-
Overview
A structured settlement is one in which the person agrees to receive payment of an amount of money in installments rather than in a lump sum, often in the case of an insurance settlement. When such an agreement is reached, often an annuity will be purchased to guarantee that all future payments will be made.There are advantages and disadvantages of this type of arrangement which the person must know before entering such a contract.
Considerations
One of the major reasons why a structured settlement is preferred over being paid in a lump sum is tax avoidance. A person will significantly soften his tax liability if the structured settlement is drawn properly; and in some cases, he may receive the funds free of any tax at all. Furthermore, a structured settlement will prevent a lump sum payment from being dissipated, if those funds are needed in the future such as educational expenses or cost of care.
Warning
Because most structured settlements do not allow the recipient to borrow against future payments, he will be unable to use its future value to make a major purchase like a new home or an expensive automobile. Further, not withstanding the tax advantages of most structured settlements, a recipient could do better investing the funds herself rather than earn substantially lower returns by having the funds invested in an annuity, particularly if those funds are invested for a long period of time.
Misconceptions
A structured settlement may preclude recipients from receiving Medicaid or other public assistance if they otherwise qualify for such aid. This is particularly true for disabled recipients whose guardian will enter into such arrangement without understanding the effect they can have. Before doing so, a potential recipient or his guardian should seek the counsel of a financial planner to learn the ramifications of such an arrangement.
Features
A beneficiary of a structured settlement must always worry about the risk of payments not being made because the entity making payments could go out of business. This can also be true in cases where an annuity is purchased to cover the payments because, for whatever reason, those payments may no longer be made.
Prevention/Solution
Depending on the terms of the structured settlement and the laws of the state in which you live, you may be able to sell your contract to a company in business for that purpose. However, many structured settlements are written to prevent such sales, and there are federal laws restricting the sale of such contracts to third parties. In addition, selling a structured settlement may negatively affect the tax advantages inherent to them. Talk with your tax adviser before attempting to sell a structured settlement.
