Get the Most From Large Settlements
If you are expecting a personal injury settlement, or any kind of settlement that could wield a significant sum of money all at one time, the last thing on your mind may be taxation of those funds, or how to invest them. But knowing some ins and outs of planning for a lawsuit settlement can help make those settlement funds go farther and last longer.
When Settlements are Taxable
In some cases, money received for damages after an injury is not taxable, but the settlement must result from a physical injury. Settlements for only emotional or mental injuries, or that involve a wrong that doesn’t involve physical damage (such as employment discrimination, or breach of contract), are taxable. However, if the mental or emotional damages arise from or are caused by a physical injury, they will not be taxed.
If possible, when receiving settlements, victims should try to avoid receiving just a lump sum settlement. Rather, it is best to try to break up the settlement amount, to ensure that the compensation is specified for non-taxable damages. This includes punitive damages, which are almost always taxable.
Using Structured Settlements
In many cases, those receiving larger settlements may want to consider structured settlements. These are actually annuities, purchased by the party paying the settlement. There are pros and cons to annuities.
The pros are that the income may not be taxable, no matter what they are for. Also, because the payor (the party paying you in the settlement) isn’t paying the entire amount all at once, it may agree to settle your case for a higher amount. Being willing to take a structured settlement can thus yield higher settlement values.
The con of a structured settlements is that like any annuity, the settlement will come in periodic payments, which could be over a period of years. Those who need cash up front or immediately may not be able to take advantage of a structured settlement (although in certain cases an up-front payment can be arranged). Of course, extended payments could also be seen as a benefit, if it avoids someone from spending all their money all at once.
Depending on the kind of annuity, the payment amounts could vary depending on the state of the economy. Like any investment, the safer it is, the lower the payout, but the more immune it will be to shifts in the market and the economy—although annuities in general are considered some of the safest investments out there.
There are many companies that provide annuities. Speak to your attorney about getting one involved in your case if you are nearing discussion of settlement. In many cases, a professional can even attend settlement conferences or mediations to assist.
Make your assets last as long as they can, and maximize their value. Contact Tampa business, asset and probate attorney David Toback to discuss your needs.