Structured Settlement Tax Benefits
The majority of personal injury or accident lawsuits rarely get to trial. In instances where the parties agree to settle out of court, early in the litigation process, the plaintiff often discontinues any intended legal action in exchange for monetary compensation. Normally the defendant or the insurance company representing the defendant makes the compensation. The payment either can be a lump sum or regularly made over a period.
Structured settlements refer to arrangements that spread the said payment over a regular period, usually, the rest of a plaintiff’s life or over a period of several years. This arrangement is beneficial for individuals that suffer catastrophic injuries because they can assign all or a portion of the settlement to fund an annuity.
Where an individual chooses the latter, the annuity provides the plaintiff with regular, tax-free payments that they then can direct towards specific needs. The regular nature of this arrangement notwithstanding, the tax benefits of structured settlements probably are the reason they are unusually attractive.
But, what exactly are the tax benefits of structured settlements and why do they seem so appealing? The U.S. Tax Code considers all payments made in personal injury or accident settlements as tax-free. Moreover, they are flexible and can transition to the plaintiff’s next of kin in case of death of the beneficiary. That aside, the other benefits are:
- Substantial tax benefits – As earlier highlighted, the U.S. tax authority lumps personal injury settlements with all other payments that are tax exempted. Internal Revenue Code, Section 104, and sub-section (a) spells that the concerned authority shall not levy tax obligations on the entire amount or structured payments made to a plaintiff as a settlement associated with accidents or personal injury. Do note, however, that payments made for punitive damages are exceptional and may attract taxes. You as such may need to engage your attorney fully, to know the breadth of tax relief that your settlements entitle you to and, the accompanying preconditions if any.
- Better returns – The chaotic market situation, as it exists now, offers very few investment opportunities or revenue streams that are entirely tax-free. Moreover, even opportunities that come with tax-deferred arrangements are very unpredictable, and most have considerably lower returns compared to structured settlements.Thanks to their tax-free nature, structured settlements pay more regardless of the fluctuations that markets experience and, recipients need not worry about administration and or management fees.
- Personalized payment policies – regular payments from structured settlements have additional benefits aside from being tax-free. For instance, it is possible to arrange them so they can create a positive change in your overall tax obligations, estate planning as well as budgeting. You can factor them in benefit raises and escalators to address concerns regarding inflation and future income.
- Stability – Unlike mutual funds, bonds and stocks, structured settlements do not suffer the fluctuations that financial markets induce. Moreover, you can schedule them to begin at whatever time you want or, defer them to fit your financial needs. Importantly, the periodic nature of the payments reduces temptations and restricts you from making large extravagant purchases. Such purchases may compromise your tax situations.
- Protection and guarantee – Generally, annuity contracts carry a guarantee that obligates an insurer to get cover. And, though there are additional regulations that stipulate when and how an insurer may declare bankruptcy, almost every state enforces a safety net rule that guarantees payment to structures settlement beneficiaries even when the insurer experiences financial difficulties.
Structured settlements are great because they easily ensure that victims of catastrophic injuries do not waste their windfall. That the arrangement spreads the payment over a considerable period, ensures that beneficiaries can meet their financial obligations without necessarily being dependent on relatives. Make sure to review our list of best structured settlement companies before selling your future payments.