Over $5 billion in structured settlements get issued each year. Are you anticipating a payout due to injury or medical malpractice? Then you’re going to want to know the difference between a structured settlement and a lump sum.
Wondering what these terms even
mean? Or how to tell which one is better for your situation? Read on to learn
the answer to all your questions about structured
settlements and the lump sum tax.
What is a Structured Settlement Versus a Lump Sum Tax?
While these payments can result from
winning a lawsuit, they can be used to avoid a court case altogether.
Typically, these payments arise from personal injury, medical malpractice, worker’s
compensation, or wrongful death lawsuits.
So, what’s the difference? Well, if
you want your money all at once, you’ll receive it in a lump sum. If you want
the payment over a period of years, you’d ask for a structured settlement.
Sometimes you need a structured
settlement because the entity involved can’t pay the full amount at one time.
But other times people opt for a structured settlement.
Why wouldn’t you want your money all
at once? Simple: the lump sum tax.
Lump sum payouts are subject to tax. But structured settlements are not, thanks to the Periodic Payment Settlement Act. If a payment meets particular requirements (most structured settlements fit the bill), there are no taxes if you receive it over time.
So, you’ll have to choose between receiving less money all at once, or more money over a set period of time. Structured Settlements also ensure long-term financial security.
How Does a Structured Settlement Work?
So, how does a structured settlement
work? First, the party receiving the money comes to a negotiation with the
opposing party or their insurance carrier. This agreement can take place in or
out of court.
After agreeing on an amount, the
paying party purchases an annuity from a life insurance company. That way an
impartial 3rd party can manage the regular payments. It also protects the
ultimate sum from recessions and market fluctuations.
Some payments occur over a set
number of years, while others pay over a lifetime. Additionally, some payments
are stable over time. Others allow for an increase in benefits in the future.
Pros and Cons of a Structured Settlement
At face value, it’s simple. Do you
want less money right now (lump sum)? Or do you want more money received over
time (structured settlement)?
Of course, most of the time, things
aren’t that simple. For example, if it’s payout for an injury that accrued
medical bills, you might need the lump sum now to pay them off.
Additionally, having all your money
means more flexibility. If you have an emergency, the money is there. With a
structured settlement, you’ll incur charges for dipping into the rest of the
money. Or you’ll need to sell your payments to another party — either one will
cut into your payout.
The biggest benefit of structured
settlements is that payments are tax-free. Additionally, your annuity will earn
interest over time, netting you more money. And since they don’t fluctuate with
market changes, a settlement is more secure.
There’s also the issue of discipline. Roughly a third of lottery winners end up bankrupt. Many people can’t resist making extravagant purchases when they get a lump sum payout.
A structured settlement prevents you
from doing so. Additionally, if your injury means you’re unable to work, your
structured settlement can make up for your income loss.
Still Can’t Decide?
If you still can’t decide whether
you want to deal with the lump sum tax or choose a structured settlement,
you’ll probably want to consult with a lawyer. Have a potential lawsuit?
Consider using our personal injury calculator to see how much yours
could be worth!
