It's My Money and I Want It Now – But Should You Do It?

March 16, 2011  |  John T. Buchman

There have been many t.v. ads from J. G. Wentworth and others urging people with structured settlements to convert them to cash now. These ads feature comments like, “It’s my money and I want it now.” For some it may be a good decision, particularly if they are in financial distress without any other options. A structured settlement is one that pays an injured person over a period of time rather than a one-time payment upon conclusion of a settlement.
I have represented many people who have suffered injuries from car crashes in the Coon Rapids/Blaine area as well as in greater Anoka County, who have opted to explore a structured settlement. I also represented a client who suffered a brain injury at a construction site accident in Blaine, for which it worked out very well to purchase a structured settlement. Such settlements are common in cases involving injuries to minors as well as people with serious or catastrophic injuries. The advantage of these was that they can provide prudent financial counseling for young people, who may not otherwise make the best decisions about having a significant sum of money when they turn 18, or for those whose injuries have impacted their ability to earn a living and this becomes an income substitute.
One of the main advantages of structured settlements is that they provide tax-free interest. Until the recent collapse of the financial markets, the interest rate return on structured settlements, particularly when factoring in the tax-free element, was desirable.
However, if you have a structured settlement and are considering cashing it out, be careful to analyze all of the facts and issues before you decide. You should seek the advice of a tax professional and, as the adage goes, “buyer beware.” It is hard to put a fair value on a structured settlement since the value of the payments over time has to be reduced to present value. For example, receiving $10,000 five years from now is worth less than $10,000 today. However, many people are not skilled in figuring out the true present day value of their future payments. Thus, they are at a disadvantage when dealing with companies soliciting their business since it is hard to figure out exactly how much it is worth. Such companies often offer a significant reduction from the present value, which is how they make money. CPAs and other investment advisers can often provide a ballpark present value assessment of such payments. It would be wise to seek such advice before entering into such a deal.
Finally, you should talk to a tax professional before agreeing to such an offer. One of the principle advantages of a structured settlement was that the interest you earn is tax free. However, it may well be that if a person converts that to cash today, not only will they receive less than the present value, they will lose more money again because it is taxable. Unless a person really has no other option, it would be wise to proceed carefully and talk the right people before making a decision.