A structured settlement is a method of payment for plaintiffs in successful lawsuits, e.g. someone injured in a car accident that was not their fault may be offered a settlement amount by the driver at fault or their insurer. In many cases, you can opt for a cash lump sum or request a more structured form of settlement. You might hear about lawsuit winners getting a $500,000 payout upfront and this might seem really attractive, especially if you need financial help, but there are some advantages to opting for regular installments.
The most prominent advantage of opting for a structured agreement is the tax-free nature of the payments. A $500,000 cash lump sum, as soon as it is invested, is counted as taxable income which means you may lose a large chunk of your settlement figure. The slow and steady route, i.e. a structured settlement, has no tax penalties unless you request an advance on your payments to cover emergency financial situations.
With structured settlements, you have the option to control when and where you get your installments. You might not want to receive payments straight away because you're in a financially stable position and you want the money to remain inaccessible until a time that you'll need it, e.g. when your child reaches the age that they'll need college tuition. A structured form of settlement can also be used to ensure you have a secure income during your retirement. Structured settlement brokers are well versed in creating contracts with a variety of payment stipulations such as no settlement payments for 10 years or payments spread out over the next 15 years, for example. You could even get the best of both worlds: a settlement figure to be paid partly in cash up front, and partly through regular payments. As long as you stipulate your terms before signing the settlement agreement, structured settlements are extremely flexible.
The one thing that sets apart a structured payment system from a cash payment after winning a lawsuit is the fact that you don't technically own any of the money. What actually happens when you opt for structured payments is that the reward gets assigned to the subsidiary of a life insurance company instead of being paid to you or your lawyer. The assigned subsidiary company buys the payments from its parent insurance company, holds the policy and is responsible for the monthly payments. There are special tax code provisions that ensure this money is registered as tax-free for insurance companies and thus tax-free for you to receive. On a technicality, the tax code means that you don't own any of the money; you merely own the expectation of monthly payments. This might seem a little risky, but it's much practiced, perfectly legal and you're guaranteed to receive installments as and when you've specified in your settlement.
Structured payments can also provide you with spendthrift advantages and asset protection. The best way to handle structured settlements is to have small increments paid out over long periods of time, but this method of settlement is not suitable for everyone.