Introduction
As a plaintiff attorney representing personal injury victims, you are always looking for ways to secure the best possible outcomes for your clients. In the complex landscape of personal injury settlements, structured settlement annuities are a powerful tool that can significantly benefit both your clients and your practice.
Structured settlement annuities offer a unique approach to managing settlement funds. They provide a stream of tax-free payments tailored to meet the specific needs of injury victims. Instead of receiving a lump sum payment, your clients can benefit from a customized payment schedule that ensures long-term financial stability and protection.
As we delve deeper into the mechanics and benefits of structured settlement annuities, you’ll discover how this settlement planning tool can safeguard your clients’ futures and enhance your practice.
In this article, we explore the ins and outs of structured settlement annuities, why they are particularly attractive in this higher interest rate environment, the ideal candidates for an annuity, and the benefits they offer to both injury victims and attorneys.
How Structured Settlement Annuities Work
Plaintiff attorneys need to understand how structured settlement annuities work and when they might be a good fit for a client. Let’s explore the basics of structured settlement annuities.
Basic Concept and Setup
At its core, a structured settlement annuity involves converting a lump sum settlement into a series of periodic payments.
Here’s how it typically unfolds:
- During settlement negotiations, your client agrees to receive their settlement funds through structured future payments rather than a single lump sum.
- The defendant sends all or a portion of the client’s settlement funds directly to a highly-rated annuity company (i.e. MetLife, Pacific Life, New York Life) to purchase a structured settlement annuity.
- The annuity company assumes the obligation to make payments to your client according to the agreed-upon schedule.
This setup provides a win-win situation: your client receives guaranteed future income, while the defendant gets a full, immediate release.
Customization Options for Payment Schedules
One of the most attractive features of structured settlement annuities is their flexibility. The client can choose a payment schedule that best suits their needs. Options include:
- Regular monthly, quarterly, semi-annual, or annual payments
- Larger lump sums at specific intervals (e.g., every five years)
- Increasing payments to offset the impact of inflation
- Deferred payments that begin at a future date (ideal for minors)
This customization allows a structured settlement annuity to address your client’s immediate needs while also planning for their long-term financial security.
Current Market Conditions
The financial landscape has shifted significantly in recent years, and interest rates have increased significantly (as anyone trying to purchase a home or get a loan knows all too well). These interest rate changes have positively impacted the rates of return earned in structured settlement annuities.
Frankly, due to the higher interest rates, structured settlement annuities are an attractive option once again for many plaintiffs.
Interest Rates and Their Impact
Higher interest rates have directly increased the attractiveness of structured settlement annuities. Here’s why:
- Higher yields: Higher interest rates increase the yield (i.e., the rate of return) on structured settlement annuities. A higher yield means that your clients receive larger periodic payments for the same amount of settlement money.
- Improved long-term value: Higher interest rates compound over time, resulting in a higher total payout from the annuity over a longer time horizon.
- Competitive rates: With better rates, structured settlements become more attractive than other investment options in personal injury cases, especially given that both the initial principal amount and all the growth in the annuity is received tax-free.
At the moment, we are seeing annuities with guaranteed, fixed interest rates between 4.5% and 5%, depending on the time horizon. The taxable equivalent yield (i.e., the rate of return you’d have to earn on a taxable investment to match a tax-free return) is often over 7%, depending on the client’s tax bracket.
These higher rates make structured settlement annuities more compelling and attractive than they’ve been for the past several years.
The improved rates of return make structured settlement annuities a solid choice for the secure, fixed-income portion of a client’s overall settlement plan.
In short, the current high interest rate environment has been great for plaintiffs considering structured settlement annuities.
Ideal Candidates for Structured Settlement Annuities
While structured settlement annuities can be beneficial in many cases, certain groups stand out as particularly ideal candidates. Understanding these ideal candidate categories will help you identify when to recommend this option to your clients.
Minors
Structured settlements can be an excellent choice when representing minors in personal injury cases. Some reasons for this include:
- Higher rate of return: The rate of return of a structured settlement annuity far exceeds that of a blocked bank account. Many blocked accounts earn 0.01% in annual interest. With an annuity, the funds are growing at a tax-free rate that’s often several hundred times more than what is earned in a blocked account.
- Dissipation protection: Unlike a blocked account, a structured settlement annuity can pay out beyond age 18, protecting the minor against receiving a large lump sum at 18 and making poor financial decisions. In other words, a structured settlement annuity prevents premature spending of the settlement funds. It is often a significant concern to parents if a minor gets access to all of their settlement funds once they turn 18.
- Education funding: Annuity payments can be timed to coincide with college or vocational training expenses. Ensuring that education expenses are covered provides substantial peace of mind to the minor (and the minor’s family members).
Individuals Requiring Guaranteed Future Income
Clients who have suffered injuries that impact their earning capacity are prime candidates for structured settlements. Consider this option for:
- Those with permanent disabilities: Regular payments can replace lost income and provide lifelong financial support. Structured settlement annuities are ideal tools for this purpose.
- Individuals unable to return to their previous occupation: Structured settlement payments can bridge the gap while they retrain or adjust to a new career path.
- Clients nearing retirement age: Structured settlements can supplement or replace expected retirement income that may have been compromised due to the injury. Annuity payments can be paid for the client’s life (and also for the life of the client’s spouse, if desired).
People With Permanent Disabilities or Long-Term Medical Needs
For clients facing ongoing medical expenses or long-term care needs, structured settlements offer several advantages:
- Predictable income for medical costs: Regular payments can be tailored to match anticipated medical expenses or treatment schedules.
- Coverage for adaptive equipment: Larger periodic payments can be scheduled to coincide with replacing or upgrading medical equipment, handicap-accessible vehicles, and other needs.
- Funds for in-home care or assisted living: Consistent payments can cover the costs of long-term care services, preserving quality of life.
Additional Situations When an Annuity May Make Sense
Additional situations when a structured settlement may make sense include:
- Clients with limited financial management experience: Structured settlements can protect those who might struggle to manage a large lump sum effectively.
- Individuals at risk of exploitation: Regular payments can safeguard vulnerable clients from financial predators or undue influence from family or friends.
- Clients with a history of substance abuse: Structured payments can help prevent the misuse of funds that might occur with a large lump sum.
While these categories represent ideal candidates, each client’s situation is unique. A comprehensive settlement planner will consider a client’s specific needs, goals, and concerns and determine if using a structured settlement annuity for a portion of the settlement proceeds makes sense.
Benefits of Structured Settlement Annuities
Structured settlement annuities offer a range of benefits that can significantly enhance the long-term value of a settlement. Let’s explore some of these advantages.
Tax-Free Future Payments
One of the most compelling benefits of structured settlement annuities is their favorable tax treatment:
- 100% tax-free in personal injury cases: Unlike other investments, the periodic payments from a structured settlement annuity in personal injury cases are completely tax-free at the federal, state, and local levels. This tax-free treatment is codified in Section 104(a)(2) of the Internal Revenue Code.
- Compound growth: The tax-free status allows for more effective compound growth over time, potentially resulting in a higher total payout than taxable alternatives.
- Simplified tax planning: Your clients won’t need to worry about complex tax implications or unexpected tax bills from their settlement income. Payments from a structured settlement generally do not even need to be reported on the client’s tax return.
Protection Against Market Fluctuations
In an unpredictable economic landscape, structured settlements offer a safe harbor:
- Insulation from market volatility: Your clients’ payments remain constant regardless of stock market performance or economic downturns. Regardless of market conditions, your clients will receive their scheduled payments, providing peace of mind and stable financial footing.
- Guaranteed returns: The annuity’s interest rate is locked in at settlement, protecting against future interest rate decreases.
- No management required: Unlike actively managed investments, structured settlements don’t require ongoing decision-making or rebalancing and have no ongoing management fees.
Safeguard Against Mismanagement of Lump-Sum Payouts
For many clients, managing a large sum of money can be challenging:
- Prevention of rapid depletion: Structured payments prevent the “lottery effect,” where large sums are spent quickly and irresponsibly. Regular payments help prevent the rapid depletion of funds that can occur with lump-sum settlements.
- Protection from financial predators: When clients receive regular payments over time, they are less likely to attract unscrupulous individuals seeking to take advantage of them or their lump-sum settlement.
- Reduced financial stress: Clients don’t bear the burden of managing and investing a large sum, which can be overwhelming.
By encouraging your clients to explore whether a structured settlement annuity is right for them, you can set them up for long-term financial success, and they can enjoy these benefits.
Structured Settlement Annuities and Special Needs Trusts
Many plaintiffs receiving legal settlements receive needs-based government benefits like Medicaid and Supplemental Security Income (SSI).
Combining structured settlement annuities with special needs trusts can create a powerful financial strategy in these cases. Let’s explore how these two tools can work together to benefit your clients.
Explanation of Special Needs Trusts
First, let’s briefly review the basics of special needs trusts:
- Purpose: Special needs trusts are designed to provide for the supplemental needs of individuals with disabilities while preserving their eligibility for government benefits like Medicaid and Supplemental Security Income (SSI).
- Management: These trusts are managed by a trustee who ensures that funds are used appropriately for the beneficiary’s needs without jeopardizing their government benefits.
- Flexibility: Special needs trusts can cover a wide range of expenses not covered by government programs, such as additional medical care, personal care attendants, education, and quality-of-life enhancements.
How Annuities Can Complement Special Needs Trusts
Structured settlement annuities can work together with special needs trusts to provide comprehensive financial support:
- Funding mechanism: The annuity can be set up to make payments directly to the special needs trust, providing a steady stream of income to the trust.
- Predictable cash flow: Regular annuity payments ensure the trust has a consistent source of funds to cover the beneficiary’s ongoing needs.
- Long-term planning: The annuity’s payment schedule can be designed to align with the anticipated long-term needs of the trust beneficiary.
Benefits of Combining Structured Settlements and Special Needs Trusts
The synergy between structured settlement annuities and special needs trusts offers several key advantages:
- Preservation of benefits eligibility: By directing annuity payments to the trust rather than the individual, your client can maintain eligibility for crucial government benefits because payments made to the trust are not attributable as income to the plaintiff individually, thus preserving eligibility for government benefits.
- Enhanced financial security: The combination provides a dual layer of protection – the guaranteed income from the annuity and the professional management of the trust.
- Professional oversight: With both a comprehensive settlement planner and a trustee involved, your client benefits from ongoing expert financial management.
When representing clients who receive needs-based government benefits, it’s worth considering combining a special needs trust with a structured settlement annuity to provide long-term financial security while protecting their needs-based government benefits.
Advantages for Plaintiff Attorneys
Structured settlement annuities not only benefit your clients but can also offer significant advantages to you as an attorney. Let’s explore how incorporating structured settlements into your practice might be a smart strategy.
Option to Defer Fees Through Structured Settlements
One of the most powerful tax planning options available to plaintiff attorneys is the ability to defer the receipt of legal fees to future tax years. A structured settlement annuity is one of the options available to plaintiff attorneys to defer fees. Some of the advantages of deferring your legal fees include:
- Significant tax advantages: By deferring your fees through a structured settlement, you spread your income over time, potentially reducing your overall tax burden. You only pay taxes on the deferred legal fees when you receive them in the future.
- Retirement planning: Deferred fees can supplement retirement savings, creating an additional income stream for later years.
- Steady income: Regular payments can provide a reliable cash flow, helping to smooth out the financial ups and downs common in personal injury law firms. Contingency fee-based practices often have wild peaks and valleys in cash flows. You can use deferred fees to get off the cash flow roller coaster.
- Long-term financial stability: Having a steady income stream come into your firm can allow you to make more confident business decisions and investments in your practice. Knowing you can cover overhead and expenses for the next several years provides confidence and peace of mind.
A structured settlement annuity is one of several options available for plaintiff attorneys to defer fees. While this article focuses on annuities, there are other fee deferral methods, each with its own advantages and disadvantages.
Note: The other attorney fee deferral options include (1) a planning strategy that turns tax-deferred income into tax-free income, and (2) a planning strategy that allows deferred fees to earn market rates of return and benefit from payout timing flexibility. Please reach out if you’d like to learn more about these options.
The Process of Setting Up a Structured Settlement Annuity
The decision to set up a structured settlement annuity must be made before the settlement is finalized. The earlier planning can be done in the process, the better.
As you approach the settlement phase of a case, arrange for your client to meet with a comprehensive settlement planner. This meeting is invaluable as it allows your client to explore all available options, including structured settlement annuities, and understand how each might align with their long-term financial goals and needs.
If, after this consultation, a structured settlement annuity is decided upon as part of the client’s settlement plan, the settlement planner will work with the client to customize the payment schedule and other details of the structured settlement.
Once your client has chosen a specific structured settlement annuity, the settlement planner will provide you with a few documents that must be signed and specific language regarding the structured settlement that needs to be inserted into the settlement and release agreement. This language and documentation are required to ensure that the structured settlement annuity retains its tax-free status.
The comprehensive settlement planner you’re working with can guide you and your client through each step, from the initial planning stages to checking the language in the settlement agreement and release (and court documents if a minor or incompetent is involved).
The Importance of a Plaintiff-Loyal Settlement Planner
The only way you can ensure your client’s interests are protected is by retaining a plaintiff-loyal settlement planner.
If the defense suggests a structured settlement broker, make sure to bring in your own plaintiff-loyal settlement planner. Doing so does not increase the cost to your client, but it ensures there are no conflicts of interest (e.g., a broker brought in by the defense has a relationship with the defendant and has an incentive to act in a way that preserves that relationship).
Plaintiff-loyal settlement planners have no such conflicts of interest; their only goal is the best possible outcome for your client.
After months or even years of negotiating with the defendant, why would you suddenly rely on someone brought in by the defense to help your client with the crucial settlement planning decisions that must be made?
Remember to retain a settlement planner who works only with plaintiffs (and doesn’t have defense relationships) when exploring a structured settlement annuity for your client.
Structured Settlement Annuity Case Studies
Let’s explore a few case studies that illustrate the benefits of structured settlement annuities in personal injury cases and highlight their long-term benefits for recipients.
Case Study 1: Young Adult with a Spinal Cord Injury
Sarah, a 25-year-old graduate student, sustained a severe spinal cord injury in a car accident. The settlement for her case was substantial, but there were concerns about long-term financial management. By implementing a structured settlement (along with a special needs trust), we were able to ensure Sarah received:
- Monthly payments (to the special needs trust) to cover ongoing medical needs and lost wages
- Larger lump sums every five years for significant expenses like a wheelchair-accessible van and electric wheelchairs
- A steady increase in payment amounts to account for inflation
This plan provided Sarah with financial stability and the assurance that her medical needs would be covered for life, allowing her to focus on her rehabilitation and future goals.
Case Study 2: Minor with Future Education Needs
In another case, we helped Tommy, a 10-year-old who suffered significant lower body injuries in an accident. A portion of his settlement was placed into a structured settlement annuity. This plan was set up to:
- Grow his settlement funds tax-free at an attractive rate of return
- Begin making payments at 18, with larger payments coinciding with college tuition due dates
- Provide a significant lump sum at age 25 for a home down payment
This approach ensured that Tommy’s immediate needs were met while securing his educational future and providing a solid financial foundation for his adult life.
Case Study 3: Middle-Aged Client with Progressive Medical Needs
Finally, consider the case of Robert, a 45-year-old who can no longer work due to a medical malpractice injury. A structured settlement annuity was an important part of his plan, and the plan was designed to:
- Provide increasing payments over time to account for inflation and growing medical costs
- Include larger lump sums every decade for major medical procedures or equipment
- Guarantee payments for his lifetime, with a portion continuing to his spouse upon his passing
The structured settlement annuity gave Robert peace of mind, knowing that his and his family’s needs would be met regardless of how his condition progressed.
These examples demonstrate the versatility and effectiveness of structured settlements in addressing diverse client needs. In each case, the structured settlement provided long-term financial security tailored to the specific circumstances of the client.
When included as part of a comprehensive settlement plan (government benefits planning, settlement trusts, insurance, estate planning, etc.), structured settlement annuities can address a wide range of needs and situations.
Conclusion
The key benefits we’ve covered – tax-free payments, financial stability, protection against market fluctuations, and customizable payment schedules – make structured settlements a valuable tool in many personal injury cases.
Plaintiff attorneys can also benefit from deferring their legal fees with structured settlement annuities, which can help them save on taxes, plan for retirement, and stabilize their firm’s cash flow.
A plaintiff-loyal settlement planner can help you and your clients explore if a structured settlement annuity is the right solution.
With the current interest rates and the numerous benefits we’ve discussed, structured settlement annuities are once again an attractive and viable planning option for you and your clients.
This article was originally published in Utah Trial Journal, Summer 2024 Issue, on July 5, 2024. It is republished here with permission from the publisher.
Author Bios:
Greg Maxwell
Greg Maxwell is an attorney, Certified Financial Planner, and settlement planner with Amicus Settlement Planners, LLC. His practice specializes in financial planning, government benefits planning, and special needs planning for settling plaintiffs, and income tax planning for attorneys.
Greg is a frequent speaker to national, state, and local trial lawyer organizations on settlement planning related topics. He has been featured by Practising Law Institute, the American Bar Association, the Federal Bar Association, Business Insider, Finance Digest, and the U.S. News & World Report.
Greg is proud to be the longest standing annual partner of the Utah Association of Justice.
Daniel Maxwell
Daniel is a settlement planning attorney and partner at Amicus Settlement Planners, LLC.
He is graduate of the Creighton University School of Law, where he graduated summa cum laude.
His practice focuses on special needs planning and government benefits preservation planning for plaintiffs, and legal fee deferral solutions for attorneys.
Daniel helps administer the Society of Settlement Planners, a national organization advocating for plaintiff’s rights in the settlement planning process, and currently serves as Secretary to the Board of Directors.
