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Disclaimer: No financial, legal, or tax advice is given or implied. Publisher is not a registered investment advisor or legal or tax professional. Information provided is for educational purposes only. Please consult with your own independent advisors.
A structured settlement is designed to ensure a steady stream of monthly income to an injured party, as a result of a court decision in a civil case or as part of an out-of-court settlement. A question that a lot of people have is, “What happens to my structured settlement if I die?”
In most cases, a structured settlement is an agreement established as a result of a case settled out of court. When a person is gravely injured or disabled in an accident, such as a dog bite, a car accident or some other type of injury, it can result in that person receiving a structured settlement.
The structured settlement is an agreement that the injured party will receive periodic payments, which are intended to provide long-term financial stability to that person or their family (in wrongful death cases, for example).
The financial vehicle through which the funds are disbursed is an annuity, which is managed by an insurance company. This is intended to guarantee long-term payments and reliable income to the injured party.
Structured settlement payments are not considered taxable income by the IRS because they are proceeds from a personal injury claim. Even though personal injury settlements are always tax-free, if you receive a large lump sum at once it may accrue taxable interest. Structured settlements, on the other hand, are paid as an annuity and are therefore tax-free.
The original payee can designate a beneficiary or secondary beneficiaries in the event that they die before all the settlement funds are disbursed. Some tax rules will change, however, depending on a beneficiary’s relationship to the deceased party.
In many cases the payee of a structured settlement can designate the beneficiary(s) of their structured settlement just as you would with a life insurance policy. A primary beneficiary can be named who will inherit the structured settlement funds. Secondary beneficiaries such as children or other loved ones can also be named. A third option is to assign the funds to a trust upon the settlement owner’s death, which then pays out the funds as directed.
Each of these options has different timelines and tax rules assigned to it, so it’s important to know the differences when choosing a beneficiary or multiple beneficiaries.
Beneficiaries to a structured settlement annuity are handled very similarly to a life insurance policy. You can name a primary beneficiary on the very same day that the annuity fund is established, or at a future date.
A structured settlement owner may wish to assign secondary beneficiaries as well. These are sometimes referred to as contingency beneficiaries. This protects the funds in the event that the primary beneficiary passes away before the funds are disbursed, and it also ensures that the funds are disbursed to the owner’s heirs according to his or her wishes.
Owners can split the settlement funds in any percentage amount to secondary beneficiaries that they wish. For example, they could assign 50 percent of the funds to a spouse, and split the remainder of the funds equally among their children. Minor children cannot access funds from a structured settlement until they reach legal age.
It’s important to note that the structured settlement is not intended to replace an income stream for secondary beneficiaries. Payouts are handled differently for secondary beneficiaries, and the funds are considered taxable income.
Structured settlement owners also have the option to name a trust as the primary beneficiary. In this scenario, the trustee disburses the funds per the instructions in the trust. Payments count as taxable income when received from the trust.
As mentioned above, a minor child can be named as a secondary beneficiary for a structured settlement annuity, but the law states that they cannot receive the funds until they reach adulthood. In situations like this, funds are disbursed into a custodial account until the child is of age. It’s a good idea to talk to an investment advisor or an attorney if you plan to name a minor child as your beneficiary. Some states require that a guardian be appointed to manage the money until the child reaches age 18.
Laws can vary from state to state on rules relating to minor children inheriting an annuity, so be sure to talk to a professional who is knowledgeable about your state’s laws.
If a beneficiary is a US citizen with a social security number, it is an easy matter for the insurance company managing the structured settlement to verify that the beneficiary is the correct person and is still living. They can simply check the beneficiary’s SSN against the Social Security “Death Master” database to verify them.
When a named beneficiary is not a US citizen (and therefore does not have a social security number), or is not even living in the United States, it becomes more complicated. Locating a beneficiary who is not a citizen and who lives in a foreign country can be extremely difficult. In some parts of the world, it can be next to impossible.
If a structured settlement owner wants to name a beneficiary overseas, they should take extra steps to ensure that that person can be contacted and located in the event of their death. Some insurance companies now ask that a foreign beneficiary acknowledge their status when the designation is made. In those cases, the beneficiary agrees to contact the insurance company in the event of the structured settlement recipient’s death.
For more information on structured settlements, give our team a call at 1-800-821-7773. You can also fill out our online form to get in touch with a knowledgeable representative.
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