There are times when you cannot, or do not want to do a structured settlement, or are looking for a better alternative to a blocked account.
There may be a variety of reasons why a structured settlement is not a desirable or available alternative to a lump sum settlement, yet you still need the benefits of spendthrift protection, an appropriate rate of return and controlled liquidity. For minors and incompetents, blocked accounts may have been the only other option acceptable to the courts: until now.
These alternative solutions can satisfy the needs of interested parties for controlled liquidity, the potential for higher rates of return while minimizing risk and making the most of tax advantages. Additional advantages to these structured settlement alternatives are that they:
- Do not require the participation of the defendant
- Are simple and easy to implement
- Can be blended to produce a tailored solution
The following solutions are growing alternatives to structured settlements or blocked accounts and may provide a better set of benefits for your specific needs and goals. When it comes to meeting your needs and the requirements of the court, it helps to know your options.
Important News
Until recently, deferred annuities were primarily used for retirement purposes because withdrawals prior to 59 ½ carried a 10% penalty. However, closer examination of IRS Publication 575 shows that when deferred annuities are funded with the proceeds from a personal injury settlement, there is no penalty and they become a tremendous settlement planning tool.*
Deferred Income Annuity (DIA)
This relatively new insurance contract pays a guaranteed amount over a specified period of time with payments beginning after 13 months.
Client objectives – Structured settlement like benefits: tax advantaged deferred income streams on specific dates with a guaranteed rate of return.
Example – A 5 year old has taken receipt of $76,000 from a PI settlement so a structured settlement cannot be done. The family and court wants these funds to be invested prudently and disbursed over 5 years beginning at age 18.
Result – At age 18, the client will receive a guaranteed stream of income for 5 years. This solution provides spendthrift protection, the funds will grow tax deferred and will be received on the dates designed without penalty.
INDEXED ANNUITY (IA)
This type of annuity allows the client to take advantage of tax deferred market growth while protecting and preserving their investment principle and earned interest from market declines.
Client objectives – Protection of principle from investment risk, market-like returns, income deferral, controlled access to settlement funds.
Example – The court and family of a 10 year old wants the option to take a lump sum at age 18 or reinvest some for future needs. The court requires protection against loss of principle and spendthrift protection yet hesitates to restrict access to settlement funds beyond the age of majority.
Result – This client will have full access to the account upon reaching majority and the funds will be protected against loss while taking advantage of market gains. Spendthrift protection is provided yet there is controlled liquidity if accesses to the funds are needed.
FIXED DEFERRED ANNUITY
This type of annuity produces a guaranteed interest rate for a fixed period of time.
Client objectives – Income deferral, conservative guaranteed rate of return.
Example – A 47 year old settlement recipient wants simply to defer income to a future date while conservatively putting the money to work.
Result – The client will receive a tax advantaged rate of return guaranteed for 5 or 7 years. He can then exercise options to liquidate the contract, reinvest the proceeds or take a stream of income.
SETTLEMENT TRUSTS
This specialized trust product can be funded with investments suited to client needs and risk tolerance. It provides flexibility, controlled liquidity, spendthrift protection and cannot be factored.
Client objectives – To fund multiple needs, some known and fixed and some unknown as to the dates and amounts. Controlled liquidity, flexibility and spendthrift protection.
Example – A 24 year old client with a brain injury needs monthly income, may need future surgeries, may want to return to school and start a business.
Result - The client will receive regular income and has controlled access to trust funds when needed to meet unexpected needs or for other permitted withdrawals. This trust allows for blending of products to provide the best of each and give a tailored solution that cannot be sold to a factoring company.
SINGLE PREMIUM IMMEDIATE ANNUITY (SPIA)
This annuity pays out a guaranteed income for a stated period of time beginning within thirteen months.
Client objectives – Spendthrift protection, prudent investment returns and immediate guaranteed income for a specific period of time.
Example – A 36 year old with a history of poor money management skills needs monthly income for the next 25 years until reaching retirement.
Result – A client will receive a guaranteed stream of income without investment risk which will provide a financial safety net for a specified time.
* Additional exceptions for nonqualified annuity contracts. The tax does not apply to distributions that are:
- From a deferred annuity contract under a qualified personal injury settlement.
**Legacy Investment Advisors does not offer tax advice and recommends you contact your own tax advisor regarding your own individual options.
