STRUCTURED SETTLEMENTS
When to Use Structured Settlements
As an effective and established solution to settle damage liabilities fixed annuities are appropriate in a variety of situations including:
Personal, Physical Injury — Auto accidents, medical malpractice etc.
Workers Compensation — Physical injuries received in the course of employment
Attorney Fees — Plantiff attorneys can structure fees associated with personal injury or wrongful death cases — whether or not the client chooses to structure any other portion of his or her settlement
There are many situations in which structured settlements can help to meet individual needs.
Bridging a gap in negotiations while addressing the needs of the parties involved - this is what a structured settlement can do.
In many cases, a structured settlement can address the claimant's desire for safety and the maximum benefit along with the defendant's desire for quicker settlement and reduced litigation costs.
The fixed annuity and any earnings built into the payments are federal income tax-free to the claimant and the liability can be removed from the defendant's books, in many cases.
A guaranteed payment stream offers real benefits to all parties compared to a lump sum of cash that can be easily dissipated.
Steps Involved in a Structured Settlement
An Illustrative Example
Step One:
A professional knowledgeable about the use of structured settlements works with the claimant and his or her attorney to educate them and identify the best alternatives for his or her unique case.( Local contacts )
Step Two:
The present and future financial needs of the claimant (and possibly beneficiary or dependents) are assessed and a structured settlement plan is drafted.
Step Three:
Both the claimant and defendant (or insurer) agree upon a settlement amount. Quite often, in addition to the structured settlement, a lump sum of cash is set aside to cover immediate expenses and provide up-front cash for the claimant.
Step Four:
The defendant or insurer may assign its obligation to make the future periodic payments to a third party (the assignee). The third party then may fund its obligation to make the future periodic payments by purchasing a fixed annuity.
Step Five:
At the discretion of the assignee, the claimant then receives periodic payments from the annuity issuer as outlined in the structured settlement agreement.
Situation:
A young man, 25 years old, is injured in an automobile accident.
Needs:
Financial security to provide the funds needed to satisfy current obligations and guaranteed payments to help cover future needs such as:
Replacement of Lost Income ($2,000 per month with 3% annual cost of living increase)
Ongoing Medical Expenses ($1,500 / mo. for 5 years thereafter $500/ month for life)
Claim Summary
Structured Settlement
Future Needs Guaranteed Payout Life Expectancy Payout Annuity
Cost
Replace Lost Income (click for details)
Age 25-45 monthly payment $644,889 $644,889 $419,960
Age 45 - Life monthly payment $2,933,132 $367,701
Total $3,578,021 $787,661
On-going Medical Expense (click for details)
Age 25-30 monthly payment $1,500 $90,000 $90,000 $87,269
Age 30 - Life monthly payment $500 $315,500 $85,852
Total $405,500 $173,120
Total Structured
Settlement $734,889 $3,983,521 $960,781
Current
Obligations Cash
Payout
Cash
Payout
Up
Front Cost
Reimburse
Medical Bills $36,000 $36,000 $36,000
Attorney Fees $275,000 $275,000 $275,000
Immediate
Cash Settlement $31,000 $31,000 $31,000
Total Current Obligations $342,000 $342,000 $342,000
Total Claim $1,076,889 $4,325,521 $1,302,781
Situation:
A young boy, age 6, receives a severe scarring injury to the face and arms as the result of a dog attack.
Needs:
Financial Security to provide the young boy with funds to satisfy current obligations and guaranteed payments to provide for future needs such as:
Scar Revision($15,000)
College Tuition($25,000 for 4 years)
Future Cash Payment($100,000)
Structured Settlement
Future Needs Guaranteed
Payout Annuity
Cost
Scar Revision
$15,000 payable at 18 $15,000 $8,715
College Tuition
$25,000 payable at 18 $25,000 $53,663
$25,000 payable at 19 $25,000
$25,000 payable at 20 $25,000
$25,000 payable at 21 $25,000
Future Cash Payment
$100,000 payable at 18 $100,000 $40,646
Total Structured
Settlement $215,000 $103,024
Current
Obligations Cash
Payout Up
Front Cost
Reimburse Medical Bills $11,450 $11,450
Attorney Fees $45,000 $45,000
Immediate Cash Settlement $10,000 $10,000
Total Current Obligations $66,450 $66,450
Total Claim $281,450 $169,474
What is a structured settlement?
A structured settlement is a voluntary agreement between a plaintiff and a defendant under which the injured party (plaintiff) receives damages in the form of a stream of periodic payments purchased for the plaintiff by the defendant.
When should someone consider a structured settlement?
In situations including:
Personal, physical injury or physical sickness (auto accidents, slip and fall claims, medical malpractice etc.)
Workers Compensation (physical injuries received in the course and scope of employment.
Can a plaintiff purchase an annuity after the settlement and still qualify for a tax-free benefit on the earnings?
No, If the settlement dollars are invested by the claimant, the interest earned will be subject to tax.
Federal tax treatment of structured settlements is governed by the Internal Revenue Code of 1986, as amended (IRC). In particular IRC Section 104(a)(2) provides that compensation received on account of personal injury or physical sickness is not includable in gross income, whether received in a lump sum or as periodic payments.
How might a potential recipient of a structured settlement protect himself or herself from the effects of inflation?
One method is to build into the structured settlement payment schedule either periodic stepped increases for ongoing monthly payments or special lump sum future payments to help offset any inflationary effects.
Are structured settlement annuities widely available through most financial planners and life insurance agents?
No, because of the specialized nature of structured settlements and their unique design and focus, only a licensed and appointed structured settlement specialist can handle this type of transaction.
As an effective and established solution to settle damage liabilities fixed annuities are appropriate in a variety of situations including:
Personal, Physical Injury — Auto accidents, medical malpractice etc.
Workers Compensation — Physical injuries received in the course of employment
Attorney Fees — Plantiff attorneys can structure fees associated with personal injury or wrongful death cases — whether or not the client chooses to structure any other portion of his or her settlement
There are many situations in which structured settlements can help to meet individual needs.
Bridging a gap in negotiations while addressing the needs of the parties involved - this is what a structured settlement can do.
In many cases, a structured settlement can address the claimant's desire for safety and the maximum benefit along with the defendant's desire for quicker settlement and reduced litigation costs.
The fixed annuity and any earnings built into the payments are federal income tax-free to the claimant and the liability can be removed from the defendant's books, in many cases.
A guaranteed payment stream offers real benefits to all parties compared to a lump sum of cash that can be easily dissipated.
Steps Involved in a Structured Settlement
An Illustrative Example
Step One:
A professional knowledgeable about the use of structured settlements works with the claimant and his or her attorney to educate them and identify the best alternatives for his or her unique case.( Local contacts )
Step Two:
The present and future financial needs of the claimant (and possibly beneficiary or dependents) are assessed and a structured settlement plan is drafted.
Step Three:
Both the claimant and defendant (or insurer) agree upon a settlement amount. Quite often, in addition to the structured settlement, a lump sum of cash is set aside to cover immediate expenses and provide up-front cash for the claimant.
Step Four:
The defendant or insurer may assign its obligation to make the future periodic payments to a third party (the assignee). The third party then may fund its obligation to make the future periodic payments by purchasing a fixed annuity.
Step Five:
At the discretion of the assignee, the claimant then receives periodic payments from the annuity issuer as outlined in the structured settlement agreement.
Situation:
A young man, 25 years old, is injured in an automobile accident.
Needs:
Financial security to provide the funds needed to satisfy current obligations and guaranteed payments to help cover future needs such as:
Replacement of Lost Income ($2,000 per month with 3% annual cost of living increase)
Ongoing Medical Expenses ($1,500 / mo. for 5 years thereafter $500/ month for life)
Claim Summary
Structured Settlement
Future Needs Guaranteed Payout Life Expectancy Payout Annuity
Cost
Replace Lost Income (click for details)
Age 25-45 monthly payment $644,889 $644,889 $419,960
Age 45 - Life monthly payment $2,933,132 $367,701
Total $3,578,021 $787,661
On-going Medical Expense (click for details)
Age 25-30 monthly payment $1,500 $90,000 $90,000 $87,269
Age 30 - Life monthly payment $500 $315,500 $85,852
Total $405,500 $173,120
Total Structured
Settlement $734,889 $3,983,521 $960,781
Current
Obligations Cash
Payout
Cash
Payout
Up
Front Cost
Reimburse
Medical Bills $36,000 $36,000 $36,000
Attorney Fees $275,000 $275,000 $275,000
Immediate
Cash Settlement $31,000 $31,000 $31,000
Total Current Obligations $342,000 $342,000 $342,000
Total Claim $1,076,889 $4,325,521 $1,302,781
Situation:
A young boy, age 6, receives a severe scarring injury to the face and arms as the result of a dog attack.
Needs:
Financial Security to provide the young boy with funds to satisfy current obligations and guaranteed payments to provide for future needs such as:
Scar Revision($15,000)
College Tuition($25,000 for 4 years)
Future Cash Payment($100,000)
Structured Settlement
Future Needs Guaranteed
Payout Annuity
Cost
Scar Revision
$15,000 payable at 18 $15,000 $8,715
College Tuition
$25,000 payable at 18 $25,000 $53,663
$25,000 payable at 19 $25,000
$25,000 payable at 20 $25,000
$25,000 payable at 21 $25,000
Future Cash Payment
$100,000 payable at 18 $100,000 $40,646
Total Structured
Settlement $215,000 $103,024
Current
Obligations Cash
Payout Up
Front Cost
Reimburse Medical Bills $11,450 $11,450
Attorney Fees $45,000 $45,000
Immediate Cash Settlement $10,000 $10,000
Total Current Obligations $66,450 $66,450
Total Claim $281,450 $169,474
What is a structured settlement?
A structured settlement is a voluntary agreement between a plaintiff and a defendant under which the injured party (plaintiff) receives damages in the form of a stream of periodic payments purchased for the plaintiff by the defendant.
When should someone consider a structured settlement?
In situations including:
Personal, physical injury or physical sickness (auto accidents, slip and fall claims, medical malpractice etc.)
Workers Compensation (physical injuries received in the course and scope of employment.
Can a plaintiff purchase an annuity after the settlement and still qualify for a tax-free benefit on the earnings?
No, If the settlement dollars are invested by the claimant, the interest earned will be subject to tax.
Federal tax treatment of structured settlements is governed by the Internal Revenue Code of 1986, as amended (IRC). In particular IRC Section 104(a)(2) provides that compensation received on account of personal injury or physical sickness is not includable in gross income, whether received in a lump sum or as periodic payments.
How might a potential recipient of a structured settlement protect himself or herself from the effects of inflation?
One method is to build into the structured settlement payment schedule either periodic stepped increases for ongoing monthly payments or special lump sum future payments to help offset any inflationary effects.
Are structured settlement annuities widely available through most financial planners and life insurance agents?
No, because of the specialized nature of structured settlements and their unique design and focus, only a licensed and appointed structured settlement specialist can handle this type of transaction.
posted by IRSHELP at 6:16 PM
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