Lump Sums and Structured Settlements
If you have been injured due to someone else’s negligence, you might have a potential personal injury case. A successful personal injury lawsuit can result in a settlement that puts significant money in your pocket to cover existing debts and compensate for lost income due to your injury. However, there are multiple ways to receive this money, and individuals may differ in their preferred settlement payout structure. Today, we will discuss lump sum payments and structured settlements in order to determine which may be best for your situation.
Tax Implications of Settlements and Judgements
While we cannot give out tax advice and we highly recommend discussing every tax situation with a licensed accountant or tax attorney, generally, it is understood that the IRS considers money received from successful personal injury lawsuits tax-exempt in most instances. Injury compensation should not increase your tax bracket and tax burden, no matter which way you choose to accept it – lump sum or structured over time. The main differences between these two methods of acquiring your money are the time frames and interest-gaining opportunities.
Lump Sum Payments
Lump sum payments are the simplest way to receive money after you win a personal injury lawsuit or settle out of court with the other party. After deducting any relevant fees and paying your attorneys, you will receive a one-time payment of the remaining amount owed to you.
Lump sum payments are an attractive option for a few reasons. Notably, a lump sum payment is often enticing and hard to decline. A severe personal injury can leave you with significant medical debt and miscellaneous debt incurred while treading water during the negotiation or trial process. Lump sums let you immediately take care of these debts and use any remaining money as you see fit – investments, purchases, or savings – immediately.
The benefits of a lump sum payment can also be part of its drawbacks. With a significant and sudden influx of money, many people spend or invest unwisely. Changing market conditions can decrease your effective payment if most of it is invested simultaneously. On the other hand, a structured payment would allow you to purchase the same investments with a Dollar Cost Averaging plan with lower risk.
Structured settlements will leave you with the same amount of money as a lump sum, but this money will be dispersed to you over a long period of time instead of all at once. While the difference might seem negligible, structured payment plans often allow individuals to plan their future around a guaranteed source of income. Structured plans also offer less risk as it is impossible for someone to unwisely spend money that has not yet been given to them.
If you have a lot of debt due to your injury, a structured settlement with equal payouts might not be enough to make it through the short term. In this situation, you should be able to receive a portion of your compensation as a lump sum while still leaving some of the money in a structured payment plan. Any money left in a structured plan will accrue interest, a lower risk, lower reward investment option compared to stocks and other financial investments. Some structured settlements even allow your money to grow, and you will not be taxed on the interest that accrues, which allows you to keep more of your money.
Ultimately, the choice is yours to make. Changing the amount you receive per month by accepting a partial lump sum payment or shortening the dispersal period are both enticing options that allow you to recover from your present financial woes while still thinking about the future.
Call Hale Law today to learn more about how we can fight on your behalf to get the compensation you deserve for your personal injury.