement – What Happens Next?”