Structured settlements refer to a payment arrangement to provide funds over an extended period of time. They are often used to compensate individuals who have won personal injury lawsuits stemming from automobile accidents, medical malpractice, and workplace injuries, as well as to pay lottery jackpot winners.
Structured settlements offer substantial flexibility regarding payment amounts and payment schedules. However, once settlements are in place the terms cannot be altered without court authorization.
This type of financial compensation is often used when damages exceed $10,000 for adults or $5,000 for minor children. Annuity payments are provided on a regular basis for a specific period of time. The duration is based on several factors. The average duration is 10 to 20 years, but if injuries lead to permanent disability the payments might extend for a lifetime. In some cases, benefits extend to direct lineage heirs such as a surviving spouse or children.
When individuals win lottery jackpots they can elect to receive lump sum cash or annual payments established via a structured settlement. Winners that accept lump sum cash receive less than the full amount won because state and federal taxes are deducted prior to distribution.
Individuals who accept lottery winnings via structured settlement are still responsible for paying taxes; however, the tax rate is lower when funds are distributed over 20 years. It?s always best to talk to a tax lawyer to determine which method is best suited.
Structured settlement payments are guaranteed through annuities held by life insurance companies. Annuity proceeds are invested to expand the Annuitant?s earnings. Payments received as result of injury or negligence is not subjected to taxation. However, investment proceeds are subjected to state and federal taxes. Payments and investment proceeds received through lottery winnings are also subjected to state and federal taxes.
Annuity payments that are provided for a specific time period are referred to as ?Period Certain Annuities? or ?Designated Period.? Essentially, this means Annuitants receive a specific amount of money on specific dates for a set number of years. If Annuitants die prior to receiving the full payout the remaining balance is paid to a designated beneficiary.
When annuity payments are paid for life they are known as ?Life Annuity? structured settlements. The term ?life? does not necessarily mean they will be paid throughout the Annuitant?s lifetime. Instead, ?life? refers to a specific number of years based on the Annuitant?s life expectancy.
This type of structured settlement is referred to as ?Period Certain.? Annuitants can designate a beneficiary to receive remaining payments if they die before the settlement is fully paid.
Lump sum structured settlements are often used when financial compensation is awarded to minor children. Funds are distributed at a later date in the form of lump sum cash. There are two types of lump sum structured settlements which include ?Lump Sum? and ?Life Contingent Lump Sum.? The first lets Annuitants establish a beneficiary to receive funds in the event of death, while the second does not offer designation of a beneficiary.
Life annuities are established when Annuitants are entitled to monthly payments for life. Two types of life annuities are available and include ?Life Only? and ?Joint Survivor.? The first does not allow designation of beneficiary, while the second pays a designated beneficiary for the remainder of their life.
Lastly, Temporary Life Annuities provide regular payments for a specific time period. The annuity ends when the Annuitant dies and there is no beneficiary provision.
Structured settlements must be orchestrated by a lawyer. Some states allow Annuitants to sell future annuities, but most prohibit this practice. It?s always best to obtain legal and tax counsel to ensure compliance and minimize taxation.
Simon Volkov is California real estate investor who has written extensively on structured settlements. He shares information and resources regarding establishing structured settlements, and buying and selling future annuities at www.SimonVolkov.com.
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Source: http://www.credittocredit.com/personal-finance/common-types-of-structured-settlements
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