Of course, this is a brief explanation and you can always visit the Internal Revenue Service website for more information. One of the hard facts about structured settlements, as with so much else, is that it is primarily about taxes.
Structured Settlement Tax Benefits
If you were injured in a car accident and received a $250,000 settlement from the other person involved in the accident or from their insurance company, the settlement is tax-free. However, if you later decide to invest that $250,000, any earnings from that investment are taxable.
On the other hand, if you opt for a structured settlement instead of the $250,000 cash, you’ll receive the money over a period of time you decide, and those payments will be tax-free. This will convert your after-tax earnings to a fully tax-free return.
Payments over time vs. lump sum
Although settlement claims are won in the courtroom, most are usually resolved out of court. The most common scenario is that the insurance company or obligated party pays you the agreed amount. This payment can be a single payment, also known as a lump sum, or you can choose to receive payments in installments over time. Depending on your circumstances, a structured settlement may be a good choice that allows you to maintain a steady stream of income for a designated period of time.
The payment plan can and should be your decision. They can be simple annual payments or you can receive a certain amount as a down payment and the rest is paid to you as monthly payments.
There are many reasons for people to opt for a structured settlement. The most obvious reason is to constitute a source of continuous income, and secondly, the tax advantages associated with this type of plan. A structured settlement will substantially reduce the amount of tax you will owe.
Does a structured payment plan make sense?
A structured settlement is a much better and well-organized way to receive any type of money from your claim. However, it is entirely up to you to decide whether a lump sum or payments over time will work best for your situation. That trip around the world or a few months in Hawaii seems like a dream come true, but using your money in a calculated and structured plan that provides financial security and a stable income for your family really packs a punch.
There are some interesting statistics that you should also think about. It has been shown that about 30% of people who have chosen to receive their settlement as a lump sum instead of a structured payment plan have spent it within three to four months, and more than 80% have spent the full settlement within the first five years.