Too often we see a conflict in deciding whether to use a structured settlement annuity or an investment account to fund a trust for the settlement proceeds of a claimant, and we overlook finding the best means of satisfying the needs of the claimant. Quite often this can be accomplished by using a combination of the two to produce the liquidity and lifetime benefits needed.
A word on structured settlement annuities:
We frequently overlook the advantages that a lifetime payout can provide:
Provides a source of assets held. If the settlement provides that the trust is to be funded with cash only, the trustee often avoids spending the principal, or places caps on annual withdrawals. The reason is that it would be imprudent to deplete the principal should the beneficiary live longer than expected. This hoarding against the uncertainty concerning the plaintiff's life span is less likely if the trust is funded for the life of the injured party through a structured settlement annuity.
Protects the trust from termination due to lack of funds. If the injury is permanent, the settlement should be to - funding the trust for a lifetime with a structured settlement annuity ensures money will be available as long as the injured party is living and hedges against the shortfall risk of high withdrawal rates.
Provides diversification and performance. Impaired risk (structured settlement) annuities (consideration given to reduced life expectancy due to current health conditions) offer superior economic performance. Where the party has a severe disability that resulted from brain damage or a spinal cord injury, lifetime payments often produce a tax equivalent internal rate of return of 10.5% or more, allowing the trustee to be more aggressive in the investment of funds in the trust corpus.
Provides peace of mind for the family that the beneficiary will not outlive the funds. Life expectancies are increasing at a rate close to one percent a year, making a person with a 20 year life expectancy at retirement actually live about 50% longer than the expectancy table says. A structured settlement annuity eliminates this worry and shifts the risk to the insurance company.
Provides funding for needs beyond the age of 25 for minor's settlements. Minors trusts (Section 142, Texas) must distribute all assets by age 25, which is a concern for dissipation and future funding needs.
Provides annual cash flow to the trust. Many trust officers are pressured to procure a certain amount of assets for their department annually. A structured settlement annuity provides these assets.
Provides a means of compensation for families for loss of wrongful death claim. In settling a personal injury claim, the family must release liability for any future wrongful death claim. A structured settlement annuity with substantial guarantees allows the family to recover benefits should the beneficiary die prematurely.
A word on trusts:
We frequently overlook the need for liquidity and support that a trust can provide:
Provides guidance and resources to the family.
Provides administration to ensure government benefits are maintained.
Additional Benefits of Structured Settlement Annuities
Structured settlement annuities reduce the risk that anyone will embezzle, misuse, withhold or abscond with large sums belonging to the beneficiary.
Structured settlement annuities relieve the burden and expense of money management and minimum fees.
Structured payments do not impact Social Security retirement benefits. Interest accumulations are not considered in the calculation of tax on Social Security, as interest from CD's or Muni bonds.
Structured settlement annuities are not subject to the claims of creditors or considered common property in later marriages.
Most efficient way to purchase a home, start a business or fund retirement. Payments are made with tax-free dollars, while maintaining a tax write-off. Structures can provide cash flow to make house payments, start a business while protecting the downside of business failure, and fund a ROTH IRA each year to maintain the tax free earnings