What is a “Structured” Settlement?

What it Is – How it Works?

[By Staff Reporters]

A structured settlement (sometimes called a “periodic payment settlement”) is a claim settlement under which some of the proceeds will be payable in deferred installments in lieu of immediate cash.

Meaning

What does that mean to you? Settlements paid in the form of a single lump sum, especially in catastrophic injury cases, place claimants, and their families, in the position of having to manage money which may be intended to provide for a lifetime of medical and income needs.

Most people are not experienced in handling large sums of money and as a result, the money is often either spent too quickly or invested leaving little or nothing to cover the future needs of the seriously injured person.

History

Structured settlements were developed in order to create a more stable financial footing for claimants.  In 1982, the use of structured settlements was encouraged by Congress and special tax code was written. Instead of receiving a single lump sum, guaranteed payments can be made to you over time, through the purchase of an annuity, to better meet your financial needs.

IRS

The Internal Revenue Service determined that since the money you receive through a structured settlement is compensation for an injury, you will never pay taxes on any of the payments (principal or interest). There are two primary articles of legislation governing the tax treatment of structured settlements.

For more information regarding tax treatment of structured settlements, please visit the following pages: IRC 104 (a)(2) and IRC 130.  For other legislative actions and tax codes related to structured settlements, please click on one of the following links:  The Periodic Payment Settlement Act of 1982, 468B, 72(u) or 5891.

Schedules

Payments from a structured settlement can be scheduled for any length of time, even for your lifetime. Payment designs can include bi-weekly, monthly, quarterly or annual payments as well as future lump sums. Ongoing payments can be in level amounts or can keep up with inflation by using a Cost of Living Adjustment (“COLA”). Since you work with the Structured Settlement Consultant to determine the payment design, you can remain confident that your future financial needs are addressed.

If a single lump sum payment is taken as compensation for an injury, it is tax-free but any additional income (called “Interest Income”) you receive from investing the lump sum will be taxable. The bottom line is that structured settlements provide you with a unique opportunity to take advantage of an investment without risk OR tax consequences.

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Assessment

At the core of the federal tax code’s explicit recognition of structured settlements is the concept of” constructive receipt”.

For a concise explanation about Congress’ intent and how the Internal Revenue Service has traditionally interpreted the application of constructive receipt, click here for the National Structured Settlement Trade Association (NSSTA) brochure, Structured Settlements: Explaining Constructive Receipt.

To download the NSSTA brochure, Structured Settlements and Qualified Assignments: How Federal Tax Rules Benefit all Parties in a Claim, click here.

Conclusion

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REQUEST: A Second Opinion

By Ann Miller RN MHA

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Telephonic or electronic advice for medical professionals that is:

  • Objective, affordable, medically focused and personalized
  • Rendered by a pre-screened financial consultant or medical management advisor
  • Offered on a pay-as-you-go basis, by phone or secure e-mail transmission

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What is Knightian Uncertainty in Economics?

About Frank Knight PhD

[By staff reporters]

In economics, Knightian uncertainty is a lack of any quantifiable knowledge about some possible occurrence, as opposed to the presence of quantifiable risk (e.g., that in statistical noise or a parameter’s confidence interval). The concept acknowledges some fundamental degree of ignorance, a limit to knowledge, and an essential unpredictability of future events.

Knightian uncertainty is named after University of Chicago economist Frank Knight (1885–1972), who distinguished risk and uncertainty in his work Risk, Uncertainty, and Profit:[1]

“Uncertainty must be taken in a sense radically distinct from the familiar notion of Risk, from which it has never been properly separated…. The essential fact is that ‘risk’ means in some cases a quantity susceptible of measurement, while at other times it is something distinctly not of this character; and there are far-reaching and crucial differences in the bearings of the phenomena depending on which of the two is really present and operating…. It will appear that a measurable uncertainty, or ‘risk’ proper, as we shall use the term, is so far different from an unmeasurable one that it is not in effect an uncertainty at all.”

MORE: RD

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Assessment: Your thoughts are appreciated.

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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DAILY UPDATE: New IRS 1099-K Reporting Rule

By Staff Reporters

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IRS

The IRS just noted that there are no changes made to the taxability of income but only in the reporting rules for Form 1099-K. Taxpayers are still required to report all income on their tax return unless it is excluded by law. This is whether they receive a Form 1099-NEC, Nonemployee Compensation; Form 1099-K; or any other information return.

Previously businesses would generally receive a 1099-K tax form only when their gross payments exceeded $20,000 for the year and the business conducted at least 200 transactions.

According to the new 1099-K rule, the gross payments threshold has been lowered to just over $600 for the year with the transactions threshold no longer applying. Now a single transaction exceeding $600 can trigger a 1099-K. This includes transactions through credit cards, debit cards, banks, PayPal, Uber, Lyft, and other third-party payment settlement entities.

The 1099-K form includes information about the payment processor and the company receiving payments, and a monthly breakdown of total payments, among other information.

According to the IRS, the lower information reporting threshold and the summary of income on Form 1099-K will make it easier for taxpayers to track the amounts received.

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MDs Must Know When it’s OK to be Average

Should Active Investors Expect to Lose?

Rick Kahler MS CFP

By Rick Kahler MSFS CFP®

When it comes to investing, it’s a losing proposition to try and be anything better than average. Even if you are a doctor.

I was recently reminded of this important investing precept when I attended a presentation by Ken French, a noted professor of finance at Dartmouth College.

Dr. French Speaks

“The theory is institutions are smarter than ‘dumb’ individual and can add value,”

said French.

“That is simply not true.”

His research has found that institutions are no better at trying to beat the market than individual investors. When you pay someone to do better than the market, French told us,

“You should expect to lose. It’s really hard to identify the great managers. You are wasting your time and money trying to beat the market.”

If there’s no point in trying to beat the market through “active” investing, what is the best way to invest? Through “passive” investing, that accepts average market returns. You need to reduce expenses, diversify your portfolio into index funds of various asset classes, minimize taxes, and exhibit discipline.

  1. Reduce expenses. Passive investing generally costs around 0.20% a year in fees, compared to around 1.35% for active investing.
  2. Diversify into index funds. Simply select an index in the asset classes you want to hold. The inherent strategy of the index will determine when to buy and sell. For example, the inherent strategy of the S&P 500 is to own a fraction of the largest 500 companies in the US. Every June, those companies that fell out of the top 500 largest are sold and those that made it into the top 500 are purchased.
  3. Minimize taxes. The limited buying and selling of passive investing tends to reduce investment-related taxes.
  4. Exhibit discipline. Relying on the inherent strategy of an index fund puts some distance between you and buying/selling decisions, making it easier to maintain your investment discipline during market fluctuations.

You may be thinking that, if “passive” is the way to go, you might as well make things even simpler. Why not just put your retirement money in the bank and forget it? While you can certainly do that, the results may be disastrous. If you want more than just Social Security for your retirement, you need your money to grow.

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stock-exchange

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Considerations

In 1913, nine cents bought a quart of milk. In 1963, the same nine cents bought a small glass of milk. In 2015, nine cents bought seven tablespoons of milk. Clearly, putting money under the mattress doesn’t work for the long term. The culprit of the declining purchasing power of that nine cents is inflation. The moral of this story is to make sure your money grows at least as fast as inflation. That requires investing it.

Example:

It would require $13 today to equal the purchasing power that $1 provided in 1926. Had you put one dollar in the bank in 1926, you would have $21 today. Having invested the dollar in long-term bonds would give you $132. However, invested in the S&P 500 Index (stocks), you would have $5,386.

A Mix

Does that mean you should invest all of your retirement assets in stocks? If you are one year old, probably so. If you are 60 years old, probably not. For most of us, a mixture of index funds that include many asset classes—such as global stocks, global bonds, global real estate, and commodities—is the best strategy.

Assessment

Research supports the value of diversified passive investing as long-term strategy. According to a study by Dalbar, Inc., average passive investors earn 3% to 4% more annually than average active investors. Over time, that makes a huge difference.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™   Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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On Elon Musk’s Twitter Purchase

A Guest Column by Ryan Bernier

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What the Skeptics and Naysayers Miss about Elon Musk’s Twitter Purchase

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EDITOR’S NOTE: I first Met Richard Helppie when I was in business school. He was the CEO of Superior Consultant at the time and very gracious to me with with his advice. Today he is a respected philanthropist and publisher of The Common Bridge. -David E. Marcinko

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