FAQ's

FREQUENTLYASKED QUESTIONS

Deciding how to handle settlement proceeds can be challenging, and Sage is ready to help. Here are the answers to some common questions we receive.

 

  • Structured Settlements

    • How does a structured settlement work?

      Instead of receiving settlement proceeds in a cash lump sum, a structured settlement allows the claimant to receive the payments over time in a series of guaranteed periodic payments. The claimant chooses the payment schedule and the structured settlement carrier. Once the settlement agreement is finalized, the defendant or insurer pays the settlement funds to a third-party assignment company, which assumes liability. The assignment company purchases an annuity from the structured settlement carrier. The carrier then makes a series of periodic payments based on a previously agreed-upon timeline and amount. To take advantage of structured settlements or attorney fee deferrals, the final settlement agreement must include specific language.

      1 Guarantees are subject to the claims-paying abilities of the issuing insurance company.

      Not sure what language to include in the settlement agreement? Read this.

    • What are the benefits of choosing a structured settlement vs. a cash lump sum?

      Depending on the type of case, structured settlement payments are income tax-free or income tax-deferred, including any growth on the funds. Conversely, if a cash lump sum settlement is invested in a financial vehicle other than a structured settlement, then any growth on the investment will most likely be taxable. Structured settlements provide a range of additional benefits, including guaranteed1 payments, a competitive, a guaranteed rate of return, and protection against spending the settlement money too quickly.

      1 Guarantees are subject to the claims-paying abilities of the issuing insurance company.

      Read more about structured settlement benefits here.

    • How stable are the insurance companies that provide structured settlements?
      Most of the companies that issue structured settlement annuities have withstood the most dramatic financial events in United States history, including The Great Depression, the 2008 financial crisis, and most recently, the COVID-19 pandemic. Additionally, both state and federal agencies regulate insurance companies. Sage only offers structured settlement annuities through highly rated, well-capitalized life insurance companies.
    • What if interest rates are low- do structured settlements still make sense?

      Unlike other financial vehicles, structured settlements do not have ongoing costs or overhead expenses. When combined with the guaranteed interest rate (determined at lock-in), structured settlements often provide comparable returns. More importantly, structured settlements offer a safety net that few other financial vehicles can provide. Even if the market is down, an annuitant’s structured settlement payments remain constant. Claimants who are interested in higher potential returns may want to consider incorporating market-based structured settlements into their overall settlement plan.

      Want to learn more about why structured settlements are a smart financial safety net? Read this.

    • Who are good candidates for structured settlements?

      Structured settlements are a flexible option that can benefit claimants of all ages, from minors to retirement-age adults. Contingency fee attorneys are also eligible to leverage the tax benefits of deferred fees via a structured settlement. Structured settlements can also serve as a cost-effective funding option for special needs trusts and Medicare Set-Asides.

      Read more about attorney fee deferral benefits and options here.

    • What types of cases can benefit from structured settlements?

      Structured settlements are an excellent tool for resolving a variety of settlements. Settlement proceeds from personal injury, wrongful death, and workers’ compensation cases are eligible for income-tax-free structured settlements. Many other types of non-injury settlements (e.g., divorce, sexual harassment, discrimination, and environmental claims) are eligible for income tax-deferred structured settlements.

      Don’t be fooled by structured settlement myths! Read this first.

    • Can I choose a structured settlement after my settlement agreement is finalized?

      Unfortunately, no. The decision to utilize a structured settlement must be determined before finalizing the settlement. Plaintiff attorneys who want to defer all or a portion of their contingency fees must also make that decision before the settlement is finalized. The final settlement agreement must include all appropriate language allowing the claimant and the plaintiff's attorney to reap the full tax benefits of the settlement.

      Is your settlement agreement already finalized? Learn more about your options here.

    • Can I sell my structured settlement later if I want cash?
      Structured settlements are designed to preserve funds for the long term. Companies that purchase structured settlements from annuitants—factoring companies—often pay the annuitant pennies on the dollar for their structured settlement policies. Additionally, many states require court approval to sell structured settlement policies. Claimants who are interested in structured settlements should work with a structured settlement consultant to integrate a structured settlement into a comprehensive settlement plan that takes future needs into account, making the desire to sell in the future far less likely.
    • What happens to structured settlement payments if the claimant dies?
      If the claimant passes away prematurely, any remaining guaranteed structured settlement payments will continue to be paid to the designated beneficiary. If a specific beneficiary is not designated, the payments will be made to the claimant’s estate.
    • Why wouldn’t I want to take a lump sum cash settlement and invest it on my own?

      One of the key benefits of structured settlements is the tax treatment. Depending on the type of case, structured settlements are either income tax-free or income tax-deferred, including growth. Even if the cash lump sum from a settlement is income tax-free, if any portion of those funds are placed in a traditional investment, the growth of the funds may be taxable.

      Learn more about personally investing settlement proceeds vs. working with a settlement consultant here.

    • What is the best time to start working with a settlement consultant?

      The earlier, the better. By engaging a settlement consultant as soon as a case is opened, the consultant has time to learn the claimant’s individual needs and goals, review all possible settlement options, and help mitigate complications that could delay the final settlement, including outstanding liens, potential loss of needs-based government benefits, and probate issues.

      Working with a settlement consultant can help law firms streamline their caseloads. Learn more here.

    • How is a structured settlement consultant paid?

      Neither the claimant nor the claimant’s attorney pays the structured settlement consultant directly. Instead, the structured settlement consultant receives a commission from the insurance company that issues the structured settlement policy. Structured settlement consultants are not captive agents of any particular structured settlement provider, which means that they will only consider the best interests of the claimant when recommending products and services.

      Not sure what a settlement consultant does? Read more here.

  • Attorney Fee Deferrals

    • How does an attorney fee deferral work?
      The defendant, insurer, or Qualified Settlement Fund (QSF) directs the attorney’s fees to an assignment company. The assignment company then uses the funds to purchase a structured settlement annuity or market-based structured settlement that provides the attorney with payments based on a pre-determined schedule. The attorney pays taxes only on the income received within a given tax year.
    • If my client decides not to structure their settlement, can I still defer my fees?
      Yes. Your client’s decision regarding their settlement funds does not affect your fee deferral options. However, if you want to defer your fees, you must include the appropriate language in the settlement agreement.
    • Can the payments be made to the law firm, or do they have to be made to an individual attorney?
      Attorney fee deferrals are flexible in design, so you can choose to have the payments made to your law firm (to stabilize payroll and overhead expenses, for example), or you can choose to have the payments made directly to you. Some insurance companies also allow you to split
    • Can the payments be made to the law firm, or do they have to be made to an individual attorney?
      Attorney fee deferrals are flexible in design, so you can choose to have the payments made to your law firm (to stabilize payroll and overhead expenses, for example), or you can choose to have the payments made directly to you. Some insurance companies also allow you to split the payment streams between individual attorneys and the law firm.
    • Are there fees associated with structured settlement annuities for attorney fees?
      Most traditional investment options are laden with fees. Attorney fee structured settlement annuities do not have ongoing administrative or maintenance costs, so more money stays in the attorney’s pocket. There are several alternative fee deferral programs in the marketplace that our planners can offer to attorneys; however, those products typically have modest upfront or ongoing fees within their deferral programs.
    • What are the tax consequences?
      Attorney fee deferral payments are considered taxable income during the year the payments are received; this holds true regardless of the payee. The benefit is pre-tax growth. If the income stream is paid to the law firm, then the payments are considered taxable income for the firm. If the payments are made directly to the attorney, the attorney will have to report the payments as taxable income. The tax-favored treatment may help lower your tax obligation by reducing your taxable income and potentially allowing you to remain in a lower tax bracket.
    • Is there any written guidance on how the IRS views structured settlement annuities for attorney fees?
      Much like a structured settlement annuity for injured claimants, the tax treatment hinges on constructive receipt (or rather, the lack thereof). In Childs v. Commissioner, 103 T.C. 634 (1994), aff’d, 89 F. 3d 856 (Table)(11th Cir. 1996), the Tax Court ruled that because the attorney’s fees were transferred from the defendant directly to the assignment company, the attorney did not have constructive receipt of the fees. Therefore, the fees did not yet count as taxable income.
    • Do I have to begin receiving payments immediately, or can I elect to start receiving them in the future?
      You are in control over the timing and the size of your payments. You can schedule payments to be received monthly, semi-annually, annually, or in a series of future lump sums. You can elect to have your payments start immediately or defer them to the future (note: start date restrictions may vary depending on the issuing insurance company). Any decisions regarding the payment schedule must be made before finalizing the settlement.
    • Can I structure fees that I’ve already received?
      If you’ve already received your fees, you’ve missed the opportunity to establish a fee deferral. The option to defer fees must be included in the settlement agreement.
    • What sort of return can I expect?
      Structured settlement annuities typically provide a modest return. The rate is locked in and guaranteed—even if the market takes a dip, the deferral payments remain constant. If you are looking for a higher potential rate of return, a market-based structured settlement might be a better fit for you. You can also combine options, depending on your financial goals.
    • Are there restrictions on how I can use the money?
      No. Once the payments are received, you can use the money as you wish. For instance, you could set up annual payments to be made during the years your children are in college. The funds must be spent on IRS-qualified educational expenses if you use a traditional college investment vehicle, such as a 529 plan. Alternatively, if you defer your fees, you could choose to spend some towards college while reserving the remainder of the funds for other goals. You may also choose to use deferred fees to fund your retirement plan. While the IRS limits traditional retirement plan contributions, there are no limits to attorney fee deferrals.
    • Are fixed annuities the only option for deferred fees?
      Still looking for more information? Review a list of our services, visit our blog, or contact the Sage team today.

  • Government Benefits

    • Will a settlement affect Medicaid or Supplemental Security Income (SSI) benefits?

      Certain government benefits including Medicaid (Medi-Cal), Supplemental Security Income (SSI), Food Stamps (SNAP/CalFresh), Temporary Assistance for Needy Families (TANF), Subsidized Housing (Section 8), and Children’s Health Insurance Program (CHIP) are needs-based. In other words, the government uses income and/or asset tests to determine eligibility. In many states, asset limits are $2000 ($3000 if married). If those asset limits are exceeded (with a settlement payout, for instance), then the beneficiary will lose their benefits eligibility.

      Want to learn more about needs-based benefits? Read this article.

    • Will a settlement affect my Medicare or Social Security Disability (SSDI) benefits?

      Unlike Medicaid and SSI, Medicare and SSDI are not needs-based benefits, so settlement proceeds will not count against eligibility. Instead, Medicare and SSDI are considered entitlement benefits, meaning that beneficiaries are entitled to receive them because of money those beneficiaries already paid into the system via payroll taxes. Social Security retirement benefits are also included in this category.

      However, Medicare-eligible claimants may need to consider placing a portion of their settlement proceeds in a Medicare Set-Aside if their settlement includes funds for future medical costs. If Medicare pays for medical costs that should have been paid for with settlement funds, then the beneficiary may lose Medicare eligibility.

      Think you might need a Medicare Set-Aside? Learn how to save money on funding it.

    • How can I preserve my Medicaid and SSI if I get a settlement?

      Claimants with disabilities who are receiving needs-based benefits should consider placing their settlement funds in a special needs trust. Placing settlement proceeds into a Special Needs Trust allows you to access your settlement without jeopardizing your eligibility for needs-based government benefits (e.g., Medicaid, SSI, etc.)

      Some states allow claimants to “spend down” the settlement proceeds to maintain needs-based benefit eligibility.

      Another potential option is an ABLE account, which acts as a savings account with tax-free growth and allows you to retain access to your needs-based benefits. To be eligible, the individual must have had the onset of the disability prior to age 26. Individuals who are already receiving Supplemental Security Income (SSI) and/or Social Security Disability Income (SSDI) and who meet the age requirement are automatically eligible for an ABLE account. Individuals with disabilities who are not receiving SSI/SSDI but who meet the age requirement may still be eligible with a doctor’s written certification confirming the disability.

      Want to learn more about Special Needs Trusts, Spend-Downs, and ABLE Accounts? Read this article.

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