Parties can settle a lawsuit or a legal claim before, during, or after a trial. The parties can make an agreement to conclude the dispute by payment of damages. In personal injury cases, these payment agreements take the form of lump sum or structured settlements. A lump-sum settlement is the most common type: the defendant agrees to pay, and the plaintiff agrees to accept a specified amount of money or things of value. When an agreement spreads out payments over a period of time, and into a number of installments, it is a structured settlement. The word structure describes the agreed steps or stages in payment.
When Are They Used?
A structured settlement is a final resolution of a case except for the carrying out of the payment schedule. Structured settlements became widespread during a period in which pharmaceutical companies settled a large number of drug related birth defect cases, and the sums were quite large. They also involved a lifetime of care for injured babies. Since then, structured settlements have become quite common in large settlements and among cases involving injuries to children. Cases in which settlement provides compensation for a lifetime of economic loss and permanent injury are excellent candidates for structured settlement.
How Do They Differ?
When comparing structured settlements to lump-sum settlements, recipients should expect the same case to yield a greater amount when awarded a structured settlement as opposed to a lump sum. An amount expressed in a lump sum would be greater when paid over a period of years because the value of future dollars would be different from the present value. Further, the deferral of payment would inspire a demand for more from the receiver in a negotiation setting. Finally, the use of structure also benefits the payer who can use investment devices to produce a significant part of the amount due.
Tax Treatment
The tax treatment of structured settlement is the same as if paid in a lump sum. If it passes the I.R.S. test for settlement proceeds from an injury case, then it is excluded from taxable income. Once agreed the recipient of a structured settlement is not without options. Owners can sell a structured settlement to investors or buyers and convert it into a lump sum at any time. The recipient of a structured settlement will not receive full value at sale, but rather a percentage since the buyer will make a profit in the exchange. The benefit of a sale of a structured settlement is the conversion to a lump sum of cash, in a situation when you prefer cash to periodic payments.
