What is a Structured Settlement?
A structured settlement is an innovative financial planning solution that gives an injured person the option to receive all or a portion of his or her compensation through a series of payments. Plaintiffs who choose to structure have the flexibility to receive any combination of a lump sum for immediate needs and designated payments for long-term necessities. Still, we all know the industry gets a bad rap. Why?
For the most part, the issue can be attributed to the marketplace. Trial lawyers and their advisers spend a lot of time trying to figure out how to protect clients from the challenges of receiving a large lump sum recovery. (You might be thinking: how could a big pile of money be a problem? Believe me, there may be several issues that pop up unannounced.)
For some, a structured settlement can help smooth out the issues that may arise with a large monetary recovery from a personal injury lawsuit. There are tax-related advantages, for example. Under the federal tax code, 100% of structured settlement payments are exempt from federal taxes.
How Are Structured Settlements Tax-Free?
As a tax incentive for people considering large lump-sum payments, Congress provided the “single largest tax exemption ever” to private citizens with structured settlements. Before the early 2000s, a plaintiff could invest $1 million of his or her net settlement in a structured settlement, and over the next 40 years receive $8 million in payments, guaranteed and tax free. That’s a $7 million tax exemption for a single person. During that time, a structured settlement arrangement could protect absolutely. The contracts provided guaranteed payments and the ability to leave the annuity and all of the tax-free payments to a beneficiary. The catch was that these arrangements could never be changed. No selling, accelerating payments, or taking a loan out against the annuity policy.
Then, the industry took a turn. In 2003, the Excise Tax bill allowed payment stream financiers to prey upon people who had fallen on hard times and needed to sell their structure settlement annuity. The secondary market for structured settlements emerged, and it began ripping off annuitants by paying pennies on the dollar for their assets. There was no regulatory oversight. Major insurers stood idly by, allowing their policyholders to be fleeced, possibly because they didn’t want to be perceived as double dipping.
Today, there are $6 billion worth of new structured settlements issued each year, and about $2 billion of existing paper changes hands each year through 5891 transfers, protected by all of the various state structured settlement protection acts. It is unfortunately still an archaic marketplace. The secondary market for structured settlements may have done irreparable damage.
What’s a Plaintiff to Do?
The thing is, there are countless ways to plan for settlement. It is our hope at Milestone that in the civil justice system, “settlement planning” is not synonymous with “structured settlement.” Getting a plaintiff’s advocate on board can help an injured person create a customized plan for the settlement money that’s about to arrive. For some, establishing a trust is the answer. For others, it’s a combination of several tools that ensure both their immediate and long-term needs are met. Those who receive government benefits can maintain eligibility. It all comes down to speaking with an expert who can make it all happen.
When settlement is coming, it’s time to plan. If you are considering a structured settlement or you need to liquidate your rights under an existing structured settlement, be sure to work with an advisor loyal to plaintiffs and their families. Feel free to contact Milestone Consulting for a free consultation and to start discussing how your settlement can best benefit you now and in the future.
A West Point graduate where he served as captain and military aviator, John Bair continues his commitment to our country through his efforts within the settlement planning industry. He has represented families of victims lost in the Flight 3407 crash, offered pro bono services to the families of 9/11 victims and drafted the first consumer protection bill for plaintiffs (H.R. 3699).