In personal injury cases in which the plaintiff settles for large sums of money, the plaintiff’s counsel will likely discuss and advice with the plaintiff, in consultation with a financial planner, the option of receiving their settlement proceeds over time, as opposed to receiving it in a lump sum payment now. This is known as a structured settlement.
The Periodic Payment Settlement Act of 1982 amended the Federal tax code to recognize and encourage the use of structured settlements in personal injury cases. The structured settlement and annuity business has grown even more in recent years. One reason for its popularity is that structured settlement transactions involve large sums of money making it one of the most profitable financial products a broker or agent could sell. Having said that, it is worth noting that both the American Association of People with Disabilities, as well as the National Organization on Disability, has been supportive of the structured settlement industry and their practices.
Given the legal and financial complexity surrounding structured settlements, to better protect this special class of people, both the states and the federal government have enacted important consumer legislation and industry regulations.
A major advantage to structured settlements is that it can be devised in a variety of ways based on the specific medical and financial preferences of the claimant. These include payments that are made periodically to the claimant when funds are required for ongoing medical expenses, education, housing and support.
Structured settlements come in many different sizes and flavors. Because there are so many different variations of annuity products on the market today, the parties can usually devise a payout schedule that fits the claimant’s specifications.
Both defense counsel and the carrier prefer working with annuities because it is far easier for them to settle big dollar cases. That’s because the settlement amounts looks much larger when it gets paid out over time. Unfortunately, the defense can sometimes overstate the value of the settlement in order to get the settlement done. When this happens, it can open up the doors to litigation.
The main reason people choose to go with a structured settlement is to avoid the tax consequences associated with receiving a lump sum settlement. Receiving periodic payments reduces the chance of the claimant from overspending and consequently running out of money.
In cases involving minors, especially where there is a court ordered minors compromise that must be approved prior to final settlement, the plaintiff’s attorney must prepare and present to the court a structured payout schedule for the courts approval. In most jurisdictions the court must be convinced that the structured settlement is in the best interests of the minor.
There are also disadvantages to structured settlements. Some claimants under a periodic payment schedule often see their payment arrangement as unnecessarily restrictive. Also, it is very difficult to change the structure of the arrangement once the annuity is locked into place.
Finally, beware of excessive commissions in structured settlements. There is lots of money to be made and it can attract its share of snakes. So make sure the commissions do not consume too much of the principal. This is why it is so important to have a lawyer experienced in large and complex settlements to help guide and protect you through the process.
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