Settling Employment and other non-physical injury claims by providing the plaintiff a stream of guaranteed periodic payments, rather than a lump sum, is truly a “win/win” for both parties. Structured Settlements benefit both the defendant/insurer and the plaintiff as a preferred vehicle when settling non-physical injury cases. Both parties may be able to resolve cases sooner and more economically; the plaintiff also benefits from deferring taxes and designing a payout plan to meet their specific financial needs.
Insurance companies and self-insured’s are looking to resolve their liabilities in non-physical injury cases. Structured Settlement annuities may be utilized to better resolve: ADA and ERISA liabilities, Attorney’s Fees, Director and Officers Liabilities, Labor and Employment Litigation, Discrimination, Environmental Litigation, Errors and Omissions Liability, Harassment, Legal Malpractice, Punitive Damages, Wrongful Termination, Construction Defects and many other Non-Physical Injury Claims.
If the plaintiff receives the proceeds in cash, they may have to payout more money than they actually receive from the award or settlement. Unlike proceeds from a personal physical injury case [IRC Section 104(a)(2)], proceeds received from a non-physical injury case are taxable income to the plaintiff. In addition, the plaintiff is taxed on the entire settlement, not just their “net” proceeds. In most instances the attorney fees and costs are not an above the line deduction for the plaintiff (Commissioner v. Banks, 2005). The American Jobs Creation act of 2004 does permit the plaintiff’s deduction of attorney fees on claims of unlawful discrimination. However, this leaves the majority of non-physical injury cases excluded under the provisions of this law
The Banks decision requires that all taxpayers must declare fees paid directly to attorneys as income. This includes contingency fees. Legal fees won in a court award or settlement may be larger than the amount of the actual damages. Quite literally, the plaintiffs can find themselves losing … even when they’ve won!
For example, a Chicago woman won a court awarded of $300,000 in damages and $1 million to cover her legal fees (Spina v. Forest Preserve District of Cook County). She had to pay nearly $400,000 in taxes in addition to paying the attorney fee and costs. She lost nearly $100,000 even though she won the case.
Instead of accepting a fully taxable lump sum and losing most of it to taxes, a plaintiff can elect to collect proceeds in periodic payments, receiving the settlement over time. Although each payment is taxed, only a fraction of the total award is taxed each year as the payments are received. By spreading out the payments, the plaintiff may also reduce their tax rate to a lower bracket. In addition, an attorney can also accept their fee in the form of periodic payments and enjoy the same tax deferral benefits.
By entering into a Structured Settlement, the defendant/insurer and the plaintiff can tailor the annuity payments to meet a variety of financial needs, such as supplementing the plaintiff’s retirement planning, providing college education funds for their children or providing a stream of lifetime income. The Structured Settlement can be designed so that the plaintiff cannot outlive their money. At the plaintiff’s death, any remaining guaranteed payments can be paid to their heirs.
The defendant/insurer benefits from lower claim costs and transferring of any future obligations to the third party insurer paying the periodic payments to the plaintiff. The plaintiff benefits by receiving a much larger payout and deferring their federal/state/local income taxes over the term of the payout, rather than having to pay all of the taxes on the front end.