Your Options When You Win a Lawsuit: The Pros and Cons of a Structured Settlement

Your Options When You Win a Lawsuit: The Pros and Cons of a Structured Settlement

When you win a structured settlement, you receive your payout over time rather than in one large lump sum. Some plaintiffs are more concerned with receiving a desirable outcome to their case and don’t give much thought as to how they receive their payout.But it’s important to understand the difference between structured settlements and lump sums so that you can make the best decision for your circumstances.Here are a few of the pros and cons of forgoing a lump sum in favor of a structured settlement.

Pro: Potentially Lower Tax Liability

Awarded funds may be subject to taxes, depending on whether the money is awarded due to punitive damages or as compensation for sickness or injuries.According to the U.S. Tax Code, structured settlements due to personal injury are considered tax-free with very few exceptions. Working with a CPA can help you determine exactly how much you’d pay in taxes in either scenario.

Con: Waiting for Payday

In a lump-sum scenario, you receive the entire settlement in a single check. If you choose to structure your settlement, you will receive a fraction of that amount over a determined period of time.For example, if you win $100,000, then you could opt to receive $20,000 every year for five years.

However, not receiving all of your money upfront may put a strain on your finances. For example, if you have an older car you want to replace or you have a child entering college, you may find it more beneficial to take the lump sum and ease your financial burden.

Pro: Easier to Manage

Many people who win large sums of money often end up losing almost all of it due to poor money management skills. There are countless stories of lottery winners that end up spending on their money on lavish items with no knowledge on how to protect their wealth.

Smaller sums of money that are earned over time are much easier to manage, much like receiving a regular paycheck. Because you’re limited as to how much money you receive at a given time, you may be less tempted to enjoy frivolous purchases.This alone can be an effective way to build and protect wealth for the long term.

Con: Limits Investment Options

If you’re planning on using your winnings to set yourself up for the rest of your life, investing can provide a viable option. Receiving smaller payments over time gives you less to invest.In addition,  a structured settlement won’t allow your investment to grow as quickly, which means you could be leaving money on the table.

Should You Opt for a Structured Settlement?

A structured settlement makes financial sense when you want to limit your tax liability, don’t have major expenses to pay for, or don’t have the means to manage a large sum of money.However, only you can decide which method will benefit you the most. Do your due diligence so that you can maximize your financial gains with confidence.For all things money management, head back to our blog.