Structured Settlement – Pros and Cons
Sometimes a plaintiff settles a case for a large sum of money but the payment is made in installments over a period of time rather than in a single lump sum. When a settlement is paid in this manner, it is called structured settlement. More often than not, a structured settlement is created through purchase of annuities in order to guarantee future payments. How beneficial is this arrangement? Let’s take a look.
What are the benefits of structured settlement?
• Structured settlement may significantly reduce tax obligations. The proceeds from a court awarded structured settlement are completely tax free at both state and federal levels. On the other hand any investment income or capital gains realised on the lump sum over time would be subject to taxation at normal rates. So structured settlement definitely scores over lump sum payment in this respect.
• Some people are simply not good with money. A lump sum, for them, is a license to embrace debt by spending recklessly. Structured settlement is a blessing for such people and it protects them from the temptation to waste the money or spend it foolishly. It also saves people who cannot say no to friends and relatives who are inclined to exploit them financially. In others words, it can save people from predatory borrowers who are attracted by the lump sum and are eager enough to have a taste of the wealth.
• Structured settlement offers safety in that they are a reliable source of income. For disabled people or someone who needs a steady income, structured settlement is the right option.
• It may allow parties who are far apart in their settlement negotiations to close the chasm and make a good settlement possible.
• Structured settlement can benefit minors too. It can provide for certain costs during their youth, an additional disbursement to pay for college or other educational expenses, and then one or more disbursements in adulthood.
What are the disadvantages of structured settlements?
• You can feel restricted with periodic payments. You may wish to purchase a new car or something that requires a lump sum but you cannot borrow against future payments.
• Another drawback of structured settlement is that they do not accrue interest. If the settlement awarded is a large sum with payments spread out over many years, you might lose quite a few bucks in terms of interest.
Structured settlement is a long-term, tax free income which will give you peace of mind. However, you should take advice from your attorney/tax advisor before taking any decision. You can also consider hiring the services a structured settlement company. Finally, remember that a structured settlement will not make you a rich man but it will provide you enough money to live comfortably and will lay the foundation of a secure future.
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