When Structured Settlements Make the Difference
By Staff Reporter
You regularly hear about “structured settlements” on television. Those are the people trying to buy structured settlements that are already in place. And sometimes they’re offering pennies on the dollar. What you don’t see on television are the settlement consultants and financial advisors who plan and create structured settlements – they’re the ones working with lawyers across the country to protect the financial future of personal injury plaintiffs.
A “structured settlement” is the settlement of a lawsuit involving a payout over many years. The alternative is a “lump sum settlement.” Typically, plaintiffs are best served by receiving some of their settlement in a lump sum, and some of their settlement over time.
Don Engels of Ringler Associates and The Settlement Tax Group is an expert settlement consultant, regularly focusing on how to maximize settlement value through the use of financial, tax, and benefit strategies. He’s been advising settling parties for over 25 years and provided his expertise for this article.
Benefits of a Structured Settlement
From a tax perspective, receiving a structured settlement almost always makes sense. When the settlement is taxable, structuring spreads the taxable proceeds across tax years, reducing the tax rate that a plaintiff pays. When the settlement is tax-free, structuring allows a plaintiff to take advantage of Congress’ plaintiff tax subsidy. That subsidy allows plaintiffs in tax-free cases to indirectly invest settlement proceeds tax-free. For more on tax benefits, see his article in Bloomberg Tax.
From a financial perspective, using a structured settlement provides a uniquely secure and profitable investment for a diversified portfolio. The conservative portion of a portfolio is typically made up of highly rated bonds and blue-chip stocks. Unfortunately, they can’t provide the combination of returns and customized scheduling that structured settlements can.
From a practical perspective, payments from a structured settlement even protect you from yourself. Congress subsidizes structured settlements to encourage plaintiffs to save, just like it encourages employees to save by subsidizing 401ks. Rather than regularly asking yourself how much to take out of your portfolio, a structured settlement regularly delivers a scheduled payment.
Says Engels, “It’s always easy talking with clients about whether to use a structured settlement. The tricky part is deciding how much to structure, and designing the payment schedule.”
A Couple Downsides
The greatest downside to a structured settlements is that there’s a cost to “unwinding” it. Just like paying for a new house or a new car, you get a lot of input on what it looks like. But, when you sell it, the next owner might not appreciate all your preferences.
You get to design the payment schedule of a structured settlement. But that $15,000 bonus you scheduled in two years might not be at the right time for the new owner. In fact, since it definitely won’t be, most of the people who buy structured settlements are buying in bulk. So, you’re not going to get a great deal if you sell. And that’s why you should be thoughtful as you design your payment schedule.
The other downside to a structured settlement is that it often takes several days, or more, to implement. And since the defendant in your case may be in a hurry, getting the benefits of a structure can test their patience. That’s why it’s so important to consider whether you want to use one early. And if you do, make sure to say so while negotiations are still happening.
Examples of When to Structure
Here are a few examples when Engels would recommend a structured settlement.
- Structuring for a Young Minor. Settlements in cases with minors sometimes require bonds, annual reporting, and spendthrift trusts. A key benefit of a structured settlement is that payments can be designed to start once a minor reaches a certain age. And, in the interim, the value will grow tax-free.
- Structuring for a Dependent. For anyone who won’t be working, and who will depend on a single pool of funds for the rest of their life, a structure is pretty much a necessity. By planning out big expenses, and the need for regular income, a structured settlement can ensure a lifetime of regular payments and financial stability.
- Structuring for an Attorney. In fact, structured settlements even make sense for the lawyers representing the plaintiff. The tax deferral works in the same way, with the same benefits. Trial lawyers often pay at high tax rates in their “big years” and low rates in their “small years.” By structuring their fees, they can smooth out their income, or even defer it to be received during retirement.
Engels regularly sees fact patterns like these, and others in which structures offer similar benefits. “A settlement dollar used the right way stretches a lot further,” he says.
It’s funny that structured settlements on television are always talking about financial freedom. In fact, they’re undoing the security and stability created. Don Engels is one of hundreds of settlement consultants across the country. If you’re a plaintiff, or a plaintiff lawyer, just make sure you’re working with one of them.
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