When a legal claim results in financial compensation, you may assume that the settlement will arrive as one large payment. However, some cases are resolved through a structured settlement that provides payments according to an agreed schedule. This arrangement can spread compensation over months, years, or another specified period rather than providing the entire amount at once. Structured settlements are commonly associated with personal injury claims and may also be used for certain workers’ compensation claims. Understanding how these arrangements work can help you evaluate settlement terms more carefully.
How Does a Structured Settlement Work?
A structured settlement generally involves periodic payments established as part of the resolution of a legal claim. Instead of receiving the entire settlement immediately, you receive payments according to terms established in the settlement agreement. Depending on the arrangement, payments may occur at regular intervals or include scheduled future lump-sum payments for anticipated needs.
An annuity is often used to fund these future payments. In a qualified structured settlement, the responsibility for making payments may be assigned to another entity that purchases an annuity or another qualifying funding asset. The payment schedule is established in advance, which means you generally cannot simply change when or how much you receive from a qualified structure after it has been finalized.
When Might a Structured Settlement Be Used?
Structured settlements may be considered when compensation is intended to address needs that extend well into the future. For example, a person who experiences a serious physical injury may face ongoing medical care, reduced earning capacity, or other long-term financial effects. Scheduled payments can provide compensation over time rather than requiring the recipient to manage the entire settlement immediately.
The appropriate arrangement depends on the circumstances of the claim. A structured settlement may be used in cases involving significant personal injuries, certain workers’ compensation claims, or situations where a minor receives compensation. Depending on the case and applicable law, a settlement might also combine an immediate lump-sum payment with scheduled future payments.
What Are the Potential Advantages?
One reason you might consider a structured settlement is the ability to coordinate payments with anticipated financial needs. A settlement could be designed so that you receive regular payments for ongoing expenses while additional amounts become available at specified future dates.
Tax treatment can also be an important consideration, but it depends on why the damages were awarded. Under federal tax law, compensatory damages received because of personal physical injuries or physical sickness are generally excluded from gross income whether they are received as a lump sum or through periodic payments. Other types of settlement proceeds, including many punitive damages and certain damages unrelated to physical injuries, may be taxable.
Can You Change a Structured Settlement Later?
You should carefully review a structured settlement before agreeing to its terms because qualified periodic payments generally cannot be accelerated, deferred, increased, or decreased by the recipient. Your future needs can therefore be an important consideration when determining whether and how to structure a settlement.
You may encounter companies offering to purchase rights to future structured settlement payments in exchange for a present lump sum. Federal law provides specific rules for these transactions, and applicable state laws may impose additional requirements. Certain transfers require advance approval through a qualified court or administrative order that considers whether the transfer is in the recipient’s best interest.
Choosing a Settlement That Fits Your Needs
Deciding between a lump-sum payment, structured settlement, or combination of the two can involve legal, financial, and tax considerations. Your expected medical needs, financial obligations, and long-term circumstances may all influence how settlement terms are designed. Because the appropriate structure depends on the facts of your case, it is important to understand the proposed payment schedule before accepting an agreement.
An attorney can explain how a proposed settlement works and help you evaluate its terms in the context of your claim. You may also benefit from appropriate financial or tax guidance when considering the long-term effects of different payment arrangements. Taking time to understand your options can help you make an informed decision about how your settlement compensation will be received.