March 19, 2011 (Original publish date) • By Dennis Beaver
Last week we began our analysis of structured settlements, which is a way in which large personal injury verdicts or out-of-court settlements are often set up. A portion – sometimes all of the money – buys an annuity from an insurance company, and the funds are paid out over many years, growing tax free.
For children, these settlements are a terrific way of securing their financial future across a lifetime. One of the main features in a structure is that the principal amount is intended to be out of reach. This is so that the beneficiary can’t get their hands on all of the money at one time. That’s the idea, anyway.
The following e-mail from a reader is the perfect example of where a structured settlement would be so useful.
“My husband, Robert, will be receiving a very large settlement because his parents were killed in an auto accident last year. We expect this to be over a million dollars.
“Robert is horrible when it comes to managing money. Give him 20 dollars and he will spend 40! Fortunately, he is aware of his money-burns-a-hole-in-my-pocket problem, and during our 20-year marriage, I have been the one who handles finances, giving him an allowance. It has worked well. But now I am worried.
“Is there a way for him to receive some money from the settlement, but prevent him from getting his hands on all the funds at one time? If he does, he’ll blow it! I am asking you this, because he and his lawyer are friends from high school, and according to his wife, he also overspends. So I doubt that he would do anything which will help control my husband’s spending issues.”
Sudden Wealth Syndrome
Suddenly coming into a great deal of money is not necessarily a blessing. Lottery winners are famous for spending through fortunes. It is called the Sudden Wealth Syndrome, making a structured settlement so valuable, as it keeps other people’s hands off if it.
John Darer, a registered settlement planner in Stamford, Conn., explains it well: “As the payments are coming on a scheduled basis – perhaps monthly, every six months, or yearly – it allows you to honestly say I don’t have the money when everyone is asking for a loan. It protects you from yourself and from your friends.”
Hanford attorney Rick Conway agrees, “Very few people know how to manage, let alone make a large amount of money last, and that’s why lawyers should almost always discuss these realities with their clients and raise the issue of putting the money into a structured settlement.”
“Sell your settlement for a lump sum of cash now!”
In spite of all of the planning to “lock up” the money, in some instances it is still possible to “sell” the settlement – cashing it in and ending the periodic payments. There can be valid reasons, such as medical bills or to save a house from foreclosure. Companies like J.G. Wentworth buy structured settlements. However, what their commercials suggest about “getting cash now” is far from what generally happens.
“There are several things which most people who have a structured settlement do not understand,” Darer observes. “First, while your settlement may in fact pay out a huge amount of money over its lifetime, if you sell it now, you will not get anywhere near the full amount. You will lose an enormous amount due to the way the value of these settlements – looking into the present value of future payments – is calculated.
“You have to shop companies who purchase settlements, as what you will be offered can vary enormously, with one company offering you half of the amount another will.
“But this process of selling a settlement must be approved by a Superior Court judge and can take from 60 days to many months. More and more judges are taking this very seriously and have a paternalistic view of the proceedings, using the Best Interests Standard. They will try to determine if selling the settlement is in the best interests of the annuitant and his dependents, if any.
“Before selling, I tell people this isn’t just free money, and to think how they got the settlement in the first place. Perhaps their parents died in an accident, or their own serious injury as a child. This is compensation for that. This usually gets them more focused and less attracted by a catchy TV ad,” Darer maintains.
Conway echoes those feelings and goes one step further. “It costs a lot of money for these television commercials. Who is paying for them? It’s the people who cash in their settlements.”
Dennis Beaver practices law in Bakersfield and enjoys hearing from his readers. Contact Dennis Beaver.