Structured Settlements – The Basics

Taking a personal injury claim or other legal matter to court may help you get structured settlements out of the ordeal. If you live in the United States, then structured settlements may also be a completely tax-free way to get money out of legal matters. Most times, cash is provided at regular intervals following a legal proceeding, in order to get around taxation laws that are typical of lump sum payments. Just be sure you spend or invest the money wisely regardless.

Basics of Structured SettlementsStructured settlements are paid instead of lump sums in order to minimize interest rates and taxation. They can vary further in the intervals and amounts they are paid in; sometimes you can get large amounts of cash at a time, while others may issue you regular checks. Depending on the person you are suing, you can count on getting your structured settlements after a heated court session. Just don’t forget that a legal battle can go both ways.

How Structured Settlements Work

A structured settlement is the money or asset settlement an individual or company gets after winning a legal proceeding. The “structured” in structured settlement pertains to the nature of the payments, which is typically paid in regular intervals rather than all at once. These intervals are to make sure taxation and interest rates are at a minimum when the winning party gets the payments.

According to the Internal Revenue Code, Section 5891, structured settlements are bound by the following criteria:

  • A suit or agreement for periodic payment of damages excludable from gross income, under Internal Revenue Code Section 130
  • An agreement for the periodic payment of compensation under any workers’ compensation law under Internal Revenue Code Section 104

Internal Revenue Code Section 130 states that the periodic payments of a structured settlement must be made payable by:

  • A party to the suit or agreement, or to a workers’ compensation claim
  • A person who has assumed the liability for periodic payments under qualified assignment in accordance with Internal Revenue Code Section 130

Structured settlements in the United States are regulated at both federal and state levels. They are especially endorsed by many disability rights organizations in addition to being backed by the laws of 47 states. This n includes protection acts which are enforced by the National Conference of Insurance Legislation, or NCOIL.

Advantages of Structured Settlements

There are some particular advantages to having structured settlements instead of a single settlement:

  • You are guaranteed a source of income for a long period of time, sometimes even for life if the settlement is large.
  • Taxes and interest rates in a structured settlement plan are significantly reduced on any investment income. Taxes and interest rates usually occur in investments found in many lump sum settlements.
  • The time intervals between payments allow you to plan your expenses. If you are an impulsive spender, this may teach you some discipline when it comes to money matters.

However, there can be some disadvantages to structured settlements:

  • When you agree to a structured settlement plan, you are bound by law to stick to it. It can be very difficult to revert to a lump sum payment or any other kind of settlement plan after you agree to a structured settlement.
  • Rising inflation rates may make the regular intervals of cash seem even smaller, especially if you plan on living off one for life.
  • Again, the time intervals between payments may prove to be a negative factor for some; other people typically depend on structured settlements as a secondary form of income.

If you are familiar with the ups and downs of structured settlements, then discuss these matters with a legal adviser or your lawyer before you plan to go to court.

Keep In Mind

  • Structured settlements can vary greatly in the amount they pay winners of legal battles. Some may end up paying small cash settlements, while others may set up beneficiaries for their entire lives.
  • Structured settlements are not intended to change the amount that is won by the winning party. Don’t count on increasing the amount stated on your structured settlements if you have already won.
  • If you have won a structured settlement, there is some leeway that may be allowed in order to get more money during a payment interval than usual. For short-term financial crises that need tending to, recipients can opt for a structured settlement factoring transaction, which may include a larger payment during an interval.
  • Structured settlement factoring transactions can also be reverted to a present lump sum payment, but this can often be a difficult task.
  • Defendants will usually have to purchase an annuity in order to receive dollar amounts which are paid up front. This annuity will schedule the regular income payments with the aid of your attorney.
  • Structured settlements can be as flexible as you want them to be, provided the terms are discussed beforehand. You can have large amounts payed to you at regular intervals, or have small amounts spread across a larger span of time.
  • Keep in mind that, if you have not won the legal battle yet, you still have a chance of losing it. Don’t plan too far ahead of time.

Once you have all you need to file a case, consider getting a structured settlement plan instead of one big lump sum payment.

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