Why Structured Settlements

Why Structured Settlements

The Who, What, Where & When’s

In simple terms, a structured settlement is a powerful financial tool created exclusively for injured people. You choose a structured settlement instead of taking one lump-sum payment when you receive money from a personal injury lawsuit. Regular payments are then made over a specified period of time to match your future needs and goals. Financial advantages include:

• Guaranteed payments from the annuities purchased to fund your structured settlement
• 100% lifetime exclusion from income, dividend and capital gains taxes
• Customized planning with trained consultants to meet both immediate and future financial obligations
• No risk of losing money on market-vulnerable investments or from poor financial management
• Eligibility maintained for federal and private health care plans
• For more, see The Big Picture

One reason Congress created structured settlements was the concern that injured people who take a lump sum often spend it all before meeting future obligations. Other prominent Americans think it is a good idea as well (see who).

Wide Range of Qualified Cases

Structured settlements apply to a wide variety of injury cases regardless of how much money is involved. In fact, more than half the cases structured by Ringler Associates are for settlements less than $50,000. Consider structured settlements for any personal injury, workers’ compensation or medical malpractice cases involving:

• Long-term medical needs
• Temporary or permanent disabilities
• Minors or the mentally incompetent
• Severe injuries that result in brain damage or shortened life expectancy
• Surviving spouse and/or dependents in a death case

Structured settlements are now increasingly used for cases that involve other types of personal damages as well, including discrimination, wrongful termination, property loss (construction defects), divorce, sexual harassment and environmental harm.

Structured settlements grow your funds through interest-earning annuities purchased from top-rated insurance companies. The money is then distributed in whatever fashion works best for you: future lump sums on specified dates; over a set period; over a lifetime; monthly, quarterly, semi-annually, annually; in level or increasing payments; or in some combination of these options.

Most people start by guaranteeing critical obligations first, including replacement or supplemental income, tuition payments, mortgage payments, retirement income and ongoing medical expenses. Then other needs are considered, like a down payment on a new home or car, remodeling projects, attorney fees, major tax bills, vacation planning, etc. (See the Financial Strategies Pyramid.)

Everyone’s situation is different, which is why it is so important to work with professionals who ONLY specialize in designing structured settlements. So gather up your questions and contact a Ringler® consultant now for answers on how we can help you create a safe, secure future for yourself and your family.

History of Structured Settlements

History of Structured Settlements

For many years, plaintiffs who won compensatory damages from a defendant received large lump-sum settlements. While the payouts helped recipients pay for medical expenses and other costs related to the legal settlement, many lacked the financial know-how required to skillfully manage large awards.

The Periodic Payment Settlement Act, passed by Congress in 1982, encouraged the use of structured settlements in physical injury cases, and provided legal incentives for their use by amending the federal tax code. It also stated that payments be offered in installments over time and exempt from federal, state and local income taxes.

Minors and Structured Settlements

Minors and Structured Settlements

When courts decide – or plaintiffs and defendants settle – large cases that involve children, the financial result takes into account the children’s long-term stability. Lawyers and courts take steps to protect minors’ financial future by structuring a financial windfall into periodic payments.

These structured settlements are the result of legal cases that stem from accidents in which a parent perished or was a severely injured; a product-liability claim; or some other serious injury to the child.

Periodic payments help minors by reserving money for essential long-term necessities (food, clothing and shelter) and for any continuing medical care. The settlement pays claimants by scheduling future periodic payments, acting as a kind of financial planning.

The arrangement makes it less likely that a minor – or the minor’s parents – can spend the money too quickly or on the wrong things at a young age.

But there’s a difference between an adult owning a structured settlement and a minor owning one. That difference is control. By law, minors have little to no say in how their periodic payments are set up, and their parents or guardians must spend the money in the exact manner ordered by the court.

The setup prevents the parents of the children in these cases from having unrestricted use of the minor’s settlement funds and potentially spending the money irresponsibly or for purchases unrelated to the court-prescribed purposes.

The goal is to make sure there is money for the child when he or she turns 18.

How Minors Benefit from Structured Settlements

Minors benefit from accepting awards in structured settlements in a variety of ways. For instance:

• The money is tax-free – including free of income taxes, which normally go along with other annuities
• Money is protected until it is accessed to meet a child’s specific needs
• The settlement does not require maintenance fees
• Payments don’t decrease when the stock market dips
• The overall rate of return is fixed, assuring the same payment each time. The yield typically ranges between 3 and 10 percent

Today, structured settlement annuities make up the overwhelming majority of lawsuit awards when it comes to preserving a minor’s financial security. This is because of their favorable financial returns, their tax-free status, their flexible payout schedules and the protection they offer from pilfering. Insurance commissioners regulate them in all 50 states, and the underlying annuity is protected from creditors and judgments.

Other payment options to minors include a guardianship account (such as a money market account supervised by the court) or a structured trust (supervised by a trustee or financial advisor). Trusts can have tax benefits as well, but sometimes they reduce the settlement amount because they often have fees attached.

Laws Put Restrictions on Adults

To help minors gain some control over the financial gain from lawsuits awards, federal and state laws now assign to courts – rather than to parents – the responsibility of determining both the fairness of the monetary settlement and how the awarded funds can be spent.

Courts seek to ensure that:

• The child will receive the money he or she is due
• The money will grow over time
• The money is protected from parents who might seek to use it for themselves
• The child can’t spend the money all at once
• The money lasts over time

For a child who is under the age of 18, terms of a structured settlement – which must be drafted during the initial negotiations between a plaintiff and a defendant – are permanent and unchangeable for the life of the annuity.

These types of settlements often involve a sum of at least $5,000 and cases that involve a car accident or medical negligence.

Money can get disbursed in any number of ways – periodically over a specific time frame, with a lump-sum payout or a steady stream of payments during a child’s life. The structure can be designed to make sure payments last well into an adult’s lifetime. Attorneys typically negotiate payment schedules well before the conclusion of any court settlement. (This is not true with a verdict.) Attorneys can also structure payments so that they increase over time, rising to account for spikes in the cost of living.

Parents Can Sell on Behalf of Minors, but It’s Rare

If circumstances – financial, health-related or otherwise – change profoundly before a child reaches the age of majority, parents or legal guardians can sell the future payment rights to the structured settlement. However, the burden of proof is high. Parents or guardians must demonstrate conclusively to the court that there is an immediate necessity for a cash buyout and that the child’s needs would be served more by selling the settlement than by waiting on future payments.

These cases are rare – so rare some structured settlement companies don’t attempt them. Other companies can only recall doing it successfully once or twice, and in those cases the process usually drags out for years, frustrating all involved.

The good news for minors, though, is this: eventually, they reach the age of majority. Once they turn 18, they’re considered an adult, and they own their annuity. As an owner, they no longer have to follow regulations set up for minors.

This means a new 18-year-old annuitant can decide to sell future payment rights – some of them or all of them – to a buying company for a lump-sum payment just like any other adult with a structured settlement or annuity.

Across the board, all the same rules and laws apply. Any transfer must be considered fair, and in “best interests” of the seller, according to the court and the state’s Structured Settlement Protection Act (SSPA).

Personal Injury Settlements

Personal Injury Settlements

Personal injury settlements carry a somewhat negative undertone — perhaps they’ve gotten a bad rap.

For a better understanding, particularly what it means for those involved, let us look at what a personal injury is and see how and where the settlement comes into play.

Unlike an injury caused to one’s property, personal injuries damage the physical, mental or emotional outlook of a person. Common types of personal injury claims include traffic accidents, trip and fall claims and product defects that result in injury. The most abundant are automobile accidents — more than six million accidents are recorded annually. On average, there is one accident every 10 seconds. Unfortunately, it is estimated that this number will continue to grow given the multitude of distractions drivers now face.

Regardless of the reasons for the personal injury, negligence must be proved. The process, in some cases, can be a cut and dry.

When an insurance company acknowledges their insured client as the one at fault, then an injury settlement is more easily attained. While these situations happen, keep in mind that fault is not so easily determined.

Receiving a Personal Injury Settlement

Because only a small portion of cases actually reach a courtroom — 4 to 5 percent — most are settled out of court. What does that mean? Instead of spending time and resources bringing a personal injury suit to trial, the involved parties (usually the lawyers for the plaintiff and defendant) will reach a monetary agreement of compensation. The injured party must agree to the defense attorney’s offer, settling the case.

The plaintiff is usually rewarded this offer in the form of a structured settlement. These payments are distributed through annual or monthly payments. The plaintiff must bear in mind that once you have accepted an offer, there is rarely an option for a change of heart. Make sure you and your team has fully explored the long-term significance of your injuries, and that the offer you are willing to accept allocates funds properly for possible future expenses.

What to Do with Your Settlement

Monetary compensation is an amount of money given to help those who have been financially burdened by the negligence of another person or entity. It is important to remember these settlements are there to make one “whole” again. The end result is not to put the plaintiff in a better financial position, but to give them resources to reimburse themselves for out-of-pocket expenses they may have accrued, as well as future expenses, as a result of the incident. Make sure to properly explore payment options relating to your settlement.

Once an injury has occurred it is imperative to contact an attorney as soon as you can, this way the proper documentation of treatments, procedures or surgeries can begin immediately.

Predicting future and long-term ailments is just as important, if not more important, than receiving settlement for treatment already performed. Treatments, such as physical therapy and chiropractic visits, can continue for years or a lifetime after an injury.

Keep these factors in mind when deciding on a proper settlement and value:

• Medical bills accumulated
• Length of medical treatment
• Amount of lost income
• Long-term treatment or post-accident treatment
• Receiving a long-term diagnosis
• Possible pain and suffering damages

Settlement Process

Most personal injury cases are settled out-of-court, but when does the actual ball get rolling on these types of cases?

Once the plaintiff has formally filed the lawsuit, which occurs after they received medical attention from a professional, negotiations will not begin until the defense attorney is given adequate time to perform all pretrial explorations and research.

The magnitude of the injury case determines how the rest of the suit will progress. In smaller instances, the two opposing lawyers will simply negotiate back and forth until the plaintiff chooses to accept an offer from the defense.

In many of these cases, the defense is representing an insurance company. If the insurance company does not feel ready to begin earnest settlement discussions, then the case will be at a standstill. But have no fear: Your attorney should know this often is a good thing.

Defense lawyers or insurance companies use this strategy to test the plaintiff’s willingness to settle. You do not want to seem too eager because they will most likely lower their offer. Every case is different, and getting your hands on the money can take some time.

So hold tight. Patience isn’t just a virtue; it can also be the key to receiving a fair and just settlement.

Structured Settlements Pros and Cons

Structured Settlements Pros and Cons

Many civil cases, particularly accident and personal injury lawsuits, never make it to trial because the parties reach a settlement agreement earlier in the litigation process. Generally, a settlement requires the plaintiff (person brining the lawsuit) to discontinue any further legal action in exchange for receiving a money payment from the defendant or the defendant’s insurance company. Settlement payments are usually lump-sum (all at once) or structured (regular payments over a period of time).

A structured settlement is an arrangement that provides the plaintiff with regular payments over the course of several years or for the rest of the plaintiff's life. They are especially helpful when the plaintiff suffers a serious and permanent injury known as a catastrophic injury. With a structured settlement, a defendant's insurer typically funds an annuity policy for the plaintiff. An annuity produces a continuous stream of income over the term of the structured settlement. Annuity contracts can be quite complex to cover a variety of expected expenses.

Before accepting any settlement agreement you should discuss all available options with your attorney. Below are some pros and cons of structured settlements for you to consider.

PROS

    A structured settlement may provide a plaintiff with a substantial tax benefit. Many lump-sum settlements are considered income and must be claimed on tax returns.  Funds received from an annuity are tax-free as long as the plaintiff does not control the funds.

    Plaintiffs who receive lump-sum settlements often spend everything within five years. Afterwards, many become dependent on the government for their support. With a structured settlement, the funds are preserved throughout the time of plaintiff's disability.

    Annuity funds must be managed by a professional. Proper financial planning will help make sure plaintiffs have enough funds to cover future expenses.

    Parties may tailor annuities to cover a plaintiff's specific needs and all sorts of future demands or contingencies.

    In most states, annuities are protected by state insurance laws that guarantee the obligations of a bankrupt insurer will be covered.

    A lump-sum payment may be combined with a structured settlement to meet immediate expenses, such as medical bills, repayment of debts, rehabilitation costs, and the like.

    Parties can dedicate funds of a structured settlement to cover unanticipated advances in medicine so that if medical science develops a miracle cure, the plaintiff can give it a try.

    A structured settlement may allow parties who are far apart in their settlement negotiations to close the gap and reach an agreement acceptable to both the plaintiff and the defendant.

CONS

    If a plaintiff retains too much control over the structured settlement proceeds, the IRS may look at the situation and decide that the tax break must be forfeited.

    A plaintiff may fear that, no matter how the settlement protects against negative economic conditions such as inflation or recession, unknown changes in the economy could make the annuity payments too small.

    Sometimes, an annuity is placed with brokers who do not have sufficient protection for insolvency (when financial obligations outweigh assets).

    Insurance companies are usually reluctant to disclose how much they will have to pay to buy an annuity covering the amount of the settlement. A structured settlement frequently costs insurance companies much less than it would to make a lump-sum settlement. Without this information, however, the plaintiff's attorney may not be able to make a complete assessment of the benefits and drawbacks of a settlement offer.

In many circumstances, a settlement may be a faster, cheaper, and less stressful alternative to trial. An experienced personal injury attorney can discuss the facts of you case with you and help you decide whether a structured settlement would be your best interests.

What is a Structured Settlement Annuity?

Structured Settlement Annuity

This material is not intended to be used, nor can it be used by any taxpayer, for the purpose of avoiding U.S. federal, state, or local tax penalties. This material is written to support the promotion or marketing of the transaction(s) or matter(s) addressed by this material. Pacific Life, its distributors, and respective representatives do not provide tax, accounting, or legal advice. Any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor or attorney.
Pacific Life refers to Pacific Life Insurance Company and its affiliates, including Pacific Life & Annuity Company. Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state. Each insurance company is solely responsible for the financial obligations accruing under the products it issues. Insurance product and guarantees, including annuity payout rates, are backed by the financial strength and claims-paying ability of the issuing insurance company and do not protect the value of the variable investment options.

Why choose a Structured Settlement?

Benefits for the injured party:

• Features customized design: Payments are specifically tailored to meet the injured party's particular financial needs over a defined period.
• Emphasizes stability: Payments are designed to help meet the claimant's current and future financial needs.
• Promotes security: Structured settlement provide the dependability of a highly rated financial institution.

Benefits for the defendant:

• Leads to faster settlements
• May reduce costs
• Avoids Jury trials
• May allow for tax deduction (self-insured)