Structured Settlement versus cash

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skoolpsych
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Joined: Mon Apr 16, 2018 10:45 am
Location: California

Structured Settlement versus cash

Post by skoolpsych » Mon Apr 16, 2018 11:03 am

I lost my son in 2016 in an accident. It was a tragic loss to say the least and we have been battling in a wrongful death lawsuit I filed since his passing. We are preparing for mediation this week and my attorney gave me some information regarding taking a structured settlement which is tax free versus cash. The possible payout could be between 2-3 million dollars. I am new to investing and am seeking advice as to which route to go to ensure the best return. It's a bit difficult to throw myself in the financial part of it, as I am still struggling with my grief and anger. I'm seeking advice to know what others might suggest in this situation. I would like to be able to only work part time and be able to spend more time with my 2 living children. I'm just wondering if I can make more by investing it and taking the lump sum despite it become taxable. I reside in California which of course has some of the highest taxes in the nation. I am 46 years old and have about 10,000 in credit card debt I have a mortgage of $300,000 with a home value of 400,000. I work for the school system and have about 15 years service credit currently. I also have a separate IRA not through the school with about $80,000 saved. I also have 60,000 saved for my daughters college in a 529 plan. Any advice would be graciously appreciated.

bloom2708
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Re: Structured Settlement versus cash

Post by bloom2708 » Mon Apr 16, 2018 3:46 pm

Very sorry for your loss.

A structured settlement would be along the lines of annuity. Payments over X years. You would have to figure out what the fees are and what happens if something happens to the company paying the settlement (monthly I assume?).

All things equal, I would want to take a lump sum and do it myself. Cut the cord and move on. Once you get hard/firm numbers you could run it by this forum again. Then there are calculators to compare the annuity payments to the current value.

Paying off debt, setting aside college money, taking a vacation. A simple 3 fund portfolio with the balance at 70/30 would be a starting point. It doesn't have to be complicated, expensive or stressful. Bogleheads can also assist you.

With any windfall, it is best to do nothing for 6 months. While you formulate a plan. Tell nobody of the settlement. Don't visit with a financial advisor. They will have visions of fees dancing in their heads.

Sorry again for your loss. Hopefully others have good advice. You will find no better place for perspectives and ideas.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

mouses
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Re: Structured Settlement versus cash

Post by mouses » Mon Apr 16, 2018 3:50 pm

I am very sorry.

Are you sure any of this is taxable? That seems odd to me and google seems to say no.

I always trust myself handling money more than I trust some company handing it out over years.

Gill
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Location: Florida

Re: Structured Settlement versus cash

Post by Gill » Mon Apr 16, 2018 3:51 pm

Are you sure you understand the tax issues correctly? Are you saying a lump sum would be taxable whereas a structured settlement would be tax free? I really doubt if that is the case.
Gill

Gill
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Re: Structured Settlement versus cash

Post by Gill » Mon Apr 16, 2018 3:54 pm

mouses wrote:
Mon Apr 16, 2018 3:50 pm
I am very sorry.

Are you sure any of this is taxable? That seems odd to me and google seems to say no.

I always trust myself handling money more than I trust some company handing it out over years.
I believe at least some of it could be taxable if the damages are in lieu of wages. In my post above I questioned the distinction between the two forms of settlement. I don't see where that would make a difference. There is certainly an interest component to the structured settlement.
Gill

Valuethinker
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Re: Structured Settlement versus cash

Post by Valuethinker » Mon Apr 16, 2018 4:35 pm

skoolpsych wrote:
Mon Apr 16, 2018 11:03 am
I lost my son in 2016 in an accident. It was a tragic loss to say the least and we have been battling in a wrongful death lawsuit I filed since his passing. We are preparing for mediation this week and my attorney gave me some information regarding taking a structured settlement which is tax free versus cash. The possible payout could be between 2-3 million dollars. I am new to investing and am seeking advice as to which route to go to ensure the best return. It's a bit difficult to throw myself in the financial part of it, as I am still struggling with my grief and anger. I'm seeking advice to know what others might suggest in this situation. I would like to be able to only work part time and be able to spend more time with my 2 living children. I'm just wondering if I can make more by investing it and taking the lump sum despite it become taxable. I reside in California which of course has some of the highest taxes in the nation. I am 46 years old and have about 10,000 in credit card debt I have a mortgage of $300,000 with a home value of 400,000. I work for the school system and have about 15 years service credit currently. I also have a separate IRA not through the school with about $80,000 saved. I also have 60,000 saved for my daughters college in a 529 plan. Any advice would be graciously appreciated.
This is hard. Been through something similar, but my loss was much less tragic. To outlive one's child is surely the hardest thing for any parent to face.

You need to clarify the tax points with a good CPA. I think that's essential. I do know the name of someone who is an ethical person and skilled, who lives in Los Angeles. Private Message me if you need that name? (you click on my name, it should be a box PM and that will allow you to compose the message, then send it).

I have read, in this case of NY State, of a default on a structured settlement-- received as the result of a child's accident, and 30 or so years later there was a default. Turns out NY had some law that the State would then pick up the tab, but not every state may have such protections.

That worries me. i wouldn't want you to be in that position.

To truly grieve, it is best to cut and run. Take the lump sum, and not have monthly payments continually reminding you. No sum of money is going to make you feel better, it merely empowers you to better live a life which honours your child.

So it would be better just to take the sum. However that may be very disadvantageous to your family - depending on the tax advice that you receive.

Then, to help to honour your son, a good investment plan is necessary. I would suggest something like 50% Vanguard Total Stock Market Fund, 50% Vanguard Total Bond Market fund. That strategy would require periodic rebalancing back to 50/50. Or the Vanguard Balanced Fund (which is 60/40) which would then require no further action on your part. In the long run, such an investment strategy.

Many people here would be able to provide advice.

You could specifically set aside sums for your 2 children-- enough to pay for a good 4 year college degree.

You do not need a complex investment plan, nor expensive advisers, other than a good CPA. If you do go with an Adviser, I would recommend one that uses DFA funds-- DFA has a similar philosophy to Vanguard, but only works via advisers.

http://content.advisorflex.com/ontarget ... vestor.pdf may help you to understand the philosophy. And I can recommend Michael Lewis' book The Undoing Project, about the friendship between 2 very different men-- one a brash Israeli, another a French Holocaust survivor-- and one would go on to win the Nobel Prize in Economics.

As a teacher you have dedicated your career to the service of others. But this money might give you the chance to find some meaning in what seems a thoughtless and cruel act by the Fates - Shakespeare knew of what he was writing.

I can recommend the works of Irvin Yalom, the existentialist psychotherapist. The Atlantic interviewed him recently-- he too is facing his own mortality.

https://www.theatlantic.com/magazine/ar ... ie/537906/

https://en.wikipedia.org/wiki/Existenti ... apy_(book)

https://www.amazon.co.uk/Existential-Ps ... 0465021476

You will almost certainly have heard of or read "Man's Search for Meaning" by Viktor Frankel? He was an inmate, a psychiatrist who survived Auschwitz but lost his family there. I found his existentialist philosophy of "Logotherapy" to be very helpful at a bad time in my life.

skoolpsych
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Re: Structured Settlement versus cash

Post by skoolpsych » Mon Apr 16, 2018 5:03 pm

Thank you all so much for your kind words, compassion, and book recommendations as I navigate this journey of grief. It seems I need to do a bit more research on taking the lump sum versus structured settlement. We are set for mediation this week and my attorney gave me a brochure from Ringler with a chart showing the tax rate of return required to match the return offered by structured settlement. In a nutshell it stated with a structured
settlement rate of return at 4% , in my tax bracket of 33% I would need to earn 5.97% not including state and local taxes. I do believe that no one will care more about my money and than I do of course. I also don't want to get hit with large fees. I believe it's feasible to do better on my own with the lump sum pay out. I never thought I would be in this situation and I would love to do something special in his honor at some point. My thoughts keep returning to a garden at his elementary school, since that was something special he and I always did together. My financial goals are to cut back to part time work for about 3 - 5 years and if possible an early retirement. I would also like to supplement my two daughters college expenses. One of my daughters will also be receiving part of this settlement that could be as much as 650,000. I know many of you are well versed investors and your expertise and insight is greatly appreciated for this newbie.

psteinx
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Re: Structured Settlement versus cash

Post by psteinx » Tue Apr 17, 2018 10:57 am

This is an enormous amount of money, and your post suggests you've got little experience dealing with such sums. Moreover, you'll likely be guiding a daughter also receiving a large sum, with even less experience than you, presumably.

I realize that this may be a difficult, emotional time for you. But the decisions you make now - both in negotiating the terms of the settlement, in setting up/managing it upon receipt, and also, life/career decisions you may make in the aftermath (i.e. semi-retirement) are enormously consequential. No pressure, eh?

I think you should be pro-active about this. You should read widely, and seek REPUTABLE advice as needed. A large pot of money may be like chum in the water for the sharks of the financial world (including, perhaps, the insurance company or whatever it is offering you the structured settlement).

1) You need a good handle on the tax implications facing you. This probably entails a degree of self research, but also quite possibly consulting a good CPA. You've perhaps never had reason to consult a CPA in the past. Now is perhaps the time.

2) Managing a windfall - there is a page on this site somewhere that is, I think, titled "managing a windfall" or something similar. Perhaps start there. There is an enormous amount of information about investment advice on this site, on many other sites, and in many other forms out there (books, articles, TV and radio shows, etc.) Some good advice, but plenty of bad, too. You should probably start by educating yourself. Another option is a consultation with a financial planner who, ideally, charges by the hour. Pay somebody $1600 for 8 hours of financial advice and planning, spread across a few sessions at $150-200/hour, versus paying somebody 1.25% per year on $2M (i.e. $2500 per year), with the latter recurring, year in and year out...

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Dale_G
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Location: Central Florida - on the grown up side of 80

Re: Structured Settlement versus cash

Post by Dale_G » Tue Apr 17, 2018 11:57 am

skoolpsych wrote:
Mon Apr 16, 2018 5:03 pm
In a nutshell it stated with a structured settlement rate of return at 4%
I suggest you return when you know the lump sum and structured settlement details (monthly payment and term). Since 4% is well above market rates, I question whether there is an actual return of 4% embedded in the structured payment.

My condolences.

Dale
Volatility is my friend

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Earl Lemongrab
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Re: Structured Settlement versus cash

Post by Earl Lemongrab » Tue Apr 17, 2018 2:12 pm

Dale_G wrote:
Tue Apr 17, 2018 11:57 am
skoolpsych wrote:
Mon Apr 16, 2018 5:03 pm
In a nutshell it stated with a structured settlement rate of return at 4%
I suggest you return when you know the lump sum and structured settlement details (monthly payment and term). Since 4% is well above market rates, I question whether there is an actual return of 4% embedded in the structured payment.
Most annuities include return of capital. In this case it would be the lump-sum that doesn't get handed over.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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cockersx3
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Re: Structured Settlement versus cash

Post by cockersx3 » Tue Apr 17, 2018 2:53 pm

IANAL, but I did recently go through a similar legal process following a medical malpractice settlement a few years ago.

My understanding is that settlements from wrongful death lawsuits are generally not subject to federal income taxes. There are some exclusions and limitations to this (see https://www.irs.gov/pub/irs-pdf/p4345.pdf for details from the IRS), but your lawyer should be able to write the settlement documents in a way that satisfactorily addresses these exclusions.

Rather than settling for a lump sum, it is possible for the tortfeasor (ie the person responsible for paying the settlement) to instead award you a series of future payments as an alternative - which is what the structured settlement is. The proceeds from the settlement carry the same taxability as the lump-sum settlement would have had - so for a structured settlement arising from a wrongful death lawsuit, this would be nontaxable as well. (See https://www.annuity.org/structured-sett ... ment-laws/ for some discussion on the history of this.) This basically results in the structured settlement return being nontaxable, which (depending on your marginal tax rate) may give you a better “safe” return than if you invested the money yourself in bonds.

In practice, this is handled by the tortfeasor purchasing an annuity contract with some of all of the settlement, which “assigns” responsibility for payment to an annuity company. These are considered low-risk financial instruments, so the actual payout isn’t going to carry much of a return. I was actually surprised to hear about the 4% from the OP - it’s been a few years since my settlement was set up, and while I expected rates would go up as well that 4% seems kinda high.

I would only recommend this if you think there’s a serious concern about squandering the money quickly, or if you have a near-term savings goal for which investing for a better return is not practical. In my case, I used part of my malpractice settlement to fund a college savings account for my kids. Since college for them is only a few years out, I didn’t want to risk this savings in the volatility of the stock market. That said, I also felt completely overwhelmed by the whole process and the mind-boggling amounts of money that were being discussed, and when my attorney recommended doing this I didn’t know any better but to follow that recommendation. In retrospect I think that was a mistake.

If I had to do it over again, I would have just collected the money in cash and invested at my regular asset allocation. The return wasn’t that great, and I don’t feel that the lack of accessibility of that money was worth the tradeoff. The tax benefits are likely not as much as you may think.

Overall, I’d advise the OP to handle the mediation and structured settlement discussion as two separate, independent events. I would negotiate the settlement as a lump sum, and then (if you really are interested in structured settlements) negotiate that bit separately. How the settlement gets paid out is completely irrelevant to the tortfeasor, in my opinion - will cost them about the same either way. (If anything, it may be slightly less expensive for the tortfeasor to go the structured settlement route, since I suspect they - or their insurance company - gets a slice of the settlement return as well.)

Also would recommend that the OP take their time with this windfall, if it occurs. The recommendations for reading the Bogleheads windfall wiki are actually valuable advice. As crazy is it feels now, you will eventually get used to the money and be better able mentally to handle what to do with it. There’s no reason to feel that it needs to be spent or invested in anything right away. I actually didn’t follow this advice (didn't even know what Bogleheads was, actually) and ended up making all sorts of different changes in my investments when I first started out. Nothing terrible or anything, but if I had just taken my time with things I wouldn’t have churned as much.

Also - recommend you grab a copy of the Bogleheads’ Guide to Investing and read it cover-to-cover. This is a very readable, easy-to-understand book about the basics of investing, and it applies even for large windfalls like the one you’re potentially looking at. In fact, there are people on this forum right now - myself included -- who regularly follow the advice in this book for seven-figure portfolios. I read it after I received my settlement and it really helped a lot - best investing book I’ve ever read (and I’ve read several since then.)

I don’t have much advice on the mediation - we settled at my surgeon’s malpractice limits, so there wasn’t much to mediate. Unfortunately, I can say that the money may not address the emotions the OP mentioned. Even after my settlement and the years since my incident occurred, I still feel bitter about the pain that surgeon put my family and I through, and especially about the lifelong medical condition I now have as a result of my surgeon’s negligence. You need to do the right thing by your family, to be sure, but (as the OP probably already knows) nothing will make that sacrifice worth it.

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