The issue of inflation is very important to a settled case award or settled case fee because the purchasing power of either is part of the evaluation of the overall settlement. If there happens to be a settlement that takes place in 2017 and the settled case fee or award is deemed to be $1 million, but it won’t be paid until 2027 that can be a real problem. The uncertainty of the economy in 10 years could have drastic results for the recipients. That 10 year gap between being awarded and actually receiving the fee leaves it susceptible to rising interest rates. Rising interest rates decrease the purchasing power of that $1 million which could lead to a plaintiff or their attorney to determine the settlement as not acceptable. If interest rates rise a percentage or two, that will reduce the amount of money expected.
Settled Case Awards With Annuity Type Payments (Structured Settlements)
Situations where a settlement occurs and the plaintiffs decide to to defer receiving the entire award at once and receive periodic payments over time periodic payments that is a structured settlement. Some of the reasons why a plaintiff would decide to use this option include tax liability, financial stability, and time value of money. A plaintiff may leave themselves exposed to a higher tax rate when they take their award. The plaintiff may already be financially stable and may not need the money until a specific time in the future.
Structured Attorney Fees
When an attorney gets their fee after a settlement, successful verdict or judgment they have the option to choose to take their fee upfront, where they will be taxed at a higher rate by the government. There are options plaintiffs’ attorneys have where they can structure the fee and invest their fee into different products where they can earn more on their potential investment. Companies like MetLife, Millennium Settlement Consulting, and Pacific Life offer plaintiffs’ attorneys the ability to structure their fees. Some of the benefits for structuring their fees include reducing tax exposure, setting up retirement income, structured income over a period of time instead of a lump sum.
Once a plaintiff receives their settlement after attorney fees have been taken out, the medical costs have been paid, there is only one entity left to get their pay and that is the United States government through the Internal Revenue Service. (IRS) According to the IRS’website a plaintiff does not have to pay taxes if they have not deducted medical expenses in the prior years if the proceeds are from a personal injury lawsuit. In an employment law settlement, the proceeds connected to lost wages are subject to regular wage taxes, social security, and medicare rates in that year. Punitive damages from a settlement are treated as Other Income.
Advice: One should consult with a tax adviser after receiving settlement proceeds to get the best advice.