If you have suffered a personal injury due to another person’s negligence, you may be awarded a settlement. But one of the most common concerns for Portland, Oregon, accident victims is whether to accept a lump sum or a structured settlement. Both types of settlements have key advantages, so understanding the differences is essential when deciding which option is right for you.
The most effective strategy is to learn more about the similarities and differences so you can make an informed decision that suits your needs. This article provides essential information on lump-sum and structured settlements so you can make the best decision for your situation.
What Is a Structured Settlement and How Does It Work?
A structured settlement is a payment arrangement that provides compensation in scheduled installments over time rather than a single lump-sum payment.
If you agree to a structured settlement, the defendant or their insurer purchases an annuity from a life insurance company to fund the payments. Structured payments are overseen by the Periodic Payment Settlement Act of 1982, which can provide valuable tax advantages for the owner.
Structured settlements are the common choice for cases involving complex personal injury cases, wrongful death claims, and cases involving incapacitated individuals or minors. The terms of a structured settlement are negotiated as part of the claim resolution process.
Payment schedules can be customized to your preferences, including monthly, quarterly, annual, or a combination with deferred lump sums. Your payments can be tailored to increase over time to adjust for inflation. The annuity issuer is legally obligated to continue making payments regardless of what occurs with the defendant or their insurer. Under the law, the terms generally cannot be amended once they are finalized.
Lump Sum vs. Structured Settlement: Key Differences
The key differences between a lump-sum and a structured settlement should be evaluated based on your circumstances and financial goals. Understanding the benefits and drawbacks of both can help you decide which is the best choice for your needs.
Lump Sum Settlements
If you choose the option to accept a lump sum, you will receive the entire settlement at once. Accepting a lump sum allows you to have full control over spending and investment decisions. But one of the most significant risks of accepting a lump sum is failing to preserve a portion of your funds for future needs. If you invest your money, it is open to risk and frequent market fluctuations. Although a lump-sum settlement is generally tax-free under IRC 104(a)(2), it may result in tax implications for investment earnings.
Structured Settlements
If you prefer to receive a structured settlement, the payments are spread over time in an agreed-upon installment plan. In many cases, the original settlement amount and any growth within the annuity remain free from federal income tax under federal tax laws. One of the greatest benefits of a structured settlement is the protection that it offers against overspending. Unlike lump-sum payments, a structured settlement does not require asset management. Accepting payments over time also prevents you from easily accessing the full amount if you need it. Still, it does provide financial security for long-term medical needs.
Tax Advantages of Structured Settlements
Under RC 104(a)(2), the compensation you receive for physical injuries from a crash is exempt from federal income tax. Choosing a structured settlement locks in this benefit for the long term. Every payment is tax-exempt, including the compounding interest that accrues over time. This tax-exempt status gives structured settlements a significant financial edge over lump-sum payouts, since investing a large lump sum typically exposes any money you earn from the annuity to annual income taxes.
Oregon law follows federal tax rules, and structured settlements are not subject ot Oregon income tax laws. But if you decide to sell your structured settlement, any proceeds you receive may be subject to federal and state income tax.
When a Structured Settlement Is Right vs. When a Lump Sum Is Better
There are specific situations that can determine which type of settlement is right for your needs.
When a Structured Settlement May Be Preferable
- Life-altering injuries that require ongoing medical care
- Settlements involving children are subject to court oversight and approval, including certain structured settlement agreements.
- Plaintiffs with disabilities or who face challenges managing complex financial decisions.
- Large settlements where preserving financial resources is a concern
- The plaintiff is seeking a guaranteed income to replace the loss of future earning capacity
When a Lump Sum Payment May Be the Better Option
- The plaintiff receives a smaller settlement when structured settlements are impractical.
- Plaintiffs who need funds quickly to pay for medical debts, mortgages, and other expenses.
- Plaintiffs with prior experience handling investments and seeking control over their funds.
- Cases requiring flexibility for unexpected expenses.
- Situations where the plaintiff has an uncertain life expectancy
Can You Sell a Structured Settlement, and How Your Attorney Can Help
A common question many plaintiffs ask concerns whether they can sell a structured settlement. Under Oregon’s Structured Settlement Protection Act, the state regulates the sale of structured payment rights, and the court must approve any transfer.
The law requires approval by the Multnomah County Circuit Court for minor settlements and structured settlement transfers and provides that such approval is in the best interests of the payee. Factoring companies that purchase structured settlements do so at a significant discount. In most cases, the payee receives far less than the full value of the original settlement.
It is worth emphasizing that if you are considering selling structured settlement payments, this should be done only after other options have been explored. An experienced Portland personal injury attorney can explain the benefits and drawbacks of each option and help you determine which best serves your long-term interests.
Some of the most crucial factors to consider include any ongoing medical needs, severity of your injuries, other sources of income, age, and investment experience. You must make your decision during settlement negotiations and cannot convert a lump sum into a structured settlement at a later date.
Tillmann Law has extensive experience helping clients connect with financial advisors and structured settlement brokers during settlement negotiations. Contact Tillmann Law today at (855) 503-5035 to schedule a free consultation.
