When you win or settle a lawsuit, you are often entitled to a sum of money. This ranges from a few pennies (if you’re part of a huge class-action suit, for example) to hundreds of thousands or even millions of dollars. If you’re entitled to a lawsuit settlement, here are five things you should know about your money.
That sum of money can come to you in two ways: in a structured settlement or in a lump sum. A structured settlement pays out a little bit at a time. When a legal settlement is reached, say a medical negligence lawsuit for $100,000, the defendant will put that money into a financial product called an annuity, which will make regular payments over time, say $1,000 a month for 100 months. Structured settlement payments are not taxed as income, and they can be scheduled over almost any length of time. Furthermore, a regular, small payment can reduce the temptation to spend all the money at once. Lastly, because the annuity is held by an insurance company, the amount is subject to interest, which means it can slowly appreciate in value.
…Versus lump sums
The other type of payment is known as a lump sum. Just as it sounds, a lump sum is a large sum of cash handed over in one go. Lump sum payments are taxed as income tax for that year. So, if you get your $100,000 in a lump sum, you have to pay taxes on whatever you make on your normal income, plus the money from that settlement. However, lump sum payments allow you to spend the money as soon as you deposit the check, which means you can make purchases you otherwise would not be able to. Furthermore, if you are a savvy investor who makes fantastic returns, a lump sum can provide a sizeable foundation from which to build wealth.
One can become the other
There are several companies that offer to purchase annuities. A company like Settlement Giant, for example, will offer to buy your settlements and “unfreeze” your future earnings from an annuity if you need money immediately. If you want to start or own business or invest in a house, the remainder of your structured settlement can be tapped into as an asset for capital. These companies view structured settlements as investments, and they will buy structured settlements and resell them to other investors.
Specific settlements have specific tax implications
If you receive a settlement from a personal injury lawsuit, it’s taxed differently than other types of settlements, like one awarded from emotional distress. To take that negligence lawsuit as an example, any money you recieve for pain, lost wages, and medical bills won’t be taxed. Punitive damages, which are awarded by the court to punish the wrongdoer, are taxable. As another example, the awards received for pension rights or copyright infringement are taxable, while interest on a annuity is not taxed. Our advice: get a good lawyer and a good accountant. They should keep track of which is which.
It may be confidential
It’s not uncommon to see a lawsuit settled for “an undisclosed amount.” If you’re on the receiving end of such an undisclosed amount, know that you are expected to keep your settlement undisclosed. Confidentiality provisions in settlement agreements are enforceable in court. If you violate them, a common punishment is forfeiture of part of your settlement amount. Have your lawyer look over the details, but just to be safe, you should be very circumspect about where and when you talk about your settlement agreement. It could mean the difference between keeping your money, and having the courts take it right back.