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What is a Structured Settlement?

A structured settlement is an agreement for someone to receive payments over time. These types of agreements typically are entered into as a result of lawsuits or legal settlements. The IRS has given special tax treatment to many structured settlements, as long as certain technical requirements are met.

The IRS defines structured settlements in the Internal Revenue Code. (Click here to read the code section). The code requires the damages be for physical injury or from a workers’ compensation law and be payable by either the defendant to a lawsuit, or by another who assumed the payment obligation. In plain English, this means that the IRS only recognizes structured settlements that result in physical injury and the wrongdoer is either making the payments, or is paying someone else to make the payments.

Structured settlements began to grow in popularity at a time when interest rates were high. The advantage of receiving payments over time in a high interest rate environment was that it protected the present value of the funds. The types of legal actions typically giving rise to structured settlements are personal injury and product liability claims. This type of settlement is often used as a way for an over burdened court system to encourage settlement.

The payment over time allows the defendants to avoid a large lump sum outlay of cash. Most of the time the defendant or the defendant’s insurance company agrees to make sure the payments is made. Then the defendant or its insurance company goes out and purchases an annuity that pays out according to the timetable in the agreement.

In today’s economic world structured settlements may present several problems. With low interest rates, the money paid out in a structured settlement may be worth less over time. The settlement actually looses value over time. Large lump sum payments would likely get better returns in any of a number of different investments. Another problem is that the money in a structured settlement is locked up. The defendant or its insurance company will not, or just as likely cannot, increase the pace or amount of payments. If an emergency or once in a lifetime opportunity were to arise, the money would not be available to meet the urgent need.

Advocates of structured settlements point out that payments over time make it harder for people to loose all their money in one bad choice. Certain types of settlements may also help protect people’s Medicare and Medicaid eligibility. While structured settlements may be very important tools for some recipients, it is by no means a perfect, or even good, solution for everyone.

If you want to unlock your money now, contact the professionals at Einstein Structured Settlements today. They can help you take responsibility for your funds right away.