This is of course a brief explanation and you can always visit the Internal Revenue Service website for more information. One of the hard facts about structured settlements, as with so many things, is that they are primarily about taxes.
Structured Settlement Tax Benefits
If you were injured in an automobile accident and received a settlement of $250,000 from either the other person involved in the accident or their insurance company, the settlement is tax-free. However, if you then decide to invest that $250,000, any earnings from that investment are taxable.
On the other hand, if you opt for a structured settlement in lieu of the $250,000 in cash, you will then receive the money over whatever period of time that you decide, and those payments will be tax-free. This will convert your after tax earnings into a return that is totally tax-free.
Payments Over Time vs. Lump Sum
Although settlement claims are won in the courtroom, most are usually settled out of court. The most commonplace scenario is that the insurance company or obligated party will pay you the amount agreed upon. This payment can come in a one time payment also known as a lump sum, or you can elect to receive installment payments over time. Depending upon your circumstances, a structured settlement can be a wise choice that enables you to maintain a constant income stream over a designated period of time.
The payment plan can and should be your decision. It can be simple annual payments or you can receive a certain amount as a down payment with the remainder paid to you as monthly payments.
There are many reasons for people to opt for a structured settlement. The most obvious reason is to set up a source of continuous income, and secondly the tax advantages associated with this type of plan. A structured settlement will substantially lower the amount of taxes that you will owe.
Does A Structured Payment Plan Make Sense
A structured settlement is a well-organized and much better way to receive any type of money from your claim. However, it is entirely up to you to decide whether a lump sum or payments over time will work best for your situation. That trip around the world or a few months in Hawaii seems like a dream come true, but using your money in a calculated and structured plan that will provide financial security and a steady income for your family really carries a lot of weight.
There are some interesting statistics you should also think about. It has been shown that about 30% of the people who have chosen to receive their settlement as a lump-sum instead of a structured payment plan have spent it within three to four months, and more than 80% have spent their entire settlement within the first five years.
Blogger Comment
Facebook Comment