Over the last 60 days, I have reached settlement agreements in 4 significant cases. In each case, I strongly recommended that my client "structure" receipt of at least part of the settlement through an annuity.
A "Structured Settlement" is a settlement in which the client agrees to be paid over time through the opposing party purchasing an annuity. For example, the client might agree to be paid a fixed amount on an annual or monthly basis. As another example, the client could agree to receive payment of a fixed sum in 5 years when he knows he will have significant expenses. There are several advantages to a Structured Settlement.
One advantage is the accrual of the equivalent of a tax free interest. Under the Tax Code, recovery for a claim of damages due to physical injuries is not considered to be taxable income. However, if you deposity that recovery in a credit union account, the interest on that recovery is taxable. In a structured settlement, the interest component of the purchased annuity is not considered taxable income with the result being that an internal interest rate of 3% may be the taxable interest equivalent of 4%. In today's economy, getting that interest in a conservative investment is a good deal. Over time, it makes the settlement worth more.
A second advantage is that the structured settlement allows the client to protect his recovery through financial planning. Personal injury lawyers have too many war stories of clients losing their money through loans to "friends," investments of "partnerships" with other friends, and simply bad spending decisions. These war stories even include those clients who swear that they will manage their recovery wisely because they know it has to last the rest of their life. A structure allows a client to do financial planning and schedule the receipt of his settlement for when he needs it most like paying for school, buying a house, or paying for medical treatment. A structured settlement also allows a client to tell persons asking about his recovery that his funds are locked up in an investment that he cannot change.
The financial planning advantage of a structured settlement are important for other reasons. No client should have all of his investments in one basket. A structured settlement allows a client to address the need for conservative investments in his investment portfolio.
I am not meaning to disregard the challenges of a structured settlement and the reasons why a client might decide not to do so. The annuity company must be a reputable company of significant size and quality so that the client is comfortable that he will receive his future payments. Also, once the annuity is purchased, its terms cannot change without huge financial penalties. But every clients has to play his had smart. See http://www.junelawyer.com/
