July 29, 2021

The Analysis of Structured and Lump Sum Payouts – What’s Right for Your Client?

In Disability Advisory Services

Brian HoltRoger Reynolds
Contributions from: Brian Holt, Roger Reynolds


For personal injury attorneys, long hours spent in depositions, research, trial preparation and communications with defense counsel all culminate into successful mediation, or in some instances, a trial verdict. A person’s pain and suffering, future earning potential, and lost wages will be calculated, deliberated, debated, and tallied, representing the financial justice to the victim for whatever traumatic injury or wrongful death was endured.  Now in the last stages of this often grueling process, final decisions need to be made very  quickly that will influence the trajectory of the client’s new reality.

Many decisions during this final stage are critical and irrevocable; they can also be overwhelming and cumbersome to process when focused on the overall welfare of a client for the long-term. The question becomes, “What does it mean to take a lump sum settlement, use a structured settlement, or some combination? What will be best for my client?”  While each traumatic injury case is unique, there are underlying attributes to consider when looking at the strategy options available. These are the pros and cons that should be weighed each time a financial strategy decision is considered. Let’s take a look at structured settlements and lump sum payouts, and the considerations which should be reviewed when faced with this complex process.


A structured settlement is an insurance company’s annuity-based product, often custom designed to meet the unique cash flow needs of a beneficiary. During the “crafting” stage, there are countless options to address even the most complex situations.  When properly executed, they may distribute tax-free income to a beneficiary (generally the plaintiff in a personal injury or wrongful death suit) on a periodic basis, typically monthly. Structures work well in providing a stable, predictable, and potentially inflation-adjusted income flow to your client.  This can help meet the current, known income needs of the beneficiary.

Once the annuity payment structure is locked in, there is essentially no flexibility to modify the terms or gain access to these funds outside of the scheduled payments.  This could become complicated if there are additional needs or unexpected financial demands that can arise – additional health or quality-of-life expenses not factored into the monthly structured annuity.  This can create a delay in servicing needs, or cash flow issues that were unforeseen when the initial strategy was crafted.  There are companies who purchase structured payments from clients and provide a one-time payout in return for the contract, but these buyout offers are disadvantageous and usually pay pennies on the dollar, significantly reducing the overall value of the settlement.

While unanticipated spending may not be covered, structured settlements do have a built-in protective nature that works well for someone who has challenges controlling their spending, or to address concerns over friends and family who might also be excited about a settlement check they are not entitled to. Because the dollars are paid out periodically, the client is limited to how much they have available to spend at any particular time. The principal is locked up and untouchable. For clients that have a hard time saying no to people or may be unduly influenced by those that might not have the clients’ best interests at heart, structured settlements limit the amount of accessible funds, and protect the client from spending too much too soon. The downside, again, is that there is no flexibility or liquidity for the beneficiary once the settlement is executed.

Annuity settlements may also have favorable tax implications. As stated above, the regular settlement payments are typically not subject to state or federal taxes. In order to obtain the most favorable income tax treatment, it is important to note in many situations neither the attorney nor the client take constructive receipt of any settlement funds prior to them being placed in a structured settlement contract.  The funds should go directly from the defense side to the insurance company sponsoring the structure.  The payment amount, timing of payments and rate of return is locked in at the time the structured settlement is executed, so careful due diligence is critical at that stage.  Structures can be used in conjunction with Special Needs Trusts for those clients who are utilizing a trust format, but again, care is needed during set up to ensure the structured payouts do not put the plaintiff’s eligibility for public benefits in jeopardy.


A lump sum payout, on the other hand, is just what it sounds like—cash, paid in full to your client at the end of settlement negotiations or after a successful final verdict.  Your client has complete flexibility and the ability to access the funds for known and future unexpected needs that might transpire.  The funds can be held within the framework of a Special Needs Trust, of which the trust parameters may dictate some stipulated access to funds or owned outright by the client.

Many attorneys and clients can feel overwhelmed with the idea of a large sum of cash sitting in a trust. However, engaging a trusted investment advisor during this stage of the negotiations often helps allay fears and brings critical expertise to the decision-making process.  Developing a strategic investment plan, with the holistic needs of a client in mind, is the first step in the process of prudent wealth management. Creating a broadly diversified portfolio (which can include structure monthly payments) can be designed to assist in meeting current financial obligations, provide liquidity for potential unknown future expenses, preserve assets and hopefully grow the principal balance.

There is a vast array of investment strategies available to meet the customized needs of most investors. With the guidance of a trusted financial advisor, these strategies can be matched with a client’s financial objectives, tailored to provide potential liquidity, tax-exempt income, combat inflation and/or striving to grow the principle to meet long-term requirements.  The most critical component to a lump sum portfolio’s construction is typically the asset allocation of the money -the percentage of the principal invested in key sectors, such as stocks, tax-exempt bonds, annuities, alternatives and real estate. As with all investing, there is exposure to market volatility (i.e., risk). Careful consideration should be taken to preserve and protect assets for a client’s future objectives, balancing growth of portfolio assets and optimized tax structures.

Lump sum settlements offer your clients unrestricted access to their money.  This can be advantageous when unexpected medical costs and other needs arise, but it can also be detrimental if your client has challenges controlling their spending or has extended family and friends in the wings waiting to part your client from their settlement funds.  Here, too, a trusted financial advisor can provide guidance and warn against unnecessary and reckless spending or gifting.  Even with those protections in place, the client retains complete control of their assets unless they are placed within the confines of a trust (special needs or otherwise) with a strong trustee.

Our experience has found most client situations benefit from a combination of a lump sum portfolio and structured annuity. However, we also recognize each client’s situation is unique.  Developing a team approach (client, attorney, financial advisor, tax advisor, structured annuity provider) can help in each unique case, assisting both attorneys and their clients to determine the best course of financial action, helping the beneficiary move towards a better, financially secure future.

About the Authors: Coldstream’s Disability Advisory Services (DAS) combines experienced wealth management and disability advocacy with a trustworthy handoff to deliver better outcomes for clients and their attorneys. We assist with lump sum and structure settlement analysis along with trusts and investment expertise.

Disclaimer: All financial numbers are given as guidance based on general historical performance of stock market performance and are meant to be illustrative only.   Historical performance is not a guarantee of future performance.

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