Thursday, September 6, 2012

The Settlement Market

With all these settlements awarded to people, a market for settlements was formed from the need for people to turn future payments into current cash. Companies that deal specifically in assisting beneficiaries in converting their structured settlements are becoming more common. Still, the cost of redistribution of funds can be costly.

Those who have received (or are still receiving) regular payments are well aware of the unsolicited proposals from individuals and companies hoping to take advantage of mismanaged finances. The more unscrupulous companies have discounted the future annuity payments by as much as 40%, locking in a sizable risk-adjusted return. Due to this situation, about two-thirds of US states have enforced restrictions surrounding tax-free structured settlements.

Also, some insurance companies will not assign or transfer annuities to third parties in order to discourage the sale of structured settlements.

Some institutions will allow the partial sale of future payments. A majority of structured settlement sales are arranged in this manner, in which beneficiaries sell only the minimum portion of payments necessary to cover the most immediate of circumstances.

If you're considering selling all or a portion of a structured settlement, study the reputation of the company providing the payments. Don't get involved with a company that might become insolvent before paying out your buyout money. Also, consult with an attorney and a tax advisor before entering into any transactions. Approach potential buyers through a structured settlement broker who can compare and contrast differing offers for you and has the resources to provide legal and transaction guidance.

Take my money,

Image from

Monday, September 3, 2012

Are Structured Settlements Right for You?

Part 3 of the Structured Settlement posts, this will briefly explain why a structured settlement would be good (or not) for you.

Structured settlements are a good way to solve your financial issues as a personal injury claimants or a beneficiary of a large money claim. Other than the tax benefits and security of receiving periodic payments, structured settlements are beneficial for people who don't want to deal with investing their proceeds or who don't have the knowledge to do it correctly.

Structured settlements may be right for people who:
  • are temporarily or prematurely disabled
  • have limited financial expertise
  • are minors or unable to handle their own financial affairs
  • require savings for housing, education or other large future obligations
  • have been injured or have ongoing medical expenses

Take my money,

Thursday, August 30, 2012

Structured Settlements Payments

Back to structured settlements. As a reminder, these are regular compensations given to people who are awarded large amounts of cash, usually from a civil suit or a claim.

The installment payment arrangements are structured agreements that pay periodically. These periodic payments vary in form.

  1. Yearly Payments: Payments are divided into equal amounts and distributed for the duration of the agreed-upon period.
  2. Inflation Hedging: Payments are made in inflation hedging can fluctuate over time, depending on inflation or deflation in the economy.
  3. Monthly Indexed Installments: Payments that can change in amount due to some financial index that is tracked over time.
  4. Differed Payments: Payments are paid in unequal amounts over a fixed period of time in order to cover expected expenses over the contract period.
  5. Measures for the Future Care of the Recipient: Payments are made to cover such things as periodic medical or housing expense that may vary from period to period.

Annuity Payment Pros
The advantage of receiving annuity payments is the tax benefit. Many structured settlements are not taxable, or may significantly reduce a person's taxes as compared to a lump-sum distribution. Even those structured settlements that are deemed taxable can provide tax benefits. Income taxes can be deferred to the period in which the payment is made, as opposed to paying the lump-sum tax in the period in which the award is made.

This is the reason lottery winners are given a choice between receiving their winnings as an annuity or in entirety. In some cases (usually in the case of minors or people deemed unfit to manage their own finances), a lump sum is not awarded by design.

Annuity Payment Cons
Once the arrangements of distribution in a structured settlement are made, they cannot be changed. Depending on the legal structure of the settlement, the beneficiary may or may not use a structured settlement as collateral for a loan or another investment option. This is especially true if the payments are not taxable, since federal law prohibits the encumbrance of these tax-free benefits.

Take my money,

Saturday, August 25, 2012

Inheriting an IRA

An IRA, Individual Retirement Account, is a personal retirement account. Contributions to IRAs are either pre-tax (traditional IRA) or after-tax (Roth IRA).
If a someone passes away before his IRA is depleted, his heirs may inherit the IRA. Here are a few frequently-asked questions about the consequences of inheriting an IRA.

Q: What should I do? Should I cash out the IRA?
You're legally allowed to withdraw that money, but doing so is generally not recommended, because you'll lose the IRA's tax benefits.
If you decide to make withdrawals (which are known as "distributions"), it's generally best not to do so in one giant lump sum. If you've inherited a Traditional IRA, you'll be hit with a huge tax bill when you make that withdrawal.

Q: How Can I Maximize the Tax Benefit?
Delay making withdrawals from the IRA for as long as legally possible. The longer the money stays in the account, the longer it can grow tax-free or tax-deferred.
At a certain point, you'll be legally required to begin withdrawing money from the IRA. (The rules regarding the length of time before you're legally mandated to withdraw money from the IRA are extremely complicated. Seek the advice of a legal and tax professional.)
When that happens, take the smallest possible distribution that you're legally allowed to take. Why? Because IRA's are tax-advantaged. The longer you leave money in it, the more time that money can grow.

Q: Can I Put the IRA Into My Own Name?
If You Are the Spouse of the Deceased: Yes. You can name yourself the account owner or you can combine it with your own pre-existing IRA. You can contribute new money to the IRA.
If You Are NOT the Spouse of the Deceased: No. You can, however, set up a "beneficiary IRA" that carries both your name and the name of the deceased.
If your name is John Doe, for instance, and the name of the deceased is Jane Smith, you can set up a beneficiary IRA called: "Jane Smith, Deceased 01/01/1980, F/B/O John Doe." This signals that you're the named heir and beneficiary to the IRA.

Q: Do I Have to Pay Taxes?
If it's a traditional IRA, yes, you have to pay taxes on all the money that you withdraw. (This is true regardless of whether its an inherited IRA or your own personal Trad IRA.)
If it's a Roth IRA, then no - you can withdraw money tax-free. (Just bear in mind that you'll lose the compounding tax advantage when you withdraw that money).

Q: Can I Make Additional Contributions to the IRA?
If you're the spouse of the deceased, yes. If you're not the spouse, no. Of course, you can always set up your own IRA if you're eligible to do so.

Q: When Will I Be Legally Required to Withdraw Money from the IRA?
If you're the spouse of the deceased, and you take over as the account owner by either naming yourself on the IRA or merging the account with your own IRA (see above), all the normal rules governing IRA distributions remain in effect. The fact that it's inherited will have no bearing.
If you're not the spouse, and the person from whom you inherited the IRA was already taking mandatory distributions, and that person didn't take a distribution during the calendar year in which he/she died, then you must take a distribution by Dec. 31 of that year.
If you're not the spouse and the person from whom you inherited the IRA took a mandatory distribution in the year in which he/she died, you'll have to take a distribution by Dec. 31 of the following year.
Every year thereafter, the amount you're legally mandated to take out is dictated by the IRS, based on either your own life expectancy or the non-readjusted life expectancy of the deceased (the life expectancy that the deceased would have, if he/she hadn't passed away). These formulas and rules are extremely complicated. Always consult a tax professional, legal professional and licensed financial professional before making any financial decisions.