You need to be careful with your financial settlement. A structured settlement may be the answer.
Settlements and Personal Finances
One of the questions asked to the attorneys at TheLawFirm.com is ‘will this settlement negatively affect my personal finances’? This question is often asked by people who are applying for student aid, are getting a divorce or are on social security. In other words, it is common for people on a fixed income or going though a major life event to worry that the settlement money will negatively affect their finances.
The first piece of advice we give people is to talk to your accountant or personal financial advisor. We are usually not familiar enough with your personal finances to give you solid advice. However, many of the people who are most worried about how this money will affect them often don’t have such a person. This is where we try to offer our clients the best advice we can.
How Can A Settlement Hurt My Financial Situation?
As strange as it may sound, it is important to know that a large settlement can negatively impact your financial life. This is especially true if you are generally relying on loans or income that are ‘means tested’ (such as a student loan for example). Obviously, if your access to money dramatically increases, this may cause disruption. The first step if to figure out if whoever you are worried about cares about the settlement. Remember that the point of this money is to compensate you. In other words, the money is supposed to help put you back where you were before you were injured. Thus, depending on who the money may not have a large impact on your other income.
What Can I Do If A Settlement May Hurt My Financial Situation?
If you discover that the sudden ‘income’ will impact you, one possible solution is a structured settlement. This is where the settlement is paid in installments over time rather than in a single lump sum. Often the structured settlement will be created through the purchase of one or more annuities, which are supposed to guarantee the future payments.
A structured settlement can provide for payment in any schedule the parties choose. For example, the settlement may be paid in annual installments over a number of years, or it may be paid in periodic lump sums every few years.
What Are The Risks Of A Structured Settlement?
As with everything, there are benefits and disadvantages to a structured settlement. One significant advantage of a structured settlement may be tax avoidance. With appropriate set-up, a structured settlement may significantly reduce the plaintiff's tax obligations as a result of the settlement, and may in some cases be tax-free.
However, this is offset by being ‘trapped’ by the periodic payments. If you wish to buy a new home, or other expensive item, you may be unable to do so because you generally cannot borrow against future payments under your settlement. Depending on your situation, you may do better by accepting a lump sum settlement and investing it yourself. Done properly, your long-term return may be higher than that provided by the annuities used in structured settlements.
How Can A Structured Settlement Help Me?
A structured settlement can also protect a plaintiff from having settlement funds disappear on them. This is especially necessary when they are necessary to pay for future care or needs. In other words, sometimes a structured settlement can help protect a plaintiff from himself - some people simply aren't good with money, or can't say no to relatives. Even a large settlement can be rapidly spent.
Minors may also benefit from a structured settlement. This could provide for certain expenses during their youth, an additional amount to pay for college or other educational expenses, and even disbursements into adulthood. A severely injured person who has long-term special needs may benefit from having periodic sums with which to purchase expensive items such as medical equipment or modified vehicles.
However, as noted above, people who anticipate these issues should consult with a financial planner about their situation before choosing any particular settlement option or structure. For example, a financial planner might tell a severely disabled plaintiff to set up a special needs trust, rather than entering into a lump sum or structured settlement. This will be especially true for anyone who is receiving, or expects to receive, Medicaid or other public assistance.
The bottom line is that there are several issues to consider if you are concerned your personal injury settlement may have a negative impact on your other finances. While TheLawFirm.com may not be able to give you specific advice, we can help identify the issues and encourage you to seek advice from a qualified financial advisor or accountant.
Legal Disclaimer: Please consider this general advice. One should consult with his or her own financial advisor or CPA for advice as to the possible ramifications of a particular situation. There are exceptions to almost every legal and tax-related rule. Furthermore, we are not familiar with your personal finances or legal situation and therefore cannot offer specific advice. Additionally, the information provided here applies only to federal IRS guidelines in the United States. Your individual state or country likely has its own rules and regulations applicable to these situations. Therefore, if you expect to receive a monetary settlement or verdict, TheLawFirm.com recommends consulting with your own financial advisor, tax attorney or CPA before receiving the funds in order to plan appropriately for the associated tax burden, if any.
About The Law Firm
About TheLawFirm.com (TLF)
TheLawFirm.com is a group of award winning attorneys, paralegals and associates from the legal profession who’s main goal is to educate and represent their clients with the utmost expertise, respect and trust.
We also work closely with a large group of experts from the medical profession so we can draw upon their expertise, in order to present as much accurate information relating to various mass tort and personal injury lawsuits as we can.