Structured Settlement Annuity
Get a Quote »If you (or your client) have been injured and are anticipating monetary damages, then you might be considering a structured settlement annuity account. Annuities are preferred financial instruments when dispersing court awarded funds based on their safety, reliability, and tax advantages.
Flexible annuity payments can account for the present and future needs of injured parties and their families. They can also protect against the dissipation of funds through mismanagement, taxes and market volatility.
What Is A Structured Settlement?
A structured settlement is a payment of court awarded damages over a set number of years or a lifetime. Payments are flexible and can be scheduled for any length of time depending on the needs of the injured party. Settlements can be taken as a lump sum in the future, as a stream of payments for a predetermined number of years, or as a combination of both.
Settlements typically arise from personal injury claims such as vehicular accidents, medical malpractice, product liability and/or workers compensation suits. In such cases, the plaintiff may be in need of financial stability for an extended period of time. In many cases, annuities are used in order to provide guaranteed future payments.
Using A Structured Settlement Annuity Account
Annuities are established with monetary awards because they offer flexible payment schedules and predictable tax-free future income. Payments can be setup several different ways to account for ongoing future expenses for the injured party and his or her family. Future payments can be scheduled to increase over time to offset inflation or to provide for large expenses like ongoing medical care or a child’s tuition.
You are not obligated to deposit all of your awarded damages into an annuity. Oftentimes, a portion will be taken lump sum and the residual will be used to establish guaranteed future periodic payments. Payments can begin almost immediately or be deferred for a desired number of years.
Tax Advantages Of Structured Settlement Annuities
Under Internal Revenue Code (IRC) section 104(a)(2), gross taxable income does not include damages received in a lump sum or through periodic payments due to physical illness or injury. In other words, the I.R.S. considers structured annuity payments and earned interest from a settlement agreement as tax free income to the recipient.
The funds used to purchase the structured settlement are income tax free provided certain conditions are met. The assignee (insurance company) must assume liability and this liability is to be no greater than the party who assigned it.
The periodic payments must be fixed and cannot be altered by the recipient. The payments must be excludable under the IRC section 104(a)(1). Payment streams can later be sold for less than their worth to structured buyout firms however.
Putting the legalese aside for a moment, the ruling treats annuity payments more favorable than other investments. If the entire monetary award is taken as a lump sum and invested it in stocks or bonds, then the income generated from those investments would be taxable. If annuity payments are chosen however, then all future payments (principal and interest) would not be subject to income tax.
In a nutshell, the lump sum investment in the stock and bond markets would need to provide much higher returns in order to offer the same tax-free payments as the annuity. Put another way, taxes associated with market investments will decrease your overall returns.
Annuity Investments Prevent Dissipation
Unfortunately, many settlements taken in a lump sum dissipate after only a few years. In fact, studies show that lump sum settlements tend to be exhausted after only five years or less. Conversely, structured settlements taken as periodic payments are designed to provide benefits for several years and are therefore difficult to mismanage.
Annuities offer a fixed internal rate of return on your invested principal. The structured settlement annuity payment is treated more favorably by the I.R.S. Presumably, this law was passed by Congress to incentivize structured annuity payments while avoiding spendthrift situations where the damages were taken lump sum invested poorly and spent quickly.
Taxes will diminish any returns on your investment. Annuity accounts avoid income taxes altogether when established as part of a structured agreement. If there is concern about future obligations, safety of principal, and investment flexibility – then an annuity from a well-capitalized and highly-rated insurance carrier can be a wise choice.
We work with several trusted annuity carriers providing very competitive and predictable returns for our clients. Contact us to request personal illustrations for you or your client today.
Note: Attorney’s fees can be included in the structured settlement as well. This allows the plaintiff’s attorney to defer income for future events such as retirement or college expenses for children. A qualified tax advisor can provide consultation regarding structured payments to the plaintiff’s attorney.