First, a structured settlement is simply a way for the defense to pay you money over a period of time.
In a medical malpractice case here in New York, if your case goes to a jury verdict and the jury determines that you are entitled to receive compensation from the doctors and hospital who caused you harm, you are able to receive the first $250,000 upfront. The remaining amount of money is required to be paid out over a period of many years.
If you are settling your accident or medical malpractice case or even your wrongful death case, a payout over time may be advisable for a number of key reasons...
There are advantages and disadvantages to this type of payout.
Here are some of the advantages:
- It may be an attractive way to get the defense to settle your case.
- The cost to buy a payout over time may be more attractive to the defense.
- The total amount of money you ultimately receive will be significantly more than what you are agreeing to settle your case for.
- There are tax benefits to having your money paid over time.
- Payouts to young adults can help them preserve money and use it for college and other important expenses.
Here are some disadvantages:
- You lock your money into a long term payment schedule and cannot take out your money until certain dates are triggered.
- Once you lock your money into your program, you cannot change the program or interest rates.
Let's say you agree to settle your case for one million dollars. The defense would prefer not to have to pay you that one million dollars today. Instead, they would prefer to pay you a little today, a little next year and continue that payment schedule for many years. Doing this saves them money.
Not only does it save them from having to pay out the full amount right now, but THEY get the benefit of any interest and capital appreciation of their investment of that money, while that money is sitting in their account waiting to be distributed to you.
If you were to agree to a one million dollar settlement and agree to be paid out over time, you might choose to have $100,000 paid today.
Then in five years you might agree to be paid $300,000. Then in another five years, you might agree to be paid $500,000 and so on.
If you were to add up all the accumulated interest you will receive over the 10 or 20 or even 30 years that you will receive your money, it will be considerably larger than the $1,000,000 settlement you agree to today.
However, there are two things to consider before deciding which option you will pick...
(1) If you were to take the money in full today, could you invest that money so that after 20 or 30 years you will have accumulated a small fortune bigger than if you had put it into a structured settlement?
The problem with that question is that many injured victims do not have a lot of experience handling and investing such large sums of money.
Many studies have shown that people who come into large amounts of money suddenly often squander their money within five years of receiving it.
(2) What will you do with all that money today? Will you spend it? Will you invest it? How will you preserve the capital that you need to have it work for you for the rest of your life?
Let's now jump to my client's case...
She was badly injured. She was a young woman who was diagnosed with Stage IIIB breast cancer. She had undergone a double mastectomy and at the moment was cancer free. However, her prognosis was very guarded. The cancer studies showed that there was a very good likelihood that her breast cancer would recur within a five year time period.
When it came time to decide whether to take a structured settlement or take it all at once, she decided to take it all at once. For her, the option was "Listen, I don't know how much longer I will live. I want all my money now. I want to be able to pay for certain things and give some to my family. I don't want to wait for 20 or 30 years before seeing my money paid out to me."
Her reasoning was sound.
She's an adult and does not need anyone's permission to take all of her settlement money now. However, even though she had good valid reasons to want to take all of her money now, I still had an obligation to explain to her the risks and benefits of taking all her money now compared to putting all or some of it into a structured settlement (often called an annuity) and pay her over time.
In fact, it is so important to have this discussion with each of my clients, that I make them sign and acknowledge a form that I can put into their file, confirming that we had this discussion and they were given different payment options.
Having this conversation BEFORE they receive the money is crucial.
In New York, once the settlement money has been distributed to the injured victim, they can no longer choose the option to have their payments spread out over time. That decision MUST be made while it is still sitting in our escrow account (also known as an attorney trust account), before they ever take possession of any money.