What is the advantage to the plaintiff in choosing a structured settlement instead of a lump sum settlement?
The biggest advantage is the tax savings. Under IRC Section 104(a)(2), all payments made to the plaintiff in bodily injury cases are excluded from taxation. Payments made to the estate after the plaintiff’s death are also excludable (Revenue Ruling 79-220). Had the plaintiff received a lump sum (tax free) and invested it, the interest would be subject to taxation. In a structured settlement, both the principal used to purchase the “Qualified Funding Asset” (T-Bonds or annuities) and the interest earned are received by the plaintiff tax free. Other benefits include absence of investment risk, management-free income, flexibility in structuring payments to fit individual needs, and protection of funds against fraud and greed.
