Structured Settlements vs. Lump Sum Settlements
If you are involved in a lawsuit and awarded a settlement you will usually have a choice between a lump sum payment or a structured settlement. As the name implies, a lump sum payment consists of one payment for the amount of the settlement. A structured settlement results in the creation of an annuity that pays a specific amount of money at determined intervals. There are tax consequences, legal consequences and general pros and cons with each type of settlement so be sure to talk to a lawyer, tax adviser and financial planner before committing to a settlement type.
Tax-free Income
If the settlement is for an injury claim and the settlement terms are drafted correctly, the money received as part of a court settlement is not taxable. Any money made through most investments is, however, taxable. Because of this, many people benefit from taking a structured settlement and allowing it to provide tax-free income for the specified time period.
The Totals
The total amount of money received under a structured settlement is often much higher than the amount that would be received under a lump sum settlement. This is because most annuity settlements are paid out of an interest-bearing annuity
Settlements and Time
Many structured settlements are drafted in such a way that payments cease if the plaintiff dies. If an untimely death seems likely, it is wise to take a lump sum or place a clause in the settlement dictating a certain number of payments must be made, regardless of the plaintiff's death.
Current Expenses
A structured settlement may be an option even if you have significant expenses now. Structured settlements can be drafted in a way that allow them to provide a lump sum payment up front or at specified times throughout the term of the settlement.
Lump Sum Investing
Lump sum settlements can provide a significant amount of money to be invested. This can work to your advantage if the investments perform well but can be a disadvantage if they do not.
Terms
Be aware that the terms of a structured settlement cannot be changed once you have agreed to them.
