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Structured Settlements Are Valuable Most people realize how the value of tax-free compounding enhances the return on their investments. Many of us would like to contribute more to our retirement accounts on a tax-free basis, but statutory limits prevent us from doing so. It’s not easy to get a guaranteed return in the marketplace. High-return investments can be speculative. High quality investments, which pay a good return at the time of settlement, may be called by the issuer. Even if a bond is not called, the investor may need to “ladder”, i.e., purchase a series of bonds to assure that income continues through the period of need. This calls for a degree of sophistication most people lack. Furthermore, with many high-return investments, there is no way to obtain payments before maturity.
A structured settlement annuity, on the other hand, provides guaranteed payments for the period provided. Payments can be monthly, annually, or on specified dates. Payments can be scheduled to last a person’s entire life. Guarantees can be built in, so if the annuitant dies before the guarantee period ends, the payments are made to the estate.
Don’t confuse an annuity purchased as a structured settlement with the variable annuities sold by investment houses. In the structured settlement context, the payments are locked in and guaranteed. They do not change with the vagaries of the stock market. Unlike typical investment annuities, only a small portion of the population qualifies for a tax-free structured settlement annuity: persons with physical injuries who are settling their cases and have not yet received the settlement proceeds. This is a limited opportunity to obtain an extraordinary investment vehicle.
Internal Revenue Code sections 104 and 130 provide the statutory framework for structured settlements. Payments in settlement of a physical injury will be tax-free to the recipient whether paid in a single payment or in a series of periodic payments. The money must be paid as a settlement of an actual controversy. An unchallenged verdict, which has gone to final judgment, and for which the time to appeal has expired, cannot be structured. The injured party cannot have taken constructive receipt of the settlement proceeds. Once the settlement has been reached as to how payments are to be disbursed, the annuitant cannot have the ability to change or accelerate them. However, a commutation rider can be purchased at the time of settlement to allow acceleration if the annuitant dies. The net effect of these statutes is that money can be invested for the benefit of an injured person and the investment income is tax free.
Medicare
There are strict rules about the amount of assets and income a person can have and still qualify for public benefits. Structured settlements can be arranged to pay into a medical needs trust so that the annuitant’s benefits eligibility will be preserved while his financial needs are satisfied. Periodic payments can also be scheduled to pay premiums for health insurance in some jurisdictions. Your structured settlement broker can supply details.
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