A Structured Settlement allows a personal injury claimant to obtain cash over a period of time, rather than obtaining his settlement in a lump sum. Structured Settlements started in the late 1970’s, and they are a big business. Structured Settlements only apply to large personal injury cases, usually involving policy limits settlements of at least $100,000.00. A Structured Settlement is an annuity.
Voluntary Structured Settlements are used in personal injury cases in situations involving claimants that can’t manage their own finances.
In some instances involving minors and incompetents, a court will order that the client’s portion of a settlement must be placed in an income producing investment.
Minor Compromise Statute
In the state of Nevada we have a Minor’s Compromise Statute which involves a form of Structured Settlement. The court must approve a minor child’s settlement and will enter an order that the child’s settlement must be placed in a FDIC insured bank account in the state of Nevada, until the minor child reaches the age of 18 years. These funds can only be removed from the block account by court order. The court will only order the release of these funds before the child turns 18 years of age, only for reasons involving the special educational or medical needs of the minor child.
As far as personal injury settlements are concerned, the client’s part of the personal injury settlement is usually divided into three types of compensation. One portion is for medical bills. Another portion is for pain suffering. These portions free from federal income tax. Compensation for lost income for IRS purposes is considered to be a gain and various IRS’s Codes apply. Also, some States have state income tax laws that also apply to these settlements. So, the income tax consequences of a settlement must be considered when establishing a Structured Settlement for a client, if a portion of his settlement is for loss of income.
Attorney fees can also be structured. If an attorney wants to defer paying income taxes on a portion of or all of his fees, he can use a Structured Settlement. One example would be if an attorney had a very large fee on a case, he could purchase a Structured Settlement that would pay him a fixed sum per month, or he could receive a lump sum after a fixed period of years. This may be a way for the attorney to defer some income tax to a point in time when he has a reduced tax exposure.
Pros of Structured Settlement
The pros of a Structured Settlement for a minor or incompetent involve avoiding exploitation of these settlement funds by individuals who are close to the claimant. Incompetents and minors may use a Structured Settlement as a vehicle to pay for ongoing medical needs resulting from their accidents.
If you have a client that can not manage his money; or, if a client’s age or socio economic status would indicate that he would blow a large lump sum settlement; or, if a client would make bad financial choices in investing his settlement, a Structured Settlement may be appropriate for these individuals. When a settlement involves an incompetent individual, there have been many prominent attorneys who have found themselves involved in a malpractice lawsuit, because they did not structure the client’s settlement and persons close to the claimant have taken off with their settlement funds.
Cons of Structured Settlement
The cons of a Structured Settlement are as follows:
- As we all know bank accounts as well as other investments are currently paying low rates of interest at the present time. Therefore, this may not be the best time to opt for a Structured Settlement. However, most Structured Settlements will pay a much higher return than bank interest.
- If a claimant chooses a Structured Settlement, there is no large chunk of cash for him to use for a down payment on a house, or to pay income taxes.
- Structured Settlements can also be sold. The older Structured Settlements have a higher interest rate, and the company purchasing the Structured Settlement would receive an income stream higher than the current interest rates. Some states have restrictions on selling Structured Settlements.
Structured Settlements can be done in a hybrid form. The claimant can take some cash now and structure the remainder of the settlement.
Some factors to be considered in selecting an insurance company or investment company to write a Structured Settlement are as follows:
- The financial strength of the insurance company should be considered. State Farm is the largest insurance company in the world, and State Farm writes reinsurance for most insurance companies. So a company like State Farm will be around long after other insurance companies have become insolvent, because of a catastrophic insurance event. Allstate, Farmers, CNA, and Geico are all solid companies that will write Structured Settlements. You should avoid any fly-by-night company because they may not be around in the future, or may not be solvent enough in the future to make the structured payments. We are all familiar with AIG. We almost lost this company due to their involvement with mortgaged backed securities.
- A Structured Settlement is an annuity. As far as annuities are concerned, some can contain language of an assignment and release. These can be sold to a another insurance company which may be less solvent, because the original insurance company may not want long term payments on their books. Other Structured Settlements can’t be sold because they are designated as buy and hold.
- Financial planners and bankers give us the impression that there is no fee on the Structured Settlements, however most brokers will receive a four percent commission that will be advanced by the insurance company, so that the original principal amount of the settlement stays the same.
- One caveat concerning Structured Settlements is that it is unethical for a claimant’s attorney to take a kick-back from the person or entity that establishes the Structured Settlement xiao cheng.
Therefore, Structured Settlement annuities, even those that are mandated by a court order, must be carefully established to meet the specific needs and financial concerns of each client.