by John Darer® CLU ChFC MSSC RSP CLTC
What are the pros and cons of structured settlement annuities? It's a quick and easy commonly written topic for legal journalists. Unfortunately the legal journalists don't always get the details of the important topic straight. Here is what FindLaw "the leading and largest online resource for legal information" has to say:
- A structured settlement may provide a plaintiff with a substantial tax benefit. Many lump-sum settlements are considered income and must be claimed on tax returns. Funds received from an annuity are tax-free as long as the plaintiff does not control the funds.
- Plaintiffs who receive lump-sum settlements often spend everything within five years. Afterwards, many become dependent on the government for their support. With a structured settlement, the funds are preserved throughout the time of plaintiff's disability.
- Annuity funds must be managed by a professional. Proper financial planning will help make sure plaintiffs have enough funds to cover future expenses.
- Parties may tailor annuities to cover a plaintiff's specific needs and all sorts of future demands or contingencies.
- In most states, annuities are protected by state insurance laws that guarantee the obligations of a bankrupt insurer will be covered.
- A lump-sum payment may be combined with a structured settlement to meet immediate expenses, such as medical bills, repayment of debts, rehabilitation costs, and the like.
- Parties can dedicate funds of a structured settlement to cover unanticipated advances in medicine so that if medical science develops a miracle cure, the plaintiff can give it a try.
- A structured settlement may allow parties who are far apart in their settlement negotiations to close the gap and reach an agreement acceptable to both the plaintiff and the defendant
- If the plaintiff retains too much control over the proceeds, the IRS may look at the situation and decide that the tax
benefit must be forfeited.
- The plaintiff may fear that, no matter how the settlement protects against adverse economic conditions such as inflation
or recession, unknown changes in the economy could make the annuity payments too small.
- Sometimes, the annuity is placed with brokers who do not have sufficient protection for insolvency.
- Insurance companies are reluctant to disclose how much they will have to pay to buy an annuity covering the
amount of the settlement. A structured settlement frequently costs the insurer much less than it would to make a
lump-sum settlement. The problem with this is that the plaintiff’s attorney may not be able to make a complete
assessment of the merits of the settlement offer.
Comments about errors found in Findlaw's analysis
- There has been an income tax exclusion for damages for personal injury since about 1918. The tax laws have been amended a few times, but the tax exclusion is a function of the type of damages that the settlement payments represent, whether the payment is in a lump sum or a structured settlement. Another factor influencing taxation is if the settlement payments are for medical and the plaintiff has previously taken a tax deduction for those expenses. The relevant sections of the code are IRC 104(a)(1) and 104(a(2) and IRC 130 [IRC 213 on the meds]
- The plaintiff's control over the funds only affects the ability to structure. The plaintiff cannot be in constructive receipt or actual receipt of settlement proceeds in additional to the other factors, in order for there to be a structured settlement of any sort.
- Structured settlements can be used in taxable damage settlements and enable the payee to defer taxes
- One does not claim income, one declares income on one's tax returns.
- The dissipation of a lump sum in five years is well supported by anecdotal evidence, but as then NYU law student Jeremy Babener pointed in or about 2009, there is no empirical study to support that.
- With a structured settlement, the payee receives payments that are preserved throughout the term of the structured settlement annuity contract. The term of the annuity contract may only be for a fixed period which may be exceeded by the plaintiff's disability, or the plaintiff may die and the structured settlement payments may exceed the term of the plaintiff's disability depending on the terms of the contract. For example, the terms of the structured settlement payable to Johnny Wishbone from his lawsuit against Shirley U. Cantbeserious, extend for 25 years or his lifetime, whichever is longer. Wishbone "splits" this earth 5 years into the structure and he's no longer disabled because he's dead. But his structure isn't dead and continues to pay to Johnny Wishbone's two daughters Monique and Unique.
- A structured settlement annuity contract is backed by the insurer that issues the contract. There is no account per se, to be managed. The payee has the right to receive payments, funded by the contract, subject to the terms of the contract and the relevant settlement documents.
- Insurers cannot file for bankruptcy
- Statutory guarantees have limits.
- A structured settlement may be used as a tool to help the parties close a gap in negotiations.
- Broker's E&O typically does not cover insolvency.
- The last "Con" is simply not supportable in 2016. Today plaintiff lawyers frequently have longstanding relationships with structured settlement brokers and settlement planners. Furthermore, laws in NY, MA, FL and MN require disclosure of cost of structured settlement in writing.
Legal journalists have a responsibility to get things right about structured settlements, knowing that their errors are more likely to be cited rather than critiqued. There are plenty of legitimate credentialed resources in the industry who could make the piece more valuable. If Findlaw or any other legal publication wants to fact check on structured settlements feel free to contact me at 203-325-8640