Structured settlement

What is a structured settlement?

A structured settlement pays out settlement proceeds over time through scheduled periodic payments, rather than delivering the entire amount as a single lump sum at once.

Payments are typically funded through an annuity purchased specifically for this purpose, with the payment schedule negotiated as part of the overall settlement terms.

It offers particular tax advantages in many circumstances, since structured settlement payments for physical injury are often treated favorably under federal tax law compared to how investment income from a lump sum might otherwise be taxed.

It represents one significant option among several for how settlement proceeds can actually be received once a case resolves.

Why might a structured settlement make sense?

Several considerations can make this option attractive depending on individual circumstances.

• Provides a disciplined, guaranteed income stream over time
• Protects against the risk of quickly spending or losing a large lump sum
• May offer favorable tax treatment compared to certain investment alternatives
• Particularly relevant for minors, since payments can be structured to arrive as they reach specific ages
• Can be tailored around anticipated future needs, such as periodic medical expenses

What are the potential drawbacks?

Reduced flexibility if unexpected large expenses arise, since the payment schedule is generally fixed once established, and modifying it afterward is often difficult or unavailable entirely.

The overall total received may differ from what a lump sum invested independently could potentially generate, depending on actual investment performance and the specific terms of the annuity purchased.

Selling structured settlement payment rights later for cash, sometimes called factoring, typically involves a significant discount and is subject to specific legal requirements and court approval in many jurisdictions.

How is this decision actually made?

Individual financial circumstances, including other available assets, ongoing income needs and personal financial discipline, all factor into whether this option makes sense for a particular person.

Consulting with a financial advisor, alongside your attorney, before finalizing this decision is generally worthwhile given how consequential and typically difficult to reverse this choice becomes.

For minors and individuals under a guardianship, courts are often involved in reviewing and approving the specific structure of any settlement, including whether a structured payment schedule is appropriate.

Common questions

Can I change my mind after choosing a structured settlement?

This is generally difficult once established. Selling payment rights later typically involves a significant discount and specific legal requirements, so the decision should be made carefully upfront.

Is a structured settlement always better than a lump sum?

Not necessarily. It depends heavily on individual circumstances, financial goals and comfort with the tradeoffs involved, which is why financial guidance before deciding is valuable.

Are structured settlement payments taxed?

Payments for physical injury are often treated favorably under federal tax law, though specific tax questions should be directed to an accountant rather than assumed generally.