Structured Settlements Part 2: How Do They Work?

If you are a plaintiff in a case suing for injuries, you might want to explore the option of a structured settlement. Many cases have been settled as a lump sum payment and statistics show that this lump sum is generally spent within five years. The plaintiff loses the money before paying for all the expense resulting from the injury. Sometimes, after the award is gone, plaintiffs sue their lawyer for not offering or explaining the option of a structured settlement and have to go through the long process of another lawsuit. Here at McMinn Law, we aim to get it right the first time.

Structured settlements can be beneficial because, as we saw in Part 1 of this series, a structured settlement is an award for damages that is paid out periodically to ensure compensation for future expenses and losses as the result of an injury or life-changing incident. Instead of getting a lump sum of money that will be spent before the needs of the plaintiff are met, structured settlements are “structured” to meet the plaintiffs present and future needs.

How Are Structured Settlements Created And Enforced?

There is a three step process in structured settlements:

  1. The parties to the settlement agreement agree that the defendant will pay plaintiff
    periodic payments as part of the negotiated settlement.
  2. The defendant transfers the obligation to make the periodic payments to a third
    party assignee, usually an annuity company.
  3. That third party assignee purchases the annuity and distributes the payments periodically according to the settlement agreement.

While creating a structured settlement agreement, many times your attorney will have a structured settlement professional who understands how to determine your future needs based on your life expectancy. Plaintiff’s lawyers, generally use the government’s mortality tables to determine life expectancy. These are tables that use statistics to determine life expectancy based on age, ethnicity, sex, and medical conditions. Other variables a structured settlement professional will consider are you or your loved one’s future needs. If your case involves a minor, will money be needed to attend college in the future? If an injury, has there been a life-care plan that established what future care is needed for recovery or disabled living?

After the facts surrounding you or your loved one’s case have been established and expenses that can be calculated are considered, the professional or proposal writer will consider the needs that are not able to be calculated. These include aspects of your case like future pain and suffering and other non-economic damages. After the proposal has been written, the defendants parties and you and your attorneys will negotiate until an agreement is made (if there is no agreement, the case will go to trial).

After settlement and proposal has been made, the defendant will assign the lump sum of the settlement to a third party or annuity company. This company will “buy” your structured settlement and is then responsible for the periodic payments for the duration of the agreed upon settlement.

Are Structured Settlements Taxable?

If you receive a structured settlement you will need to talk to a CPA or tax attorney about the specifics of your agreement. Generally, the rule is simple: settlements for compensatory damages (economic and non-economic) are not taxable (even if you receive payments every month, you will not be taxed) and punitive damages are taxable. Punitive damages serve as punishment to the defendant and will have to be set aside from the annuity bought by the annuity company in order to be taxed.

What About Lawyer Fees?

Lawyer fees can be structured as a percentage of the settlement and might mean a fee taken out from the periodic payments that is agreed upon in the structured settlement agreement. Or they might be paid of in the first lump sum. These particulars are figured out during the negotiating the agreement and between you and your lawyer.

Is Your Case Fit For A Structured Settlement?

You are entitled to know every option you have regarding the settlement or awards you receive in a case. If a structured settlement isn’t offered to you than it is possible, as mentioned in the first paragraph, that your lawyer might be liable for the damages that could not be paid for. So how do you know if you are entitled to a structured settlement? If your injury or incident resulted in damages that are going to require future loss or expenses, you can explore the options you have with structured settlements. Contact us today for a free consultation on your case and learn more about how we can get you every bit of compensation you deserve.