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.
Many tort cases are so large and complex that it is difficult to obtain enough capital to ensure prompt payment of a settlement. A claimant may find herself waiting for years after a case has settled to receive even a portion of the money that was awarded. This type of delay is much more than a frustrating inconvenience; the money awarded in tort settlements is often used to pay legal fees, medical fees, cover unemployment, and cover other expenses that were otherwise averted during the legal process. Fortunately, there are options for those claimants who require their settlement funds at a faster rate than the court can pay.
Structured settlements are agreements between claimants and financial or insurance institutions in which the claimant agrees to receive periodic payments on her settlement amount rather than receiving one lump sum payment. Most commonly, this type of settlement agreement is preferred by claimants who litigated as a result of litigation or some other personal harm. In fact, it is so common for personal injury, product liability, or workplace discrimination claimants to utilize structured settlement agreements to receive their settlement awards that structured settlements have been endorsed by the American Association of People with Disabilities and the National Organization of Disability, two of the largest disability rights organizations.
The United States Department of Justice also recognizes the value of structured settlements. In 2006, the Department of Justice added a list of structured settlement brokers to its Civil Division webpage. The brokers listed on this page meet specific minimum qualifications laid out by the Department of Justice and are approved by the DOJ to “administer settlement payments according to their schedules.” The qualifications are not too extreme: brokers must be licensed in the United States, must not have been suspended from practice or have had a license revoked, must not be a felon, etc. One who practices in annuity brokerage, also known as selling structured settlements, may nominate herself to be included on the list.
The DOJ’s support of structured settlement brokers is significant, in that it legitimizes the industry on a grand scale. With such a well-known agency backing structured settlements, potential clients can more easily become elucidated about the benefits and risks involved with the practice, and hopefully, more claimants will be able to seek assistance with structured settlement brokers.
Many attorneys structure their fees so they can have a predictable amount of cash flow. There are also tax advantages to structuring their fees which can help them avoid paying a huge bill to the IRS once fees are awarded. Many attorneys are known to have cash flow issues because of the inconsistency court cases can have as well as eventual payment of the legal fee which can be subject to delay for a variety of reasons.
There are those attorneys who like structured settlement companies and hope to build a long lasting relationship with them almost like a bank. With RD Legal Funding’s Attorney Post-Settlement Fee Acceleration product, once an attorney gets funded, they can move on to the next case without worrying about a relationship with the funding company. The product is designed specifically for attorneys who are interested in getting what they need to continue their operations. Structured settlement companies have an array of options to keep the attorney in a relationship, many of which the attorney may not want. That attorney’s next fee could be big enough so he won’t need funding after the fee pays out.
In general, attorneys use settlement funding and legal funding companies when they need to bridge a short term cash flow problem. They are also used when they plan on making a big investment in what may be a huge case. For that case, they will need money for expert witnesses, advertising for new cases, personal plans, or a mixture of all three. A structured settlement prolongs an attorney’s ability to process things faster, basically handcuffing him to the situation.
Attorney Fee Acceleration allows lawyers to cash in so they can make things happen now for themselves and their firm. The future can only be changed by what happens in the present. An attorney is only as good as his next case. Reputation, prestige, and ultimately income are tied to how an attorney performs on his next case.
For many lawyers, a structured settlement may not be what is needed to help them get the competitive edge on their colleagues or help them with their cash flow. Structured settlements are for attorneys who are thinking about the future. Attorney Fee Acceleration is for attorneys who are thinking in the present and looking to advance in the moment. That is something most attorneys have in common, which is being in the moment.
When the subject of litigation financing comes up, people usually have a general idea of what it means. But how it actually works and the consequences of using it are more of a mystery. The same goes for winning the lottery. People have an idea of what to expect, but in most cases don’t know what the entire process entails.
Financially speaking, winning the lottery and litigation financing are distant cousins. Both have very similar structures in the way people are paid when they receive the funding. A man goes to the store to pick up some milk for his family. While online waiting to pay, he plays the lottery just for the fun of it. The lottery is basically legal gambling. It was a legal answer to the underground numbers game people played in which the rules to play were very similar. He pays for his milk and with the lottery ticket still in hand goes home.
After falling asleep he wakes up just in time to hear the numbers. He checks his ticket and he has all the numbers. When he goes down to City Hall to collect his award, they give him the option of receiving a lump sum or getting it incrementally. Many don’t know that getting a lottery sum incrementally is basically a structured settlement. As defined, a structured settlement is when a person gets a statutory payment over a certain mandated time period. Once a lottery winner takes the option of getting paid over time, they have just agreed to a structured settlement.
The situation is similar when talking about litigation financing. Litigation financing is when a lawyer or plaintiff accepts funding either before the case starts or after the case settles to use at their own discretion. That could mean for lawyers, paying bills for other cases, which can be expensive. For the plaintiff, that could mean paying their bills to get them over the hump. In either situation, money is being paid over a statutory time period.
Structured settlements are ways to avoid costly trials, and litigation financing is a way to get much needed funds to plaintiffs to either pursue a lawsuit or advance a partial sum of the settlement towards the plaintiff. For some people, litigation financing is like winning the lottery. Given the long time period of a trial, a person can be wiped out very quickly depending on the defendant. An advance from a funding company can come at the right time or unexpectedly if they qualify and change their life-the same way a lottery ticket can be an unexpected surprise and change a person’s life. In either situation, both can really be a tool to help people.