Financial Security through Structured Settlements

Structured settlements have become a natural part of personal injury and worker's compensation claims in the United States, according to the National Structured Settlements Trade Association (NSSTA). In 2001, life insurance members of NSSTA wrote more than $6.05 billion of issued annuities as settlement for physical injury claims. This represents a 19 percent increase over 2000.

A structured settlement is the dispersement of money for a legal claim where all or part of the arrangement calls for future periodic payments. The money is paid in regular installments--annually, semi-annually or quarterly--either for a fixed period or for the lifetime of the claimant. Depending on the needs of the individual involved, the structure may also include some immediate payment to cover special damages. The payment is usually made through the purchase of an annuity from a Life Insurance Company.

A structured settlement structure can provide long-term financial security to injury victims and their families through a stream of tax-free payments tailored to their needs. Historically, they were first utilized in Canada and the United States during the 1970s as an alternative to lump-sum payments for injured parties. A structured settlement can also be used in situations involving lottery winnings and other substantial funds.

How a Structured Settlement Works
When a plaintiff settles a case for a large sum of money, the defendant, the plaintiff's attorney, or a financial planner may propose paying the settlement in installments over time rather than in a single lump sum.

A structured settlement is actually a tradeoff. The individuals who were injured and/or their parents or guardians work with their lawyer and an outside broker to determine future medical and living needs. This includes all upcoming operations, therapy, medical devices and other health care needs. Then, an annuity is purchased and held by an independent third party that makes payments to the person who has been injured. Unlike stock dividends or bank interest, these structured settlement payments are completely tax-free. What's more, the individual's annuity grows tax-free.

Pros and Cons

As with anything, there's a positive and negative side to structure settlements. One significant advantage is tax avoidance. When appropriately set up, a structured settlement may significantly reduce the plaintiff's tax obligations (as a result of the settlement). Another benefit is that a structured settlement can help ensure a plaintiff has the funds to pay for future care or needs. In other words, a structured settlement can help protect a plaintiff from himself.

Let's face it: Some people have a hard time managing money, or saying no to friends and family wanting to "share the wealth." Receiving money in installment can make it last longer.

A downside to structure settlements is the built-in structure (no pun intended). Some people may feel restricted by periodic payments. For example, they may want to buy a new home or other expensive item, yet lack the funds to do so. They can't borrow against future payments under their settlement, so they're stuck until their next installment payment arrives.
And from an investment perspective, a structured settlement may not make the most sense for everyone. Many standard investments can provide a greater long-term return than the annuities used in structured settlements. So some people may be better off accepting a lump sum settlement and then investing it for themselves.

Here are some other important points to keep in mind about structured settlements: An injured person with long-term special needs may benefit from having periodic lump sums to purchase medical equipment. Minors may benefit from a structured settlement that provides for certain costs when they're young--such as educational expenses--instead of during adulthood.

Special Considerations

- Injured parties should be wary of potential exploitation or hazards related to structured settlements. They should carefully consider:

- High Commissions - Annuities can be highly profitable for insurance companies, and they often carry very large commissions. It is important to ensure that the commissions charged in setting up a structured settlement don't eat up too much of its principal.

- Inflated Value - Sometimes, the defense will overstate the value of a negotiated structured settlement. As a result, the plaintiff winds up with much less than was agreed upon. Plaintiffs should compare the fees and commissions charged for similar settlement packages by a variety of insurance companies to make sure that they're getting full value.

- Conflict of Interest - There have been situations where the plaintiff's attorney has referred the client to a particular financial planner to set up a structured settlement, without disclosing he would receive a referral fee. In other cases, the plaintiff's lawyer has set up a structured settlement on behalf of a client without revealing the annuities are being purchased from his own insurance business. Plaintiffs should know what financial interest their lawyer may have in relation to any financial services being provided or recommended.

- Using Multiple Insurance Companies - It's advisable to purchase annuities for a structured settlement from several different companies. This offers protection in the event a company that issued annuities for a settlement package goes into bankruptcy and defaults.

Benefits of Selling A Settlement

A structured settlement is specifically designed to meet the needs of the plaintiff at the time it's created. But what happens if the installment arrangement no longer works for the individual? If you need cash for a large purchase or other expenses, consider selling your structured settlement. Many companies can purchase all or part of your remaining periodic settlement payments for one lump sum. This can boost your cash flow by providing funds you can use immediately to buy a home, pay college tuition, invest in a business or pay off debt.

If you're considering cashing out your structured settlement, contact your attorney first. Depending on the state you live in, you may have to go to court to get approval for the buyout. About two thirds of states have laws that limit the sale of structured settlements, according to the NSSTA. Tax-free structured settlements are also subject to federal restrictions on their sale to a third party, and some insurance companies won't assign or transfer annuities to third parties.

When selling your structure settlement, check with multiple companies to make sure that you get the highest payoff. Also, be sure the company buying your settlement is reputable and well-established. And keep in mind that if the deal sounds too good to be true, it probably is.

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The Tips to Plan Tax on Your Tips

Handle your tips carefully

You should report your tips accurately to your employer and also on your tax return. Remember, tips are received by people working in various industries. So if you don't work for a restaurant, do not assume that you can avoid reporting tips. Cab drivers, club attendants, hairdressers -all of them or people working in the similar professions must report tip income to IRS.

You should keep daily record of tips in a tip diary. You should use Form 4070 to report such tips to your employer. Tips include -which you get from the customers' order from other employees and tips from credit card charge customers that your employer pays to you. You should also report the non-cash tips you get in the form of tickets, passes or other items. The amount of tips which you paid to other employees through the tip pools should also be reported with the name of the employees to whom you paid them.

You should not include in your tip diary the amount of service charge that your employer adds to the bill of his customers and then pays you as part of your wages.

The reporting of tips to your employer is very important because your employer can withhold Federal income tax and social security as well as Medicare taxes on that amount.

If your total tips for any one month from one job are less than $20, you need not report them to your employer. You need not report the value of non-cash tips to your employer. This is because you do not pay social security or Medicare taxes on them.

If there is no other way to report your tips to your employer, then you should use form 4070 employees report of tips to employer. You can fill in the necessary information on that form, sign and date that form and give it to your employer. Alternatively you can hand over a statement to your employer with your name, address, social security number, the month in which you received tips, and the total tips required to be reported for that period. You can also send this statement electronically to your employer. The report should be sent to your employer every month by the 10th of the next month. If your employment ends during the month, then you can report your tips when your employment ends.

There is a penalty for non-reporting tips. The penalty maybe equal to 50 per cent of the social security and Medicare taxes you owe on the under-reported tips.

If your regular pay is not enough for your employer to withhold all the taxes, then you can give money to your employer to take care of the rest of the taxes. All taxes which are for the month can be collected by your employer from your next paycheck. If some taxes remain uncollected at the end of the year, you may be subject to a penalty for the underpayment of estimated taxes.

Reporting tips on your tax return

You can report your tips with your wages in forms 1040EZ or Form 1040A or form 1040. If you receive tips as a self employed person, you should report them as your income on schedule C or C-EZ.

Your employer can allocate tips to you in addition to the tips you reported to him, if you worked in a restaurant that must allocate tips to employees or the tips your reported to your employer were less than your share of 8% of food and drink sales. You must report these allocated tips on your tax return. Your employer can use a tip rate lower than 8%, but not less than 2%, to your allocated tips only if IRS approves the lower rate.

Reporting correct tips as your income is good for your future because this figure can be used to determine how much money should be paid in your social security and Medicare accounts. This will be very convenient for collecting these benefits on your retirement or if you are disabled.