Structured Settlements – “Nobody knows you when you’re down and out.”
When someone settles a personal injury case, he or she is often left with a substantial amount of money – often more than that person has ever had. This is especially compounded by the fact that personal injury settlements are not taxable. The IRS does not consider them “income.” They are “indemnity,” something which makes the injured person whole. Structured settlements can be an important tool in helping the recipient of a judgment avoid financial problems.
Most of my clients are not accustomed to receiving large amounts of tax-free money. The experience of many personal injury victims is unfortunately very similar to that which has been documented by lottery winners across the country – euphoria followed by a spending spree, and the inability to turn down pleas from long lost friends and relatives. I have sadly seen too many cases where the plaintiff cashes the settlement check, only to go through the entire settlement amount, (often a six figure sum) within one year.
This scenario has always reminded me of the blues standard “Nobody knows you when you’re down and out,” presciently written by Jimmy Cox in 1923, just a few short years before the Great Depression. Eric Clapton sang it memorably at the Hurricane Sandy Relief Concert. The meaning rings just as true today as it did when the song was penned. The lyrics most apropos to this article are “When you get back on your feet again, everybody wants to be your long lost friend.”
My clients have told me over the years, that scarcely having left the bank to cash the settlement check, they are inundated by requests for money from seemingly everyone they’ve ever met. Many of these people have legitimate needs – a sick child needs medical care, a family is on the verge of eviction – and my clients, being decent human beings – feel obligated to “lend” money. Within months, the settlement is gone. For this reason, I encourage all of my clients to use a structured settlement rather than accepting the entire amount in a lump sum.
A structured settlement is a legal settlement paid out as an annuity (little by little) rather than in a lump sum. The client is guaranteed a steady stream of income for months or years to come, and simply cannot acquiesce to the requests from friends and strangers. The injured person merely has to explain to the long lost friends that payments come in small amounts every month.
(While I of course encourage my clients to be charitable, my goal is to maximize their recovery. It is my fiduciary and moral obligation to look out for their financial well-being. I want my clients to have all the options at their disposal and to be justly compensated for their injuries.)
When I work with a client who has the potential to receive a particularly large settlement amount, I encourage him or her to meet with my finance team early on – a structured settlement broker, and an accountant. (I learned this tip in a course from legendary Texas trial lawyer Joe Jamail.) If the broker is introduced to the client on the eve of settlement, there’s no time for trust to be built up. People look askance at this new player at the table, and may feel reluctant to sign away the right to receive all the money up front. By introducing a client to a broker early on in the case, the basic framework is explained in advance, and the client is more likely to accept the deal later. (Early on in a case, it is also often hard to figure out how much, if anything, the case could be worth, but I like to get the client thinking about at least the possibility of having a structure.)
Clients often ask me “What happens if, God forbid, I die before all the money is paid out?”
As unpleasant as it is to ponder this possibility, it is an excellent question. The answer is simple. The settlement would continue to be paid to the decedent’s beneficiaries, e.g., spouse, children, etc. under the conditions prescribed in the settlement agreement.
Structured settlements provide peace of mind and prevent clients from having to make tough decisions about whether or not to make guilt driven charitable contributions. All personal injury clients should at least consider speaking to a structured settlement broker before accepting a settlement.