Structured Settlements
What is a Structured Settlement?
Structured settlements are financial arrangements where a claimant receives periodic payments over time, typically from a civil lawsuit settlement (personal injury, wrongful convictions) or insurance payout, instead of a lump sum, often funded by an annuity to provide tax-free income and long-term financial stability.
Key Benefits of structured settlements
Tax free income
Can be tailored to meet specific needs, such as increasing payments or lump sums at key intervals.
Protection from Mismanagement: Spreads funds over time, reducing the risk of spending a lump sum too quickly.
Support for Dependents: Can be structured to provide for family members, such as minors or spouses, over time.
Spread attorney fees over time to defer income taxes, reducing immediate tax liability.
In 1982, Congress passed legislation affirming that claimants in personal injury, wrongful death and worker’s compensation lawsuits could receive their settlement awards as streams of tax-free income payments through a structured settlement annuity. Prior to the legislation, settlements were awarded as single lump sums, and claimants were often burdened with the task of managing the money themselves. Structured settlements provide a solid foundation for future financial security. It is important to carefully evaluate the choices available and decide which payment option is most appropriate.
Benefits of a structured settlement
Tax-free income.
A structured settlement is a one-time opportunity to settle a personal physical injury claim, including wrongful death, with tax-free benefit payments. It is tax-free based on Section 104(a)(2) of the Internal Revenue Code. By contrast, the investment earnings on a lump sum payment are usually fully taxable.
Predictable income
Defines gross income as all income from whatever source derived, unless specifically excluded by law, such as under Section 104(a)(2) for damages received for personal physical injuries or sickness.
Explains that gross income does not include damages received on account of personal physical injuries and physical injuries.
Explains exclusions from gross income damages received for personal physical injuries or physical sickness, except for punitive damages.
A structured settlement is a one-time opportunity to settle a personal physical injury claim, including wrongful death, with tax-free benefit payments. It is tax-free based on Section 104(a)(2) of the Internal Revenue Code. By contrast, the investment earnings on a lump sum payment are usually fully taxable.
Guaranteed payments for life
The availability of lifetime payments can be of critical importance to claimants, since lifelong income can provide them with increased financial security. Now that people are living longer, many people are concerned about outliving their savings.
Payments to the beneficiary
Guaranteed structured settlement payments can be received by the named beneficiary on a tax-free basis. If a claimant accepts a settlement in a lump sum, there is no guarantee that there will be money available for a named beneficiary after the claimant’s death.
Guaranteed payments for a specified period, or as lump sums
Structuring Attorney Fees
Attorneys with contingent fee arrangements can opt for a structured legal fee arrangement, where the defendant funds periodic payments instead of a lump sum at settlement. These payments are not taxable until received, allowing lawyers to defer income taxes. This strategy helps smooth out income fluctuations, reduce tax burdens, and support retirement or estate planning goals.
A structured legal fee arrangement is typically funded through an annuity purchased by an assignment company. The defendant provides the funds—equal to what would have been paid as the attorney’s fee—which the assignment company then uses to buy the annuity. This converts what would have been a lump sum into a stream of periodic payments. When properly arranged, the structure allows the attorney to defer taxes, as income is only taxed when the payments are actually received. For example, rather than receiving a $500,000 lump sum at settlement, an attorney might instead receive $70,000 annually over ten years. The total payout of $700,000 reflects not only the original amount but also the growth from tax-deferred investment returns. This approach provides predictable income while minimizing immediate tax liability.
Structured attorney fees have no ongoing administrative or maintenance fees, allowing attorneys to keep more of their earnings. Payment schedules are highly flexible—payments can be made monthly, quarterly, semi-annually, annually, or as future lump sums. These payments can begin right away or be deferred to a future date, depending on the attorney’s financial goals.
Key Benefits
Income and tax management
Highly customizable payment options
Receive interest on structured amount