Structured Settlements: Maximizing Settlement Dollars in Personal Injury Cases
By: Joanna Wynes, J.D., Partner Planner, Synergy Settlement Services
The primary goal of a plaintiff’s attorney in a personal injury or workers’ compensation action is to achieve the greatest possible financial recovery given the facts and circumstances of the case. Once there is an agreement on the amount to settle the case for the injury victim or workers’ compensation claimant, there is a one-time opportunity for the plaintiff to invest a portion of the recovery in a structured settlement annuity. The decision to purchase a structured settlement with a portion or all of a victim’s settlement must be made before receipt of the proceeds.
What is a Structured Settlement and Why is it Used?
A structured settlement is an investment vehicle where the settlement proceeds are paid as a periodic stream of payments instead of a lump sum payment or in addition to a lump sum. Since their inception in 1982, structured settlement annuities have been considered one of the safest financial options at settlement for personal injury and workers’ compensation victims. Prior to the creation of structured settlements, plaintiffs could only receive their settlements in the form of a one-time lump sum cash payment. As a result of limited financial expertise and the fact that many plaintiffs receive more funds from a settlement than they have ever had in their lifetime, there is a significant risk of quick dissipation of settlement funds. In fact, there is anecdotal evidence that ninety percent of claimants quickly dissipate lump sums received for personal injuries within five years of receipt of the lump sum. A structured settlement provides financial management for settlement funds and can be designed in various ways to meet a plaintiff’s needs. Depending on the type of structured settlement plan selected, it can ensure that the settlement proceeds will last for the rest of an injury victim’s life.
A structured settlement has many advantages over taking an entire settlement as a lump sum, as discussed in more detail below:
1) A structured settlement offers valuable tax incentives: Although personal injury and workers’ compensation settlement proceeds are tax-free, any interest earned on traditional investments is fully taxable. To promote the use of structured settlements, Congress amended the federal tax code to make 100% of every structured settlement payment received on account of personal physical injury or sickness exempt from income taxes.
2) A structured settlement helps provide financial security: Traditional investments typically do not offer a guaranteed return. A structured settlement, on the other hand, creates a fixed stream of guaranteed income with a guaranteed rate of return, which allows a personal injury victim the ability to recover without spending time and resources determining investment strategies. Additionally, a structured settlement can help protect funds from creditors, relatives, friends and others seeking money when they learn of a large settlement.
3) A structured settlement is flexible in design: A personal injury or workers’ compensation victim can design a structured settlement to provide a monthly check to help pay for basic needs such as food, clothing, transportation and/or housing. Alternatively, it can be used to provide for the future cost of college, retirement funds and/or a down-payment on a home.
4) A structured settlement is backed by the highest-rated insurance companies: A structured settlement is contractually guaranteed by a highly rated, well-capitalized life insurance company.
Cases in Which a Structured Settlement Should Be Considered:
Structured settlements are ideally suited for many types of cases including:
1) cases that involve minors or persons found to be incompetent;
2) people with temporary or permanent disabilities;
3) severe injuries necessitating extensive future medical care and income replacement;
4) wrongful death cases where the surviving spouse and/or children need monthly or annual income, or assistance with education expenses; and
5) workers’ compensation cases.
20-Year-Old Female: Anna Parker (name changed for privacy and confidentiality)
Ms. Parker was significantly injured in an automobile accident. Although she was not completely disabled, her injuries significantly diminished her future employment capacity. Ms. Parker’s case settled for policy limits, and after the payment of attorneys’ fees and costs, she was going to net $350,000.00. Ms. Parker elected to take $40,000.00 of her net settlement proceeds in a lump sum at the time of settlement to buy a used car and rent a new apartment. She also elected to invest $310,000.00 in a structured settlement, which would provide her with guaranteed monthly payments of $1,169.27 for thirty years to help her with monthly bills as her earnings capacity was diminished. The contractually guaranteed payments under the plan selected totaled $420,937.20. Accordingly, her structured settlement was guaranteed to earn $110,937.00 of tax-free interest on her investment.
9-Year-Old Female: Lisa McDonald (name changed for privacy and confidentiality)
Lisa McDonald sustained a severe arm fracture as a result of medical negligence as a young child. Her case settled when she was 9 years old for $750,000.00. After attorney’s fees and costs, she was going to net $400,000.00. Because she was a minor at the time of settlement, and not disabled, her parents had two choices for her settlement funds under Maryland law. One option was to place her funds in a statutory “Title 13 Trust.” With this option, her funds would be in a restricted bank account, earning little to no interest until she reached the age of 18. The funds would not be available for use without Court Order prior to the age of 18, and upon age 18, Lisa would be able to withdraw all of her money at any time. The other option was a structured settlement, which could start paying her at or after the age of 18 on a schedule selected by her parents and was guaranteed to earn significant interest. After speaking with her parents, we designed a structured settlement so that Lisa would receive semi-annual payments of $20,000.00 for four years starting in the summer following her 18th birthday, with the intention that those payments would assist with college tuition. Her parents also elected for her to get a guaranteed lump sum of $45,000.00 on her 23rd birthday, $30,000.00 on her 25th birthday and $322,918.47 on her 27th birthday. The contractually guaranteed payments under the plan selected totaled $557,918.00. Accordingly, her structured settlement was guaranteed to earn $157,918 of tax-free interest on her investment.
If you or a family member are anticipating a settlement for personal injury or sickness, speak with your attorney about getting a structured settlement consultant involved to discuss options for your settlement proceeds, and to ensure that a plan is putting in place prior to signing settlement documents and receiving funds. Alternately, reach out to a settlement planner, such as myself, directly, to learn whether a structured settlement might be right for you or your family. You can contact me at email@example.com.