When to Use a Structured Settlement Annuity

Personal Injury Settlements: Structured settlement annuities are primarily used to compensate victims (plaintiffs) in personal injury settlements. They are extremely useful in resolving these types of cases since many injury victims are no longer able to work, yet still need future guaranteed income – often for the remainder of their lives. Structured settlement annuities are extremely flexible and can be designed to meet the future medical, educational, and income needs of injury victims and their families.

Settlements for Minors:  Structured settlement annuities are particularly useful in settling litigation on behalf of minors. Rather than allowing the settlement recovery to sit in a court-ordered bank account (also referred to as the Registry of the Court) the settlement proceeds can be placed in a guaranteed structured settlement annuity that is designed to pay for future medical, college expenses, and to provide lump sums at certain dates in the future for their first car, first home, and many other customized options; depending on the needs and size of the case, some payments are designed to pay for life.  Learn more about structured settlements for minors.

Taxable Damages Settlements:  Many settlements involve non-physical injuries – such as discrimination cases, sexual harassment cases, employment cases, or whistleblower cases. Unlike recoveries for physical injuries, which are completely tax exempt, recoveries from non-physical injury cases are fully taxable. This can create a tax nightmare for plaintiffs receiving their settlement awards. Often, after paying attorneys’ fees, litigation expenses, liens, and federal, state, and local taxes (often including the Alternative Minimum Tax) the plaintiff is left with a fraction of the original recovery. This is where the nonqualified structured settlement annuity can help. Nonqualified structured settlements can be used in non-physical injury cases to defer and spread the taxation to future years.

For example, assume Client A receives a $100,000 taxable recovery in a gender discrimination case. Rather than accept the full $100,000 recovery in immediate upfront cash and pay federal, state, and local taxes on the entire amount, Client A could place the money into a nonqualified structured settlement annuity that will pay $10,000 per year for the next 13 years. By structuring her recovery in this plan, she will avoid paying taxes on the full $100,000 in the year her case settled. Rather, she will only be required to pay taxes on the $10,000 each year as she receives it. This will help Client A remain in a lower tax bracket each year, resulting in a much smaller total tax liability; she will earn interest on monies that she would have paid in taxes upfront; and, she can custom design the future payments in any way that meets her future needs and goals.

Why Use a Structured Settlement Annuity

There are many reasons to consider structured settlement annuities to resolve your personal injury or taxable damage case.  A few are briefly summarized below:

1. Matching income with future needs and goals: Structured settlement annuities are flexible in design to allow future expenses to be offset by future income. Structures can be paid weekly, monthly, quarterly, semi-annually, annually, in a series of lump sums, deferred up to 20 years before starting, often payable for the plaintiff’s lifetime, or a combination of all.
2. Tax Savings: Personal Injury: The principal and interest earned on structured settlement annuities for personal injury victims are completely tax exempt; see IRC 104(a)(2). Or, Non-Physical Damages and Non-Personal Injury Type Cases: Structured settlement annuities established for settlement recipients of taxable damages cases, while not tax exempt, are tax deferred, allowing the recipient the opportunity to take advantage of substantial tax savings (see taxable damages cases above).
3. Guaranteed Rate of Return: Structured settlement annuities are fixed annuities with fixed rates. Fixed annuity rates provide a level payment for a guaranteed period of time or for the rest of the annuitant’s lifetime, or for the combination of both. The annuitant is guaranteed a fixed rate of return to provide a fixed income stream. With the guaranteed rate of return, the annuitant does not have to worry about market fluctuations or value loss.
4. Medical Underwriting/Substandard Age Rating: Structured settlement recipients who desire lifetime payments may also benefit from medical underwriting. Medical underwriters of participating life insurance companies will review the medical history of a prospective annuitant and assign a substandard rate rating. The substandard age rating is based on the individual’s particular health history. The rated age, rather than the individual’s biological age, is then used to price the lifetime annuity – resulting in higher annuity payouts per premium dollar. In serious injury cases, the substandard age rating can greatly improve the future payments to the injured individual.
5. Guaranteed Lifetime Income: Structured settlement annuities protect settlement recipients from the fear and worry of outliving their resources. Lifetime annuities guarantee that annuitants will have the ability to meet some or all of their future income needs. The peace of mind this creates for many annuitants cannot be overstated.
6. Flexible Design: Unlike the traditional annuities, the structured settlement annuity is not limited by 72(u) rules or any other tax rules and restrictions. Structured settlement annuities can be designed to pay out in almost any design conceivable. This flexibility allows injury victims and taxable damage settlement recipients the ability to match future payments to their particular future needs and goals in a unique way.
7. Creditor Protection: Structured settlement annuities also protect recipients’ future income from the claims of creditors.

Learn more by contacting ROBINYOUNG & COMPANY.