General Advantages of a Structure

Structured settlements are unique, unlike investment options available once the settlement proceeds have been received. However, sophisticated investors will find that the advantages of structures can be combined with traditional investments.

+ PAYMENTS ARE EXCLUDED FROM GROSS INCOME.

Tax-free pursuant to § 104(a)(2) of the Internal Revenue Code (Title 26 U.S.C.) if based on personal physical injury or physical sickness, or to fund future payments for a workers’ compensation claim under § 104(a)(1).

+ EXTREMELY LOW RISK.

Payments are backed by the largest and highest rated life insurance companies in the country. The life insurance industry is one of the strongest Sectors of the U.S. economy.

+ BENEFIT FORMAT IS VERY FLEXIBLE.

Limited only by our imagination and the amount of the settlement, the payment stream can be made the same each year or increase annually to offset the effects of inflation on purchasing power; plus they can be made on a lifetime bases, assuring that the payee cannot outlive the payments.

+ HEIRS PROTECTED BY GUARANTEEING PAYMENTS.

Payments can be guaranteed 5, 10, 15, 20, 30 years or longer to protect heirs and prevent a windfall to the life insurance carrier.

+ STRUCTURED PROGRAM CAN BE INTEGRATED WITH A COMPANION INVESTMENT PORTFOLIO.

If one has the risk tolerance to invest in stocks, periodic payments provide an ideal source for “dollar cost averaging,” a strategy of investing the same amount of money each month or quarter that lowers the per-share cost over time.

+ REDUCES THE POTENTIAL OF DISSIPATION OF SETTLEMENT PROCEEDS.

It is believed that 90 percent of large settlements are gone in less than five years. Structured settlements were authorized by Congress for this very reason—to provide a significant tax benefit as an incentive for injury victims to elect periodic payments to preserve the money recovered in damages so that the victims would not become a ward of society after the money was gone.

+ TAXABLE RECOVERIES MAY ALSO BE STRUCTURED.

Taxable recoveries from litigation claims such as age discrimination (except lost wages), breach of contract, construction defects, disability discrimination (except lost wages), environmental litigation, errors and omissions liability claims, false arrest or imprisonment, fraud, harassment, intentional tort damages, non-physical personal injury, wrongful termination (except lost wages), etc., may be structured. The advantages are several, including: deferring income taxes on amounts not paid in the current year, allowing that money to grow for the claimant’s benefit; spreading income over several years to escape the higher tax brackets; reducing or eliminating the alternative minimum tax (AMT) in those jurisdictions that consider attorney fees as taxable income to the claimant and disallow below-the-line deductions.

+ ATTORNEY FEES MAY ALSO BE STRUCTURED.

Attorneys may structure their fees, creating a private retirement plan for themselves, with no requirement to include employees or to make future contributions. This is a deferred compensation plan, which is a well-settled concept in tax law. Attorney fee structures specifically have been approved by the U.S. Tax Court. An attorney fee does not need to be from a personal physical injury or physical sickness case to be structured. Any fee receivable may be structured, whether the client’s recovery was taxable or nontaxable, or whether the client recovered any damages at all.

By Richard B. Risk, Jr., Esq., and reprinted with expressed permission.