A structured settlement is a financial agreement where payments are made periodically until the full settlement amount is received, often used by insurance companies to settle claims or in legal situations. It offers benefits such as lower tax liability, but also comes with responsibilities and is not recognized in all countries.
A structured settlement is a financial arrangement in which an individual or entity receives a series of payments until the full settlement amount has been received. Agreements of this type are usually very detailed and include a payment schedule that leaves no doubt as to when payments will be received. This type of agreement is sometimes used by insurance companies to settle claims, or in legal situations where paying a lump sum in a judgment would result in what the court considers extreme financial hardship for the party ordered pay the deal.
The structured settlement serves as a viable alternative to the direct settlement or lump sum model. With a direct settlement, the recipient receives a single payment that is large enough to settle the full amount of the judgment or insurance claim. The structured model allows for periodic payments that are scheduled to disburse within a specified time frame. Many property insurance agencies, as well as casualty insurance providers, often prefer this model, as it allows them to meet the terms of coverage while maximizing their cash flow.
Receivers of settlement funds may also receive some benefits as a result of a structured settlement. One of the most obvious advantages has to do with paying taxes. In countries where the money obtained from a settlement would be taxable, receiving the series of payments often carries a lower tax liability over the course of the year. As a result, the recipient will pay less tax on the full settlement amount, since it is received gradually over more than one tax period.
Along with the benefits, a structured settlement comes with some responsibilities. There are countries where the tax tables that apply to this type of settlement are different from the tables used to calculate the taxes due on other forms of income. In other countries, there is no such distinction, but the inclusion of periodic payments in the calculation of general income may place the taxpayer in a higher rank, resulting in an increase in the tax liability. Financial advisers who are familiar with the current state of tax laws in a given country can advise a client on how to organize their financial affairs to legally minimize tax liability and get the maximum benefit from receiving settlement payments.
Not all countries in the world allow structured settlements. Over the years, more nations have included the provision for this type of settlement in their tort laws. The United States, Australia, the United Kingdom, and Canada are notable examples of countries where the structured settlement concept is recognized and often used when it comes to resolving claims and other types of legal actions.
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