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Big Windfalls and Structured Settlements -
What They Are, and How to Handle Them
If you've received this windfall, it might sound like you're
fixed for life. The reality is that your financial life has
changed drastically, and you need to plan for it.
A structured settlement is a way of receiving partial
payments for a major amount of money you've won or received in a
lottery, a court or insurance case. You hear a lot of
commercials on the air for getting cash from structured
settlements, but it's important to understand what they are and
how they should be handled if you're ever the recipient.
A good place to start is with a tax expert like a certified
public accountant, a financial planning expert like a CERTIFIED
FINANCIAL PLANNER™ professional, or an attorney or structured
settlement consultant who has significant experience dealing
with these payment structures. When there is big money at stake,
it might make sense to consult all three. Some ideas:
First, the definition. A structured settlement is
structured like an annuity. It is a contract written by an
insurance company that provides periodic payments to a winner in
a lottery, a lawsuit or some other settlement arrangement over
time. Amounts can be paid out weekly, monthly or yearly.
The benefits. Structured correctly — and with the
right oversight going in — a structured settlement annuity
provides a payment stream that may be tax-free over a period of
time during the winner's lifetime and remaining payments may be
bequeathed to his or her survivors after their death.
The pitfalls. One should never accept a structured
settlement agreement without vetting it against their own tax
situation or estate needs. Also, it helps to have an expert who
understands these agreements well enough to know whether certain
fees or charges connected with that settlement are appropriate
to the overall size of the award. Keep it in mind that the
structured settlement must be purchased by the person or company
that is at fault or is making the award. This is why it's
particularly important to have an expert watching over that
selection process from the moment the award is announced.
The lump sum alternative. If a winner chooses a lump
sum payment over a periodic payment based on the full amount of
the award, that payment will likely be handled with an insurance
contract that physically pays the lump sum but at a much heftier
chunk of the full total — they get a big payoff for giving you a
big one-time payoff. Keep in mind that the lump-sum payoff idea
may not be worth pursuing unless it's large enough to throw off
substantial investment income in the future and that you have
talented management making sure that lump sum makes money over
time. This is why it's always a good idea to confer with tax,
financial and investment experts on the best way to go with
either a lump sum or a periodic payment as soon as you're
notified that you won the money.
Keep in mind that others get an advantage too. Many
attorneys are also structuring their fees that are taken
directly out of a court award. This allows them to postpone
receiving their share of an award on a tax-deferred basis so
they can build their own retirement funds. There's nothing wrong
with this, but it's important to know who else in the process
might benefit from any decisions that get made.
February 2009 — This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
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