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Structured Settlement Solutions
When a personal injury case settles, how the proceeds are structured can have lasting implications for a claimant's financial future. Payment timing, tax treatment, investment considerations, and inflation all play a key role in how settlement proceeds support long-term needs.
Traditional fixed annuities have provided predictable income for decades and remain an important foundation of structured settlement planning. Today, market-based alternatives are expanding the options available to attorneys and their clients.
Prospera works with settlement consultants and attorneys to explore these options, offering solutions that combine the established advantages of structured settlements with new opportunities for investment participation and long-term financial planning.
What Is a Structured Settlement?
A structured settlement is an arrangement that provides scheduled payments over time rather than distributing an entire settlement as a single lump sum.
Payments can be designed around a claimant's anticipated financial needs, including ongoing medical care, living expenses, education, and long-term income requirements.
Traditional structured settlements are generally funded through annuities issued by life insurance companies. These arrangements offer predictable payments established at the time of settlement.
Modern structured settlement solutions may also incorporate market-based investment participation, creating additional opportunities for long-term growth while introducing investment risk.
Understanding the Tax Advantages
Under Internal Revenue Code §104(a)(2), qualifying damages received on account of personal physical injuries or physical sickness are generally excluded from gross income. When a qualifying settlement is properly structured, periodic payments may retain this tax treatment.
This creates an important distinction between receiving qualifying settlement proceeds through a structured arrangement and investing a lump sum in a taxable investment account, where subsequent investment earnings may be subject to taxation.
The specific tax treatment depends on the nature of the damages and the structure of the settlement.
Structured Settlement vs. Lump Sum: Understanding the Options
One of the most important settlement planning decisions is whether to receive proceeds immediately, distribute proceeds through scheduled payments, or allocate between the two approaches.
Each option offers different benefits and considerations.
Tax Treatment. Qualifying structured settlement payments may be excluded from gross income under Internal Revenue Code §104(a)(2). While qualifying personal physical injury damages received as a lump sum may also be excluded, subsequent earnings generated from investing those proceeds are generally subject to applicable income taxes.
Long-Term Financial Planning. Structured settlements can provide scheduled payments based on anticipated financial needs, helping claimants plan expenses over an extended period.
Spending Protection. Receiving payments over time may help reduce the risk of prematurely exhausting settlement proceeds, particularly when funds are intended to support ongoing medical care or living expenses.
Flexibility. A lump sum provides immediate access to funds and greater control over investment and spending decisions. Structured settlements establish payment terms in advance, which can provide predictability but may limit the ability to change distributions later.
Payment Design. Structured settlements can include different payment schedules, such as periodic income, scheduled lump-sum payments, and increases at specified intervals.
The right approach depends on the claimant's circumstances, financial objectives, and settlement terms.
Nonqualified Structured Settlements
Not every settlement involves damages eligible for the federal income tax exclusion under Internal Revenue Code §104(a)(2).
Nonqualified structured settlements may be used in certain employment disputes, contractual claims, and other matters involving taxable damages.
When properly established, these arrangements may allow eligible recipients to receive payments over time rather than recognizing the entire settlement amount in a single year. The availability and timing of tax deferral depend on applicable tax law, the nature of the underlying claims, and the terms of the settlement.
For attorneys handling cases involving taxable damages, nonqualified structured settlements can offer an additional planning option to evaluate with qualified tax counsel.
Market-Based Structured Settlement Solutions: What Prospera Offers
For decades, fixed annuities have been the primary funding mechanism for structured settlements. Their predictable payments provide valuable financial security, particularly when claimants need dependable income for essential expenses.
However, fixed payments may lose purchasing power over time as inflation increases the cost of living.
Market-based structured settlements introduce another approach, offering the potential for investment growth within a structured settlement framework.
Prospera provides solutions designed to expand the options available to attorneys, settlement consultants, and their clients.
Growth Structured Settlement (GSS)
Prospera's GSS introduces market-based investment participation within a structured settlement framework.
Through Vanguard® and BlackRock® investment options, GSS offers the potential for long-term growth. Unlike a traditional fixed annuity, GSS investment performance is subject to market conditions. Market-based investments involve risk, including potential loss, and returns are not guaranteed.
For claimants with longer financial horizons, GSS may help address inflation and preserve purchasing power over time.
GSS can also complement traditional annuities, allowing settlement professionals to consider guaranteed payments for near-term needs alongside market-based growth potential for longer-term financial objectives.
Prospera's Settlements Plus provides an additional structured settlement solution that can be evaluated based on the claimant's payment objectives, financial circumstances, and the terms of the underlying settlement.
Settlements Plus expands the range of solutions available for individualized settlement planning, including investments in mutual funds, model portfolios, or advisor-managed accounts. Market-based investments involve risk, including potential loss, and returns are not guaranteed.
Structured settlement planning can also benefit attorneys seeking greater flexibility in managing contingency fee income.
Prospera's Fee Structure Plus provides a market-based attorney fee deferral solution that may allow eligible attorneys to defer receipt and recognition of fees under a properly established arrangement. Investment vehicles can include mutual funds, model portfolios, or advisor-managed accounts.
Fee Structure Plus offers investment flexibility and the potential for long-term growth, subject to applicable tax requirements and investment risk. For attorneys managing substantial or irregular contingency fee income, fee deferral can be an important component of a broader financial strategy.
Combining Traditional Annuities with Market-Based Solutions
Structured settlement planning does not have to be an either-or decision between fixed annuities and market participation.
For some claimants, combining traditional annuities with a market-based solution can offer a way to balance predictable income with long-term growth potential.
A traditional annuity may provide guaranteed payments for immediate and near-term expenses, while a market-based structured settlement can offer investment growth potential over a longer horizon.
This approach lets attorneys and settlement consultants evaluate funding strategies based on the claimant's needs, risk tolerance, and financial objectives.
Prospera provides the market-based component that can complement a traditional annuity arrangement.
Working with Prospera on Structured Settlement Solutions
Every settlement presents different financial considerations. The right solution depends on the claimant's age, expected expenses, income needs, tax considerations, risk tolerance, and long-term goals.
Prospera works alongside settlement consultants and attorneys to evaluate available options, develop payment illustrations, and coordinate the documentation necessary to implement structured settlement solutions.
With more than $250 million in GSS assets under administration since its launch five years ago, Prospera brings established experience and an innovative approach to an evolving settlement planning landscape.
From traditional settlement strategies to market-based growth opportunities, Prospera broadens the conversation about what a structured settlement can accomplish.
Contact Prospera to explore structured settlement solutions for your client.
