Rebecca Warren: A structured settlement is a way of receiving partial payments for a major amount of money you’ve won or received in a lottery, a court or insurance case.
A structured settlement is a way of receiving partial payments for a major amount of money you’ve won or received in a lottery, a court or insurance case.
You hear many commercials on the air for getting cash from structured settlements, but it’s important to understand what they are and how they should be handled if you’re ever the recipient.
A good place to start is with a tax expert like a certified public accountant, a financial planning expert like a Certified Financial Planner professional or an attorney or structured settlement consultant who has significant experience dealing with these payment structures. When there is big money at stake, it might make sense to consult all three.
• First, the definition. A structured settlement is structured like an annuity. It is a contract written by an insurance company that provides periodic payments to a winner in a lottery, a lawsuit or some other settlement arrangement over time. Amounts can be paid out weekly, monthly or yearly.
• The benefits. Structured correctly — and with the right oversight going in — a structured settlement annuity provides a payment stream that may be tax-free over a period of time during the winner’s lifetime and remaining payments may be bequeathed to his or her survivors after their death.
• The pitfalls. You should never accept a structured settlement agreement without vetting it against your own tax situation or estate needs. Also, it helps to have an expert who understands these agreements well enough to know whether certain fees or charges connected with that settlement are appropriate to the overall size of the award.
Keep in mind that the structured settlement must be purchased by the person or company that is at fault or is making the award. This is why it’s particularly important to have an expert watching over that selection process from the moment the award is announced.
• The lump sum alternative. If a winner chooses a lump sum payment over a periodic payment based on the full amount of the award, that payment will likely be handled with an insurance contract that physically pays the lump sum minus a hefty chunk — they get a big payoff for giving you a big one-time payoff.
Keep in mind that the lump-sum payoff idea may not be worth pursuing unless it’s large enough to throw off substantial investment income in the future and that you have talented management making sure that lump sum makes money over time. This is why it’s always a good reason to confer with tax, financial and investment experts on the best way to go with either a lump sum or a periodic payment from the moment you’ve been informed you won the money.
• Keep in mind that others get an advantage, too. Many attorneys are also structuring their fees that are taken directly out of a court award. This allows them to postpone receiving their share of an award on a tax-deferred basis so they can build their own retirement funds. There’s nothing wrong with this, but it’s important to know who else in the process might benefit from any decisions that get made.