Structured settlements can provide financial security and stability to someone who has been injured. But what happens when the recipient passes away?
It is a common misconception among claimants that the guaranteed payments from a structured settlement annuity will automatically transfer to their families or beneficiaries if they pass away. However, this is not the case. Most structured settlement annuities have a guaranteed period, typically around 25 years for a life annuity, during which the payments are guaranteed to the claimant. It is important to keep this in mind while considering structured settlement annuities.
So, if you are asking yourself, ‘What happens to structured settlement payments if I die?’ This is an important consideration when setting up a structured settlement. Proper planning can help ensure your loved ones continue receiving payments even after your death.
What Are Structured Settlements?
A structured settlement is a legal agreement that provides scheduled, tax-free payments to an injured party or claimant who has agreed to resolve a personal injury claim over a number of years, often a lifetime. These payments are funded by a structured settlement annuity purchased by the defendant’s insurance company responsible for handling the claim, as part of a settlement or court judgment.
When an individual purchases an annuity, he enters into a contract with the issuer which is usually a life insurance company. The annuity issuer is then obligated to make periodic payments to the owner based on the terms and conditions outlined in the annuity contract.
Structured settlement provide steady income over time to cover expenses related to an injury, like medical bills or loss of wages. They are commonly used in personal injury cases, workers’ compensation cases, and wrongful death claims.
Planning for the Possibility of Death
When establishing a structured settlement, it’s crucial to consider what should happen to the remaining payments if you pass away prematurely. There are a few key factors that affect this:
- Whether your settlement guarantees a minimum number of periodic payments. If so, your beneficiaries are ensured at least that amount regardless of what happens.
- If your settlement contains a “commutation rider,”. This allows your beneficiary to choose to receive the remaining payments in one lump sum after your death.
- If your settlement is strict “life contingent”. In this case, all payments cease immediately at your death.
To provide for your loved ones, it’s important to understand these settlement terms and carefully choose the options that best meet your needs. Consult with an experienced lawyer when evaluating your choices.
Perhaps the most critical decision is beneficiary designation which is properly naming beneficiaries to inherit your settlement payments. Here are some key options:
Primary Beneficiary – This is the main person you designate to receive any remaining structured settlement funds if you pass away. This is typically 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 trust as the beneficiary of your settlement payments. 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.
No Named Beneficiary
Failing to designate any beneficiary can cause issues in settling your estate. Without clear instructions, your remaining structured settlement payments 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 funds 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 payments in one lump sum following your death. This immediate payout gives them flexibility to pay expenses or reinvest the money.
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 payments. Companies like Fairfield funding 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.
There are some caveats depending on the relationship of the beneficiary:
- Spouse – If your spouse inherits the payments, they remain completely tax-free.
- Other relatives – Payments inherited by a non-spouse beneficiary may be partly taxable depending on factors like the beneficiary’s age.
- Non-relatives – If the beneficiary is not a family member, payments are taxed as ordinary income.
Consult a tax professional to understand the specific tax implications based on your beneficiary’s situation. Proper tax planning is key.
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:
- Review settlement terms regularly – Revisit commutation riders, contingency options, and beneficiaries to keep them current. Life changes may alter your wishes.
- Evaluate selling payments – You can also sell your remaining structured settlement payments while alive if you need funds for retirement or medical care.
- Seek legal and financial advice – An estate planning lawyer and financial advisor can help develop the optimal plan for your settlement inheritance and other assets.
- Know your state laws – Regulations on estate matters like probate and trusts vary by state. Understand your specific state’s rules.
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.
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!
Bara is a seasoned expert in the structured settlement and annuity field, with a successful career in structured settlement factoring. Her experience spans prominent companies such as J.G. Wentworth, Peachtree Settlement Funding, and Liberty Settlement Funding, where she managed substantial marketing campaigns. Constantly updating her knowledge, Bara is committed to providing exceptional experiences and maintaining her position as a trusted professional in the industry.