Over many years I have represented personal injury victims with serious and catastrophic injuries, and I have represented families who suffered the loss of life/ wrongful death of a family member. In many cases, after months or years of representing the victim or family, when we are on the verge of settling the case (or have settled the case) the family members or victim are curious about whether some part of the major settlement should be placed into an annuity or structured settlement. While my job is to obtain maximum compensation for my injured client or a family of someone who has been wrongfully killed, I am not a financial broker or structured settlement professional.
Nonetheless, clients understand that I may not be a financial broker, but they still want basic advice on why they should consider a structured settlement and what advantages it may have over taking a simple lump sum settlement of all the settlement money at one time. After doing a quick internet search, it appears there isn’t much information from experienced injury attorneys on this subject and so I am offering this article as a basic guide for injury victims as well as for family members representing a minor or child who was been seriously injured. I hope this article assists in helping you understand some of the basic concepts of structured settlements.
What is a structured settlement or annuity? Answer: Once a case is actually settled for a monetary sum, the money is not received by your personal injury attorney in the law firm trust account but is instead directly sent to a bonded and rated financial company that agrees to provide a periodic stream of partial payments to the personal injury victim or the beneficiary. Clients often ask if the money can be monthly, quarterly or at some other periodic payment schedule and the answer is yes, that can be agreed upon prior to setting up the structured settlement or annuity.
Is there anything in it for the injury attorney?
No, the personal injury attorney gets no financial interest in whether the family or victim sets up a structured settlement for their settlement money. As a matter of fact, ethics regulations for attorneys in every state prohibit an attorney from getting any interest in the client’s lawsuit besides what is stated in the fee or retainer agreement. Injury attorneys simply want to help clients in managing their major settlement funds in a wise and prudent way. We would hate to successfully settle our client’s case, and then see them throw their money into a ponzi scheme or bad investment.
How do the companies that provide structured settlement or annuity services get paid? Just like a regular financial broker that invests your money in stocks or bonds, any financial broker that sets up a structured settlement or annuity is normally paid a percentage commission by the fund in which they place your money or your family’s proceeds of the settlement—you do not pay them out of your settlement proceeds yourself. If you would like a disclosure from the financial broker of exactly what percentage they will make on their commission, you can ask the broker for the information but understand that they are not working for free and that this is a common commission that all brokers make on placing money in such funds.
Why would we not take our major injury settlement or wrongful death settlement recovery all in a lump sum right away?
Under longstanding Internal Revenue Service (IRS) laws and regulations, when a personal injury victim receives their final settlement monies, or when the estate in a wrongful death case receives the settlement, the money recovered is not normally taxed (there are exceptions, which are unusual and not covered here). The reason a personal injury settlement or recovery is not taxed is that it is considered getting back money that was lost, that is, it is considered getting back to zero or baseline. The victim or family is considered to have lost the wages, earnings, earning capacity, pain, suffering or permanent impairment of the victim and the recovery gets that person back to square one. This means, that there is no taxable event on a person or estate’s tax return for putting the settlement money in the bank account (the IRS wants the income listed as such a recovery, and your tax professional or the IRS website can direct you how to list the recovery on your tax forms). This is contrasted with something like a state lottery recovery which is taxed on receipt because it is considered a gain or windfall and is taxed immediately.
However, what an experienced injury attorney explains to their client is that even though there is no taxable event on getting the hundreds of thousands of dollars in the bank, as soon as that money gets in your bank, any interest you earn on the recovery then starts being taxed on a monthly or annual basis. Where there is a major recovery of money that will sit in an estate or family bank account for months and years, this means that you will be taxed on the interest earnings of the recovery/settlement money. This is the point of doing a structured settlement or annuity. Any amount of money over what will be necessary for monthly living expenses or other requirements could conceivably be placed in a structured settlement and under the Internal Revenue Service (IRS) rules. The growth of the money– if invested in an annuity or structured settlement at the time of settlement, will not be taxed on the growth of the money. In other words, a qualified structured settlement or annuity is one of the only legal ways to have a personal injury settlement fund grow, tax free, for months or years while you really don’t need the use of that money for living expenses or personal consumption activities. No, you cannot set up such an annuity or structured settlement after you get your settlement proceeds and protect the interest income from taxation.
To give you an example let’s assume that the settlement of the personal injury proceeds to a victim is $600,000.00. Because of losses the victim or client may need to place $200,000.00 of the proceeds right into their bank account for monthly and other personal expenses simply to get by on a month-to-month basis for the near term. However, $400,000.00 of the $600,000.00 settlement could be directed into a structured settlement at the time the settlement occurs and before the money goes to the personal injury attorney or enters the attorney’s trust account. If the structured settlement is set up in a legal fashion and does not hit the victim’s bank account or the personal injury attorney bank account, the IRS allows the growth of the money to not be subject to taxation.
All of the specifics of how the incomes will be paid and how this works are outlined in spreadsheets to a person who is setting up a structured settlement or annuity. The financial broker provides scenarios, and payout plans designed by you and your broker before the money is placed in the fund or funds. Often, each of our personal injury clients have different needs or desires and the financial broker setting up the annuity can give printouts of every different formula that can be imagined of monthly payments, increased quarterly or annual payments and variations.
Who should do a structured settlement?
There are various types of personal injury settlements that should be considered for structured settlements or annuities and they include any case in which a minor or child suffers serious injuries and by law, will not be able to receive the funds until age 18 or later. If the settlement is considerable, a structured settlement is appropriate. In cases of paralysis, paralyzing injuries, traumatic brain injury/brain damage, or amputation of an arm, leg, finger or thumb, that results in a substantial settlement, a structured settlement should be contemplated depending upon the significance of the recovery. Also, in wrongful death case recoveries where there is a surviving husband or wife or family members that are minors, depending upon the amount of the recovery, a structured settlement should be considered. The purpose of this article is just to explain basic information about structured settlements and annuities for personal injury victims or surviving family members and is not to give specific legal advice.
About the Editors: Shapiro, Cooper, Lewis & Appleton personal injury law firm (VA-NC law offices ) edits the injury law blogs Virginia Beach Injuryboard, Norfolk Injuryboard, and Northeast North Carolina Injuryboard as a pro bono service to consumers.