Structured Settlement or Lump Sum Injury Award Payments?

When a person wins a small award through a lawsuit, he almost always receives the money in a lump sum payment. When an injured person wins a large award through a personal injury lawsuit or a worker’s compensation claim, he can usually choose between receiving the award in one lump sum payment and receiving the payment in smaller amounts over a long period of time. Receiving periodic payments over a long period of time can be set up through a structured settlement. There are advantages and disadvantages to both methods of payment.

Lump Sum Payments

A lump sum can be helpful in paying for medical bills and replacing lost wages when there is an immediate debt. A lump sum may also be good for someone who has the skills and knowledge to invest the money so the money can grow over the years and will be available to him in the future. The disadvantage of a lump sum is that the temptation to spend it may be too great. When the award is intended to compensate an individual for many years of lost wages, it is important that the money not be spent immediately because the money must be there in the future when the injured individual is not receiving a pay check. While the money received in cash settlement is not usually taxed, when that money is invested it will incur tax liability over time. The tax consequence of a lump sum payment can be another disadvantage to receiving the money in one payment.

Structured Settlements

Structured settlements have tax advantages. If a person chooses to receive the payments through a structured settlement though, the settlement can be set up to lower, and even possibly eliminate tax liability. A structured settlement can be organized and divided in a way that offers a large portion of the award immediately for paying immediate debts, and then spreads the rest of the award out over time. It can be structured for varying lengths of years. The obvious disadvantage to a structured settlement is the inflexibility of when one receives his money. Once the structure is determined, it is typically not changed over time. If a person finds himself in a situation where he needs more money because he can’t pay for an unexpected emergency, he cannot access the money before it is scheduled to be paid.

Be Careful if Selling a Stuctured Settlement

There are many companies now in existence who prey on people who have structured settlements from lawsuits. The companies offer to buy the structured settlement in return for a lump sum of money. Historically, the companies were charging large sums of money in exchange for the purchase, and were taking advantage of people who needed money right away and didn’t realize the money they were actually losing in the exchange for their structured settlement. To address the problem, at least 44 states have passed laws, in addition to the federal laws, to control the companies’ unfair practices. A person who has accepted a structured settlement should contact an attorney before selling their settlement to anyone in order to protect himself from losing money over time.

A Lawyer will Advise the Client on the Best Option

It is best to discuss the options of a structured settlement or a lump sum payment with an attorney and possibly with a financial planner or certified professional accountant as well. Every case has personal considerations which determine which choice is best. If the injured person is in her 80’s and she may not live much longer, it may make sense for her to take the lump sum because money over a long period of time will not help her. On the other hand, if she has children who will get her estate, she may want a structured settlement which can be structured in a way that the remainder of the money goes into a trust when she dies and can then be distributed over time as the injured person chooses. A person who has little self-control when it comes to spending would be wise to choose a structured settlement as a means of protecting himself from spending it all at once. If an individual chooses to invest the money on his own, one bad investment could destroy the money for the future. In tough economic times, a structured settlement is the safest way to ensure the money will be there for years to come.

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