Over $5 billion in structured settlements get issued each year. Are you anticipating a payout due to injury or medical malpractice? Then you’re going to want to know the difference between a structured settlement and a lump sum.
Wondering what these terms even mean? Or how to tell which one is better for your situation? Read on to learn the answer to all your questions about structured settlements and the lump sum tax.
What is a Structured Settlement Versus a Lump Sum Tax?
While these payments can result from winning a lawsuit, they can be used to avoid a court case altogether. Typically, these payments arise from personal injury, medical malpractice, worker’s compensation, or wrongful death lawsuits.
So, what’s the difference? Well, if you want your money all at once, you’ll receive it in a lump sum. If you want the payment over a period of years, you’d ask for a structured settlement.
Sometimes you need a structured settlement because the entity involved can’t pay the full amount at one time. But other times people opt for a structured settlement.
Why wouldn’t you want your money all at once? Simple: the lump sum tax.
Lump sum payouts are subject to tax. But structured settlements are not, thanks to the Periodic Payment Settlement Act. If a payment meets particular requirements (most structured settlements fit the bill), there are no taxes if you receive it over time.
So, you’ll have to choose between receiving less money all at once, or more money over a set period of time. Structured Settlements also ensure long-term financial security.
How Does a Structured Settlement Work?
So, how does a structured settlement work? First, the party receiving the money comes to a negotiation with the opposing party or their insurance carrier. This agreement can take place in or out of court.
After agreeing on an amount, the paying party purchases an annuity from a life insurance company. That way an impartial 3rd party can manage the regular payments. It also protects the ultimate sum from recessions and market fluctuations.
Some payments occur over a set number of years, while others pay over a lifetime. Additionally, some payments are stable over time. Others allow for an increase in benefits in the future.
Pros and Cons of a Structured Settlement
At face value, it’s simple. Do you want less money right now (lump sum)? Or do you want more money received over time (structured settlement)?
Of course, most of the time, things aren’t that simple. For example, if it’s payout for an injury that accrued medical bills, you might need the lump sum now to pay them off.
Additionally, having all your money means more flexibility. If you have an emergency, the money is there. With a structured settlement, you’ll incur charges for dipping into the rest of the money. Or you’ll need to sell your payments to another party — either one will cut into your payout.
The biggest benefit of structured settlements is that payments are tax-free. Additionally, your annuity will earn interest over time, netting you more money. And since they don’t fluctuate with market changes, a settlement is more secure.
There’s also the issue of discipline. Roughly a third of lottery winners end up bankrupt. Many people can’t resist making extravagant purchases when they get a lump sum payout.
A structured settlement prevents you from doing so. Additionally, if your injury means you’re unable to work, your structured settlement can make up for your income loss.
Still Can’t Decide?
If you still can’t decide whether you want to deal with the lump sum tax or choose a structured settlement, you’ll probably want to consult with a lawyer. Have a potential lawsuit? Consider using our personal injury calculator to see how much yours could be worth!