Under current tax law, the proceeds of a personal injury claim settlement are nontaxable. A structured settlement is designed to allow an accident victim to maximize the benefit of this tax law. Structured settlements are commonly used to plan disbursal of a child’s settlement to ensure that the funds are paid at preplanned intervals to avoid the risk of an eighteen-year-old beneficiary irresponsibly squandering his or her injury claim proceeds. However, adult accident victims may also choose to structure their settlement so that their accident claims are paid through a series of preplanned installments.
A structured settlement agreement is a private agreement and contract that can be engineered to meet the victim’s wishes. For example, in child injury cases, parents often choose to follow a “college-years payout.” Instead of the child receiving all of the money at age eighteen, he or she would receive five equal installments beginning on the eighteenth birthday and continuing annually over a five-year period. The court must approve the structured payment plan if the victim is a minor child. If the victim is an adult, he or she is free to create any payment plan that the parties agree to.
A word of caution is warranted concerning structured settlements. There are a number of financial service organizations that advertise payment advances on structured settlements. The structured settlement is an annuity contract whereby the insurance carrier pays money to the victim over time. Because the victim never receives settlement proceeds until the contractual date of disbursal, there is no income tax on these future settlement payments. The annuity contract is an ironclad agreement. They are typically not tied to stock markets or investments, and the future payment is a certainty. The companies that offer advances and early payment typically buy the victim’s annuity rights at a severe discount. You truly give up a great amount of money to secure these early payments. Thus, plan ahead when considering a structured settlement and make sure that you will not need early access to your settlement proceeds. If you might need access to settlement money sooner, avoid the structure option and take your full settlement as a single lump sum.