Structured settlement is an arrangement made when a plaintiff settles a case for a large amount of money that is to be paid by the defendant in installments over a period of time, rather than as a single lump sum. This arrangement is often done in consultation with a certified financial planner and the plaintiff's attorney.
What are the Benefits?
- In most cases, closing a legal case with these settlements can reduce the risk for both the sides. Such arrangements are often proposed by defendants who fear they may have the liability. So, making an offer can help them minimize the expenses on the fees of a legal consultant and the future penalties levied by the court.
- The payments can be scheduled as per the convenience of both the parties. It can be paid in annual installments over specified number of years or in periodic lump sums once in every 2-3 years.
- These plans can benefit the plaintiff as it ensures a steady stream of cash over a specified number of years. These payments normally earn almost double the yearly rates of Government or Municipal Issued Treasury Securities and Bonds.
- Defendants can benefit from such a plan, as they do not have to pay a huge amount of money at one go. This gives them enough time to arrange the amount. The periodic payments can be managed by defendants through the purchase of annuities that guarantee future payments.
- One significant advantage of such arrangements is tax avoidance. The tax advantage is gained at the Federal as well as at the State level. It should be noted that the returns derived from a lump sum are subject to both Federal and State taxes.
- An injured person with special needs may benefit from the periodic lump sums received from a structured settlement as it can help them to purchase medical equipments and modified vehicles.
- It can protect a beneficiary from having their settlement funds dissipated faster, when they may be required for paying future needs. Sometimes, even a large fund may get rapidly exhausted. But periodic payments prevent rapid exhaustion of the amount and ensure a steady flow of money over several years.
- Seniors are usually the target of greedy people when a large pot of cash is available with them. This may put them at a risk of getting duped by conmen. Settlements structured as installmentsmean a smaller pot of cash, which is not that attractive to the conman. It helps to keep opportunistic people away and secures the beneficiary's source of income.
What is the Gain for a Purchaser?
Whenever the person receiving benefits of a structured settlement, wants to sell the remaining payments in whole or a part, the cash flows can be sold at a discounted rate in exchange for the total remaining sum. This discounted settlement is later available for sale to the person who purchases it.
- This particular way of securing the discounted payments directly from the seller helps the purchaser to get favorable yields. Purchaser receives much higher yields than they may secure from similar fixed rate investments like deposits and bonds.
- Purchasers also receive a fixed income for a certain period of time based on the defined parameters of the settlement.
- This arrangement is supported by annuity contracts that are issued by rated insurance carriers.
Any Point of Concern?
These plans require beneficiaries to wait to obtain funding so they do not provide the flexibility required for managing immediate expenses. In other words, people cannot depend on them for emergency cash requirements.
A structured settlement can be quite comforting for the plaintiff as well as the defendant. After all, it's nice to receive a steady monetary flow for a set period of time. It is the best option for those who do not need money now. This is considered a win-win position for both the parties locked in a legal battle.