There are times when a plaintiff enters into a settlement agreement for a considerable amount of money, and the defendant, the plaintiff’s attorney or financial planner may suggest that the settlement be paid in installments over a period of time in lieu of in one lump sum. This is called a structured settlement. The settlement is frequently developed through the purchase of an annuity, which guarantees future payments.
One of the benefits of a structured settlement is the avoidance of taxes. A structured settlement can greatly lower the plaintiff’s tax obligations due to the settlement, and in some instances, may not be subject to tax. Additionally, a structured settlement can safeguard a plaintiff from the depletion of settlement funds when they are needed to pay for care in the future. Such a settlement can also help insulate a plaintiff from him- or herself, especially if the plaintiff is unable to manage money, or cannot say no to family members who would like the plaintiff to share the funds with them.
The settlement can also be helpful to minors, for whom certain costs can be defrayed during their youth, and disbursements can be used to pay for their college education. A plaintiff who has suffered an injury and who has special needs could benefit from the receipt of periodic payments that can be applied toward the purchase of medical equipment.
In some cases, it would be more advantageous for a seriously disabled plaintiff to establish a special needs trust instead of having a structured settlement. A plaintiff who is the recipient of, or anticipates being the recipient of, Medicaid or other needs-based government benefits, is advised to contact a financial planner prior to selecting a structured settlement.
One of the possible disadvantages of a structured settlement is that some individuals may feel constrained by the receipt of payments at fixed intervals. You may be considering buying a new home or other costly item, but may not have the capital because of the inability to borrow against future settlement payments.
In such cases, it may be more beneficial for you to accept a lump sum payment, and invest the funds yourself. There are investments that will yield a higher long-term return than the annuities used to create a structured settlement.