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What is the smartest way to be sure your settlement money is used wisely?
Congratulations, you’re in the process of settling your personal injury case! And while this may feel like the satisfying end of a long road for you, there are still a few important things to consider as the final pieces of your personal injury legal journey come to a close.
Whether you were in a serious car accident and suffered a traumatic brain injury, or had a slip-and-fall incident that caused a spinal injury, the settlement you are about to receive is meant to compensate you for your injuries and help you navigate your post-accident life. Depending on the nature of your injury and other damages that were sustained, you may be dealing with a large sum of money, and it can be hard to know the smartest way to approach spending, saving, or investing it. You may find yourself considering making one large purchase, like buying your dream home, a new car, or some other expensive item, but you may want to think twice about whether that type of spending is in your best interest.
That is because your settlement isn’t necessarily meant to provide you with one big windfall in your bank account. Depending on the circumstances surrounding your claim, your situation may be one where you need to use the money you received in the settlement as a life-long support to your income, so you want to be sure that you won’t run out of money over the long haul. In this case, something called a “structured settlement” may be a good idea. A structured settlement is a legal settlement paid out as an annuity rather than as a lump sum, meaning that you receive a set portion of your settlement at regular intervals over time, which you determine at the time of settlement. Structured settlements also come with certain tax advantages for the recipient.
However, it is important to note that in order to place any amount of your settlement money in a structure, this must be done before you or your lawyers receive money from the insurance company. In order to meet IRS rules and regulations, the money must come directly from the insurance company to the annuity company. So, the time for thinking seriously about structuring your settlement is as your lawyers are negotiating settlement of your case with the insurance company. That way, your lawyers can alert the insurance company that you may be interested in structuring your settlement, or at least a portion of it, if and when the case resolves.
There are many reasons to consider a structured settlement, and having an honest conversation with your lawyers and financial advisors about the pros and cons is a good idea. There isn’t just one way that structured settlements are put together, so you can tailor one to your unique needs and situation. For example, payments can be scheduled for almost any length of time and can begin immediately, or payments can be deferred for as many years as requested. They can include scheduled lump-sum payouts or benefit increases in anticipation of future expenses.
Several years ago, as part of a complicated, serious injury case with multiple victims, our client, then just a teenager, had the wisdom and financial foresight — along with the good advice from her legal team and parents — to plan out a settlement that would pay her relatively modest sums every 3-5 years, followed by substantial lump sum payments starting later in life that will allow her to retire early and be financially secure.
Another interesting feature of a structured settlement annuity contract is that it often yields, in total, more than a lump-sum payout would. This is because of the interest the annuity may earn over time. Second, one of the benefits of a structure is that the interest it earns, often called an internal rate of return, is not taxable. With a conventional settlement payment that is then invested by the claimant in some kind of interest-bearing account, the amount paid by the insurance company is not taxable, because it is compensation rather than income, but the interest it earns is fully taxable.
Our teenager’s structured settlement value will more than double over the course of her life as the annuity continues to earn interest
As you can see, as you near resolution of your personal injury claim, there is still a lot to think about as you consider how to make your settlement work best for you. If you or someone you love needs legal advice after sustaining a serious personal injury, please don’t hesitate to call us at 800-969-1650, or email us at firstname.lastname@example.org.