Use of Structured Settlements in Personal Injury Cases

Most personal injury claims are settled by exchanging a single sum of money in return for a release of all claims against the defendant. In some cases, however, the parties are better served by negotiating a structured settlement which typically provides for an immediate cash payment and additional payments over time. This type of arrangement is typically referred to as a "structured settlement". The payments can be scheduled over any length of time or even on specific dates. I have had some clients set up monthly installment payments beginning on their anticipated retirement date in order to supplement retirement income. Others have scheduled lump sum payments to be made at or around the time tuition bills arrive each year. The point is, the settlement can be structured to meet the needs of the individual.

Structured settlements can also help to maximize an injured persons recovery from a lawsuit. A defendants insurance company may resist paying more than a set amount on a claim but that same amount, invested in a structure, may produce a result the plaintiff can accept. This is true because structured settlements are funded with the purchase of a single premium annuity contract which guarantees a specific return on investment over time. Typically, this return on investment would be taxed by the internal revenue service as a gain. Section 104(a)(2) of the Internal Revenue Code, however, specifically excludes personal injury settlements, whether paid in a lump sum or as periodic payments, from gross income.  By way of example, an insurance company may settle by purchasing a $100,000 annuity contract today that actually guarantees non-taxable payments to you of $125,000 according to a schedule you set. If you accepted the same $100,000 in settlement and invested it yourself to acheive the same return, the IRS would tax the return as a gain. By structuring the settlement, you actually recieve a greater, non-taxable return over time. 

Structured settlements are popular when the injured plaintiff is a minor. Large settlements on behalf of minors can be deferred to grow tax-free over time for use as a college fund. Structured settlements also protect against an injured person spending the settlement proceeds too quickly. Some statistics suggest that most lump sum settlement funds are exhausted within five years. Structured settlements are also a great way to supplement retirement income with tax-free periodic payments.

Make sure your personal injury lawyer is well versed in how to use this effective settlement tool to your advantage.