Before accepting any settlement agreement you should always discuss all available options with a tax attorney, personal injury attorney or certified public accountant (CPA) to fully explore tax consequences of a verdict or settlement. Below are some structured settlements Pros and Cons for you to consider. Read;
Structured Settlements Pros
- A structured settlement may provide a plaintiff with a substantial tax benefit because personal injury settlements are considered “tax-free” under the U.S. Tax Code. However, some exceptions apply and can make portions of a settlement taxable, such as an award of punitive damage or interest that accrues on the settlement. Speak to a qualified attorney to learn more.
- Structured settlements offer plaintiffs the certainty of payments over a fixed period of time. However, lump-sum payments may be better suited for cases involving minors, as they allow for long-term investing, or those suffering from a debilitating injury that will require future medical expenses.
- Parties may tailor annuities to cover a plaintiff’s specific needs and all sorts of future demands or contingencies.
- In most states, annuities are protected by state insurance laws which guarantee that the obligations of an insurer will be covered. Although federal law doesn’t allow an insurer to formally declare “bankruptcy,” most states have a safety net for insurance companies that become insolvent: insurance companies and policy claims will continue to be covered and paid by the home state’s guaranty association, subject to state limits.
- A lump-sum payment may be combined with a structured settlement to meet immediate expenses, such as medical bills, repayment of debts, rehabilitation costs, and the like.
- Parties can dedicate funds of a structured settlement to cover unanticipated advances in medicine so that if medical science develops a miracle cure, the plaintiff can give it a try.
- A structured settlement may help parties who are far apart in their settlement negotiations to reach an agreement acceptable to both the plaintiff and the defendant.
Structured Settlements Cons
- Certain parts of a settlement, whether a lump sum payment or a structured settlement, can be taxed, including punitive damages, some attorney’s fees, purely emotional damages not stemming from physical injury, and more.
- A plaintiff may fear that, no matter how the settlement protects against negative economic conditions such as inflation or recession, unknown changes in the economy could make the annuity payments too small.
- In the past, some insurance companies were reluctant to disclose how much they would have to pay to buy an annuity covering the amount of the settlement. A structured settlement frequently costs insurance companies less than it would make a lump-sum settlement. Without this information, the plaintiff’s attorney was not able to make a complete assessment of the benefits and drawbacks of a settlement offer. Today, however, most states, such as New York and Florida, have some form of a disclosure law known as a “Structured Settlement Protection Act” (SSPA). These laws require insurers to be upfront about their costs.
In some cases, settlement may be a faster, cheaper and less stressful alternative to trial.