Structured settlements are a type of financial arrangement that provides regular payments to compensate an individual for damages suffered, often due to personal injury, wrongful death, car accident, or other legal claims.
These payments are designed to provide long-term financial stability and are usually funded through a life insurance company.
While structured settlements can offer a reliable stream of income, it’s important to understand what happens to these structured settlement payments in the event of the recipient’s death, especially in cases involving spinal cord injury or a wrongful death settlement.
What Happens to My Structured Settlement if I Die?
What happens to a structured settlement annuity after the recipient dies depends on the type of structured settlement available: If it’s a life-contingent structured settlement, then the payments stop after death. However, if it’s a Guaranteed structured settlement i.e. for 30 years, then the remaining number of payments will be given to the beneficiary. Here are some more types of structured settlements and what will happen to each one if the recepient dies;
1.Life-contingent structured settlements:
These settlements provide payments only for the duration of the recipient’s life. Upon the recipient’s death, the payments cease, and no further money is disbursed to beneficiaries or the estate.
2. Guaranteed structured settlements:
These settlements offer a guaranteed minimum number of payments, regardless of whether the recipient lives or dies. If the recipient passes away before receiving all guaranteed payments, the remaining payments will be made to the estate or designated beneficiaries.
3. Joint and survivor benefit structured settlements
In this arrangement, payments are made to the primary recipient for their lifetime. Upon the primary recipient’s death, a designated secondary beneficiary, such as a spouse or child, will continue to receive payments for the remainder of their life.
4. Structured settlements with commutation riders:
Some structured settlements include a commutation rider, which allows the beneficiary to receive a discounted lump sum payment instead of ongoing payments in the event of the recipient’s death.
Naming Beneficiaries
Perhaps the most critical decision is the beneficiary designation to inherit your structured settlement payment rights. Here are some main options:
Primary Beneficiary
This is the main person you designate to receive any remaining structured settlement funds if you pass away. Typically, this is a spouse, child, or other close family member.
Secondary Beneficiary
If your primary beneficiary dies before you, your payments would then go to this contingent beneficiary. It provides a backup plan.
Trust
You can name a special needs trust or other trust as the beneficiary of your settlement proceeds. An advantage of a trust is avoiding probate. The trust trustees can then manage the funds for beneficiaries like minor children.
Charities
You have the option to name a non-profit organization or charity as your beneficiary. This can be a way to leave a legacy and make a difference.
When setting up beneficiaries, it’s advisable to consult an estate planning attorney, financial advisor, or structured settlement expert. They can help ensure your beneficiaries are properly designated and updated if needed.
Considerations When Naming Non-resident Or Non-citizen Beneficiaries
Naming beneficiaries who live outside the United States or are not U.S. citizens can complicate the process of verifying and locating them. It’s important to provide detailed information and maintain up-to-date contact records to ensure smooth transfer of funds.
Importance Of Regularly Reviewing And Updating Beneficiary Designations
Life changes, such as marriages, divorces, births, or deaths, can impact your beneficiary designations. It’s crucial to review and update your beneficiaries regularly to ensure that your structured settlement payments are distributed according to your current wishes.
What If There Is No Named Beneficiary In A Structured Settlement When The Recipient Dies?
Failing to designate any beneficiary can cause issues in settling your estate. Without clear instructions, your remaining structured settlement payment rights would likely go through probate and be paid to your estate after you die.
The probate process can be time-consuming, involving legal procedures and fees to settle your estate. Any heirs of your estate would eventually receive payment, but this may take over a year in some cases.
To avoid legal hassles for your loved ones, it’s wise to specifically name beneficiaries to directly inherit your settlement proceeds after your death.
Payout Options for Beneficiaries
When your beneficiary inherits your structured settlement periodic payments, they have choices in how to receive the funds:
Lump Sum Payout
If your settlement has a commutation rider, your beneficiary can choose to take the total remaining annuity future payments in one lump sum following your death. This immediate payout gives them flexibility to pay expenses or reinvest the money.
Continued Payments
Your spouse may elect to continue receiving structured payments on the same payment schedule you had set up. This provides a steady income stream, especially useful if your spouse relies on the monthly funds to cover living expenses.
Sell the Payments
Your beneficiary also has the right to sell part or all of the future settlement payment rights. Companies like Fairfield Funding in New York provide pre-settlement funding and purchase settlement payment streams in exchange for an upfront discounted lump sum. Your beneficiary can use this lump sum any way they choose.
The decision depends on your beneficiary’s financial situation and needs. A financial advisor can help weigh the pros and cons of each option.
Tax Treatment of Inherited Payments
One significant advantage of structured settlements is that payments are income tax-free. This tax-free status remains even when payments are inherited by a beneficiary.
Consult a tax professional to understand the specific tax implications based on your beneficiary’s situation.
What Will An Insurance Company Do If The Recipient Dies?
Insurance companies manage structured settlements and ensure that the funds are distributed to beneficiaries or the estate upon the recipient’s death.
1. Manage the annuity funds: The insurance company is responsible for managing the annuity that funds the structured settlement payments. They invest the money and ensure that payments are made according to the agreed-upon schedule.
2. Verify the beneficiaries: When a structured settlement recipient dies, the insurance company will work to verify the identity and eligibility of the designated beneficiaries. This process may involve requesting documentation, such as death certificates and proof of identity.
3. Disburse funds to beneficiaries or the estate: Once beneficiaries have been verified, the insurance company will begin disbursing the structured settlement payments according to the terms of the settlement agreement and the recipient’s beneficiary designations.
4. Provide Assistance: Many insurance companies have dedicated teams to assist beneficiaries and estate representatives in navigating the process of claiming structured settlement payments after the recipient’s death. They can provide guidance on required documentation, payout options, and tax implications.
Estate Planning Considerations
Carefully planning what happens to your settlement when you pass away takes forethought. Here are some additional estate planning tips regarding structured settlements:
With good planning, your structured settlement can continue providing support for your loved ones even after you’re gone. Leaving clear instructions helps avoid legal issues so your beneficiaries receive payments seamlessly.
Contact Us For Further Assistance!
Structuring an inheritance plan for your settlement that minimizes taxes and legal complications can be complex. Don’t hesitate to seek assistance.
Fairfield funding experts are available to answer any questions you may have about selling your structured settlement payments either now or setting up an inherited payout for beneficiaries later. Our team can provide guidance specific to your situation and state laws!
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