The advantages and disadvantages of structured settlements
A structured settlement is a settlement in which, instead of awarding a lump sum of cash to a claimant, a periodic, tax-free payment is agreed upon. Structured settlements are often used in guardianship cases, workers’ compensation cases, wrongful death cases, and serious injury cases. Research has indicated that the more serious the injury, the more likely a structured settlement will be used.
The first thing you may be wondering is, what are the advantages of accepting a structured settlement over a cash settlement? The first reason is that it offers long-term financial security and protection to the plaintiff. It has been estimated that 90% of all big cash prizes are spent within 5 years due to poor financial management skills.
The main advantage of structured settlements is the tax-free status of payments and capital growth. For example, let’s say a claimant has been awarded a settlement and can take a lump sum of $1 million or $2 million spread over her life. If they opt for the million dollars, even though the sum itself is tax-free, any interest earned will be subject to income tax. However, the $2 million paid during his lifetime will not be subject to income tax.
One of the disadvantages associated with structured settlements is the perceived inflexibility of their structure. It is not possible, for example, to add your spouse’s name to the settlement agreement without the exception of a court order. If the claimant is risk averse, he may believe that he can generate a higher return by investing the money himself. However, it can also be argued that the monthly settlement payments give the investor an excellent way to “dollar cost average” of their investment.
If you are awarded a structured settlement, there are companies that give you the option of selling structured settlement payments for a lump sum cash fee. In this situation, you should always seek the advice of a reputable attorney. In recent years, this type of transaction has become increasingly popular and has resulted in more than 35 states and the federal government increasing consumer protection statutes and establishing strict rules and regulations for this type of transaction.