What's A "Structured Settlement"?
Your only exposure to the term “structured settlement” may be late night TV ads hawking immediate access to your money. “It’s your money,” they’ll exhort. “Cash in your structured settlement and use your money now!” If you are (or were) a successful plaintiff in a lawsuit, your contact with structures may be more personal. You may have received one, be evaluating one now, or have considered one but opted for cash.
But what should you know? Even if you already have one, you may not know how they operate and why they’re set up in the arcane fashion they are. Like so much else in the world, structured settlements are mostly about taxes.
Cash vs. Periodic Payments. If you’re injured in a car accident and receive a $300,000 settlement from the other driver or insurer, it’s tax free. See 10 Things To Know About Taxes On Damages. When you invest the $300,000, your investment earnings are taxable. If you receive a structured settlement instead of the $300,000 cash, you’ll get payments over a term of years or your lifetime (however you choose), and each payment is fully tax free. Thus, a structure converts your after-tax earnings into a tax free return.
If you agree to take your award as a structured settlement, instead of receiving one large amount from the plaintiff, you will receive periodic payments over the course of a fixed number of years. For example, if you win $500,000, your structured settlement may require the defendant to pay you $50,000 every June for ten years.
You can design a structured settlement so that it provides money when you need it most. Here are a few options.
Large initial payment. Say you've been unemployed for some time and your bills are mounting. You can design the structured settlement to provide a large initial payment so that you can pay overdue bills, pay off a mortgage, or purchase needed items like a new car. The smaller subsequent payments could then act as a substitute for lost income.
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