One thing that comes after winning a personal injury lawsuit is the settlement amount. And how exactly you want to receive it. While some choose a lump-sum amount, some settle for a personal injury structured settlement agreement!
Legal experts like the Ohio Personal Injury Attorneys help clients to choos the right formof settlement. For instance, when it comes to a structured settlement, the insurance company primarily pays the plaintiff a series of payments over a period of time.
But is that the one for you? If that is what you want to know, you have come to the right place.
In this blog, we will talk about the following things:
- What is a personal injury structured settlement?
- How does it work?
- Whatare the factors affecting the structured settlement amount?
- Do you have to pay taxes on the settlement amount?
Therefore, if these are what you want to know, keep on reading this blog till the end…
What Is Personal Injury Structured Settlement?
Image Title: Benefits Of Personal Injury Structured Settlement
- Tax-Free Income
- Financial Stability
- Customizations
- Market Protection
In a personal injury case, a structured settlement is basically a financial arrangement where the injured party (the claimant) receives compensation through a series of periodic payments over time, rather than a single lump-sum payout. Something a knowledgeable car accident lawyer can help you understand and negotiate effectively.
An annuity generally backs this type of arrangement, which the defendant or their insurance company purchases from a life insurance company.
According to Annuity.org, a structured settlement is a court settlement that the court pays in the form of an annuity rather than as a one-time lump sum.
A structured settlement often entails a set of tax benefits for the recipient, and at the same time, it gives the party footing the settlement some savings.
Generally, structured settlements are voluntary agreements between the defendant and the injured party.
In such a case, both parties usually decide whether they want to settle a structured settlement or get a lump-sum payment.
The injured party might choose to take a lump-sum settlement if the amount of money is quite small.
For hefty sums, a structured settlement annuity is typically set up. The following are some of the factors affecting the decision:
- Money needs and preferences of the recipient.
- Future money management and tax considerations.
- The whole negotiation process among the parties involved.
When a structured settlement happens, the party responsible will use the money to purchase an annuity, an insurance policy product that an insurance company gives and which promises to make periodic payments for a stipulated period.
Personal Injury Structured Settlement Legal Process: How Does It Work?
Image Title: Legal Process Of Structured Payments
1. Negotiation And Agreement
2. Drafting The Agreement
3. Qualified Assignment
4. Purchase Of Asset
5. The Court Approval
Structured settlements refer to settlements of a legal nature that are paid out over time through insurance companies.
However, there are four stakeholders in the process of these settlements. These are:
- Claimant or Plaintiff: The person who is injured. A claimant submits a lawsuit against the party that they believe has caused the injury.
- Defendant: The party that the claimant brings a lawsuit against. If the defendant loses in court or decides to settle before a court trial, they may arrange a structured settlement to pay the judgment or settlement.
- Assignment Company: The defendant, or their insurance company, makes a qualified assignment, delivering to me the court’s obligation to make periodic payments of the settlement to the claimant. There is a transfer of obligation to an assignment company that assumes it.
- Insurance Company: Assignment companies typically have arrangements with life insurance companies. The assignment company purchases a structured settlement annuity from the life insurance company and thus pays the claimant for the entire duration of the annuity contract.
Here’s how the entire process works:
1. Negotiation And Agreement
Firstly, this process starts through settlement talks between the plaintiff and the defendant. Both sides have to move from a simple one-time payment to a structured agreement.
At this point, professional settlement planners or consultants usually get involved to estimate the future medical expenses, the loss of earnings, and the adjustments for inflation so as to come up with a payment stream that is a good fit.
Furthermore, you must make the choice to opt for structuring prior to the signing of the settlement agreement.
If a plaintiff has a “constructive receipt” (legal control) of a lump sum, they cannot subsequently decide to convert it into a tax-free structured settlement.
2. Drafting The Settlement Agreement
A binding settlement agreement is prepared to incorporate the specific language Internal Revenue Code Section 104(a)(2) requires in order to keep the payments tax-free. This agreement sets out:
- The exact sum and schedule of all future periodic payments.
- Instructions for the beneficiaries in case of the death of the claimant before the term expiration.
Additionally, license confirmation that the payments are “fixed and determinable” and, once established, they cannot be accelerated or deferred.
3. Qualified Assignment
In order to remove a long-term liability from their balance sheet, the defendant generally transfers the payment obligation through a third-party, referred to as a Qualified Assignment Company.
The defendant makes a single premium payment to the assignment company. Following this, the assignment company assumes the legal obligation to make all future payments to the plaintiff.
To qualify for tax exemption, this transfer needs to adhere to IRC Section 130 criteria for all parties involved.
4. Purchase Of The Funding Asset
The assignment company puts the premium into buying a qualified funding asset, most commonly a specialized annuity from a top-rated life insurer.
The assignment company holds the annuity, while the plaintiff becomes the beneficiary.
The life insurance company subsequently issues checks or makes direct deposits to the claimant according to the agreed schedule.
5. Court Approval (In Specific Cases)
Legal oversight is necessary in some cases to safeguard the interests of vulnerable persons. That is the reason why the court approval is necessary in certain cases, like:
- Children and Adults without Capacity: Court’s involvement is typical when a settlement is made so that a judge can ensure the settlement is in the individual’s best future interest.
- Transfers (Sale of Payments): In the event that a plaintiff wants to sell his/her future payments for a lump sum later (factoring), he/she needs to get a court order pursuant to State Structured Settlement Protection Acts.
What Are The Factors Affecting The Personal Injury Structured Settlement?
Image Title: Factors Affecting Structured Settlement Amount
1. Nature and Severity of Injuries
2. Financial Loss (Economic Damages)
3. Liability and Legal Framework
4. Structure Design and Market Factors
Some of the most common factors that can play a massive role when it comes to personal injury settlement amounts are as follows:
1. Nature And Severity of Injuries
The extent of the victim’s physical injuries will primarily determine the total value of the settlement.
To illustrate, permanent “hard” injuries (e.g., spinal cord injury, traumatic brain injury, or amputation) typically have a much higher value than temporary “soft tissue” injuries such as sprains.
2. Financial Losses (Economic Damages)
The amount of settlement is usually based on those losses that can be quantified. Most of the time, these are:
- Medical Expenses
- Loss of Earnings Capacity
3. Liability And Legal Framework
Thirdly, the indisputably liable party’s settlement value will generally be higher if their fault is clear.
But, in case the plaintiff is also at fault (comparative negligence), the total amount usually comes down in accordance with their percentage of fault.
The insurance coverage of the party at fault often serves as a “ceiling” on the money that can be obtained, no matter how much hurt the plaintiff has suffered.
4. Structure Design And Market Factors
In the end, after the establishment of the total value, there are many factors that affect the payment arrangements. These are:
- Interest rates and present value.
- Inflation adjustments.
- The frequency of payments.
Furthermore, structured settlements are basically based on the idea of the “time value of money.”
Because an annuity that earns interest over time places the money, the total amount paid over a period of 20 to 30 years will be greater than the initial amount paid to set it up.
Do You Have To Pay Taxes On Personal Injury Structured Settlement?
A structured settlement can be a great way for you, as a plaintiff, to get an income tax benefit. The U.S. Internal Revenue Code considers personal injury settlements to be “tax-free payments.”
However, there are always a few exceptions to the rules. According to legal analyses from FindLaw, no matter if you receive your settlement money as a one-time payment or in a structured arrangement, certain parts of the money will be subject to tax.
Examples of such parts are punitive damages, some attorneys’ fees, and emotional distress damages.
Nonetheless, personal injury and car accident settlements can be subject to taxes. To gain more knowledge on taxing your settlement proceeds, you should consult a qualified attorney or tax specialist.
Besides, you have to consider other financial liabilities such as health care and insurance subrogation.
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