A structured settlement refers to monetary compensation that is paid over an extended period of time. Annuitants receive annuity payments at regular intervals until the allocated funds are fully distributed. The most common use of structured settlements is to compensate individuals who have been injured due to the negligence of another.
Structured settlement annuities are also used to pay lottery jackpot winners. Annuitants typically receive a lump sum cash payment on a quarterly or annual basis. Entering into this type of payment arrangement allows lottery winners to receive the full amount of winnings, less taxes. Lottery winners who accept a one-time cash payment generally receive around 50-percent of the total winnings.
Annuity payment plans are established by a structured settlement company. Several factors are considered when annuities are used to compensate for injuries. When Annuitants sustain injuries that require on-going care or if they can no longer work, the settlement amount includes adequate funds to pay for medical care and lost wages.
In most cases, settlements provide Annuitants a lump sum payment to cover litigation expenses and required medical treatment, than periodic payments follow. Annuities might be paid for 5 to 20 years, or continue for the remainder of the Annuitant's life. Annuity payments provided to injured persons are tax-exempt, while annuities provided to lottery winners may be subjected to state and federal taxes.
Annuity payments are intended to provide sufficient funds for Annuitant's to obtain the care they require and continue with the lifestyle they had prior to injury. For example, if the Annuitant is unable to return to work, annuities can be structured to include funds for rent or mortgage payments, utilities, insurance, clothing, food, and healthcare expenses.
Oftentimes, structured settlements are offered when the defendant prefers an out-of-court settlement. When litigation costs are reduced there is a possibility the plaintiff's payout will be higher. Legal expenses can consume upwards of 50-percent of available funds, so out-of-court settlements can be particularly beneficial to plaintiffs.
It is nearly impossible to modify structured settlement agreements once they are in place. Therefore, it is crucial that the plan is exactly the way it should be before signing contracts. If a structured settlement is modified, there is the potential the tax classification will be altered which can result in the Annuitant being charged with income tax. If annuity payments are made to an estate, they may be subject to estate tax. It is best to consult with a tax attorney prior to signing a structured settlement agreement.
There are instances where Annuitants sell their structured settlement in exchange for lump sum cash. In most cases, only those receiving annuity payments for lottery winnings can sell their settlement. Not all states allow the sale of annuities regardless of their use. States which do allow the sale of future annuities require Annuitants to obtain court authorization.
It is important to understand the advantages and disadvantages of structured settlements before entering into an agreement. Most personal injury lawyers are familiar with this type of payment arrangement and can guide clients in the right direction.
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