Like many people, your only exposure to the term “structured settlement” might be late night TV ads hawking immediate access to “your money.” Even if you already have one, you may not know how they operate and why they’re set up the way they are. So what is it exactly?

A structured settlement is an arrangement for the periodic payment of compensation from a lawsuit. It is a financial award given to someone that sustained injuries in an accident typically paid by an insurance company. Rather than one large payment and structured settlement is an annuity that pays the recipient out over time.

The purpose is to provide ongoing income for someone that may not be able to work so that they can meet their financial obligations over the many years. Payments are often paid monthly or quarterly and can last up to twenty, thirty years or more depending on the case and situation. And, like so much else in the country, structured settlements are mostly about taxes.

In many situations, when a plaintiff wins or settles a lawsuit, the defendant has to pay them the settlement amount in a lump sum. A structured settlement, however, is another option which pays the plaintiff in installments over time.

Installment payments can be structured in a number of ways to suit the injured parties’ needs and to protect the individual from inflation. Installments can range from yearly payments to complex arrangements consisting of an initial lump sum payment, monthly indexed installments, deferred payments, and special provisions relating to the future care of the injured individual.

One advantage of a structured settlement is that you are guaranteed a source in income for life. A second important advantage is tax management: you may be able to substantially reduce the taxes you would have to pay the government on any investment income that would otherwise accrue from a lump sum settlement.

One drawback is that you are stuck with the terms of the structured settlement. You cannot change it at a later date. Hence, it’s very important to be represented by a good attorney and tax advisor from the beginning who will help negotiate the structured settlement terms to meet your long-term needs.

While a structured settlement is not appropriate for everyone, they can be very useful, depending on your needs. Your attorney can help you evaluate whether they are suitable for you.

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