Determining if a Structured Settlement or Lump Sum is the Better Choice After a Personal Injury
If you’ve been injured in some type of accident and you are looking to accept a personal injury settlement, you may wonder how the money will be paid to you. You may have the option of choosing your settlement as a one-time payment, or you can choose to receive it in smaller payments over time. The latter is what’s known as a structured settlement. There are a different factors to consider before deciding as to whether or not you should take a lump sum or structured payments, including how you plan to spend your money and tax liability.
Structured Settlement
If you opt for a structured settlement, you’ll receive a certain number of payments over the course of a certain time-frame. For example, you could settle for $800,000 and have $80,000 paid to you annually for ten years.
You also have the option of accepting a large initial payment. If you’ve been out of work for a long period of time and your bills are piling up, you can take a large initial payment to pay those bills and purchase necessities, then accept the remainder as payments meant to serve as lost income.
Sometimes, settlements are designed to provide the injured party an annual income, using some of the money to help pay for other living expenses. You can also set up the payments to increase over time, starting out on the low end with the payments getting higher each year. Or, you can do the opposite and start out with a high payment if you expect your income to increase over time. And lastly, you may be able to choose a delay in payment until you reach retirement.
Determining Which Payment Structure is Best
If you’re unsure if you should opt for a structured settlement or lump sum, consider the implications. Both types of payments can have long term personal and tax consequences.
- Regarding tax obligations, whether the award is tax-free or taxable is dependent upon if the award is compensating you for sickness and injuries, or if the award is compensating you for punitive damages (meaning the award is meant to punish the defendant for his actions).
- The form of payment, be it a periodic or lump sum payments, can affect your tax liability. The law is complex, so it’s best to confer with a tax professional.
- The next thing that will affect your decision on the type of settlement is how you’ll use the money. Do you need it right away to pay overdue bills, or are you using the money to replace future income? Your goal for the money can help determine how to structure your award.
- Also, you need to determine if you have the skills to manage a large sum of money on your own. Do you think you will spend the money wisely, or make unnecessary purchases? Many times people lack the experience and knowledge of managing such a large sum of money and instead hire a professional to help advise on money management and investment.
For more information on settlement options, speak to a skilled attorney, like a Milwaukee personal injury lawyer with experience.
Thanks to our friends and contributors from Hickey & Turim S.C. for their insight into personal injury practice.
