One question that we often get from attorneys is, “What options are available to a personal injury client for allocating their settlement proceeds?”
There are three main “buckets” that a client’s settlement funds can be placed into after settlement:
- Structured Settlement Annuity
- Settlement Trust
The first bucket is cash. Cash is both good and bad. It can be spent on anything; it’s very flexible and liquid. But, that’s also why it’s troublesome in a lot of situations. Because of its inherent liquidity, it gets spent very quickly. Cash is slippery, and too often, clients who take everything in cash dissipate the funds rapidly.
Structured Settlement Annuity
A second option — one that is unique to personal injury victims — is called a structured settlement annuity. In this option, all or a portion of the client’s net settlement proceeds are placed into a single premium immediate annuity. The client can then decide how and when they want to receive those funds in the future.
One advantage of a structured settlement annuity is that the principal and the interest earned on those annuities are tax-free. Thus, an annuity could payout over the client’s lifetime, and the client would never have to pay any income tax on the payments from the annuity.
Another advantage of a structured settlement annuity is that the payments are fixed and guaranteed by some of the largest and most financially secure companies in the world: Pacific Life, Metropolitan Life, Berkshire Hathaway, etc.
One of the advantages of annuities — the fixed and guaranteed payments — can also be a downside. Once a client sets up a structured settlement annuity, it is difficult to access the money very easily.
Once the money is put into the annuity, it’s set and cannot be changed. To have unscheduled access to the money, the client would have to sell their right to receive their future payment to a “cash-now” company. These companies often pay pennies on the dollar, so this outcome should be avoided if at all possible.
The third bucket and option for settling clients is to place settlement funds into a trust. A trust provides both flexibility and dissipation protection. If a client is a spendthrift, then you want to make sure that he or she doesn’t spend the money too quickly, and that the settlement proceeds are there for them over a long time. Placing the funds into a settlement trust provides the spendthrift protection they need.
A settlement trust allows your clients to access the funds when needed — but a settlement trust also prevents them from spending the money too fast or from making unwise spending choices and decisions.
Also, if needed, settlement trusts can help maintain eligibility for government benefits that a client may be receiving (such as SSI or Medicaid). Trusts used for purposes of preserving government benefits are called Special Needs Trusts.
Mix and Match
In many cases, the best option for a client is to mix and match each of these buckets. Particularly if it’s a larger case, the client may benefit from the liquidity and flexibility of cash, the guaranteed, tax-free payments of a structured settlement annuity, and the flexibility and oversight that a settlement trust provides.
If you have any questions about any of the options for allocating settlement proceeds that we discussed in this article; or how to allocate settlement proceeds for a client, give us a call. We can discuss the best approach and solution that meets your client’s needs.