A structured settlement establishes a steady stream of periodic payments that are funded by an annuity. Using a structured settlement to fund a personal injury claim is what provides payments free from federal income tax, a unique status under the law. In addition to injury claims, structured settlements can be used to settle non-physical injury claims as well. There are numerous benefits to structured settlements, including but not limited to:
- Favorable federal tax-exempt status
- Favorable total yield on the fixed annuity
- Predictability of payments
- Lifetime payments and lump sum periodic payment combinations
- Financial security and freedom
It is with a structured settlement that one receives benefits without having to manage the settlements by oneself. Structured settlements help produce the maximum return for you, your family or a seriously injured individual. There is no other investment option that provides individuals with such peace of mind. Many in the industry such as claims professions, plaintiff attorneys, judges and defense attorney advocate the use of structured settlements because they are able to effectively meet the needs for security and provide better benefits over time.
As previously mentioned, a distinct benefit of structured settlements is that they have numerous tax benefits. All income from one’s annuity is exempt from federal and state taxes. One’s payments are also exempt from taxes on interest, dividends and capital gains. With taxes always on the rise, it’s definitely a huge positive that structured settlements are tax-free. However, by contrast, if one takes the settlement in cash, one will need to account for the fact that additional interest may push one into a higher tax bracket – something to keep in mind.
Eligibility for Government Programs
In addition, anyone who has been injured (especially seriously) will want to maintain eligibility for government means-tested programs. An individual with as little as $2,000 in assets, can be disqualified from Supplemental Security Income, Medicaid and private care programs based on Medicaid eligibility. It is without that eligibility, that medical and living expenses can quickly deplete even large settlements. Ultimately, that would leave one wholly dependent on government funding, which would not be a good prospect.
But you may be able to avoid that problem by establishing a trust to pay for injury-related care and then funding that trust through a structured settlement. If you fund the trust irrevocably with a structured settlement, the government doesn’t consider you to “own” the future annuity payments and therefore you have a greater chance of maintaining your eligibility.
Not to mention, it is very important for individuals to manage a settlement so that it guarantees one the regular income that he/she needs to live. Specifically, guaranteed income is vital and few have experience creating plans to meet this need, which is why structured settlements are important.
Keeps You on Budget
The ironic part of a structured settlement is that it helps keep you on a budget. Since one does not receive all the money immediately, it prevents the receiver of the funds from blowing through or wasting all of the money all at once. The annuity payments are spaced out so that one does not waste the money that is funding one’s future. This is especially a good benefit for someone who is not good with budgeting his/her money, which can oftentimes be difficult for one to manage especially when one is coming into a large amount of money suddenly.