Nov 8, 2024
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6 min
Are Annuities Taxable?
In this guide we’ll help you understand how annuities are taxed, when they're taxed, and strategies to manage your tax liability effectively....
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A structured settlement is a stream of payments paid to someone who won or settled a civil lawsuit. The defendant in the case funds the settlement, and the plaintiff (or victim of a personal injury lawsuit) is paid these funds over time.
Generally, a structured settlement can be paid out immediately on a periodic basis or the plaintiff can choose to delay payments so that they can accumulate in value.
A structured settlement is designed to provide long-term financial security to an injured party. This agreement can also allow a defendant and plaintiff to reduce legal fees by avoiding a trial.
Structured settlements provide plaintiffs with a guaranteed income stream for at least a period of time. In cases where the plaintiff is concerned about their ability to handle a large lump sum payment right away, a structured settlement can be a good solution.
In most cases, a settlement is paid in one lump sum amount. For many personal injury victims, one lump sum payment is preferred because you can address your immediate needs that often arise in a personal injury case, such as:
Settlements can also be paid out as structured settlements, which work well for income replacement. They can also be used for ongoing medical expenses that you know will happen in the future.
Unlike a lump sum payment, a structured settlement is paid out over time. It is most often paid out either monthly or annually, but you can set up whatever payment schedule makes sense for you and the defendant when you make those arrangements.
When you settle a personal injury case, you will use the settlement amount to cover expenses incurred during the process before you spend the lump sum as you specified in court.
The settlement money will first be used to cover any expenses that were incurred in the lawsuit. In many cases, the law firm you are working with will cover common expenses like filing fees, court reporter fees, and expert expenses. Then, when you win your case or get a settlement, you will reimburse the law firm for those fees.
Expenses vary a great deal from case to case. A simple car accident, for example, is going to have fewer expenses compared to a complicated product liability case.
In many cases, plaintiffs have a hard time keeping up with medical expenses as they are incurred. Most medical providers will render service and lien the recovery for the amount the insurance company doesn’t cover. That lien on your legal case means that you are required by law to pay those medical expenses once you get any funds out of the lawsuit. Sometimes medical providers will reduce their lien or make other adjustments if you request it.
In addition, if a hospital knows that the expenses will be paid after a lawsuit concludes, they may wait to try to collect any outstanding amounts due until after you finish your lawsuit, including co-pays.
Once your expenses are paid, you may need to use your settlement money to reimburse your health insurance carrier and pay off any outstanding medical expenses that you still owe.
Finally, you must pay out any attorney fees from your settlement amount as well. The amount of the attorney fees is based on the fee agreement that you worked out with your lawyer when you retained him or her.
In most cases, the attorney fee is based on a percentage of your total settlement. Most fees are between 25% and 40%, and they might depend on the type of case that you have. Attorney fees often also increase if you have to file an appeal after going to trial too..
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Imagine that you settled your personal injury case for $25,000. From that, your lawyer spent $200 on filing fees, and you had no other fees. You also have medical liens of $5,000. Finally, your agreement with your attorney is that you will pay her 33% of the settlement amount.
That means that you will pay $5,200 in expenses and liens. Your attorney’s portion of the settlement is $8,250 (33% of $25,000). After you pay all of those fees, your portion of the settlement is $11,550. This is the amount that you will actually take home to address needs other than your medical expenses (because those will already be paid from the settlement).
In many cases, you can decrease the medical lien amount by the amount that you have to pay in attorney fees. In this example, you might be able to reduce the lien by 33% because that is what you are paying your attorney. If that is the case, your take-home amount is $1,700 more than it otherwise would be.
Maybe. When you have a structured settlement, you do not get the full value of your settlement right away. Instead, a large portion of your settlement might be paid later.
Consider another example. Imagine you settle your case for $500,000, but it is structured so that you get $250,000 now and $250,000 paid out over the next five years at $4,166.66 per month. You still have to pay expenses, liens, and attorney fees from this amount.
It depends. In some cases, the final payout can be very quick if you receive a lump sum—a few days. In other cases, it can take a few months to be sure that all of your medical liens and other expenses are paid properly.
If you have a structured settlement, you and the defendant (with the help of your attorney) will ultimately decide how long you will receive payments and how much they will be. Once the structured settlement is set up and payments begin, you should not have to do anything else to get the payments based on your established schedule. Many structured settlements even use direct deposit to be sure you get payments on time, as promised.
Every case is different, so predicting what a personal injury settlement will be for your individual situation is challenging. The amount of the settlement will depend on:
Personal injury settlements are designed to put you back where you would have been if the accident had not happened. That means that if you suffered serious losses and damage, you should be paid more compared to someone who had very few losses or damages.
Generally, no. Settlements that are paid through an annuity or another form of a structured settlement are not taxed as regular income if a qualified assignment company purchased an annuity pursuant to Section 104(a)(2) of the federal Internal Revenue Code. If you continue to get payments after you pass away, those payments will not be taxed to your estate, either
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