When you win a big case and receive a large settlement or jury award, it’s best to practice wise fiscal management to reap the most benefit from your funds.
Unless you have a background in finance or have managed complex assets for yourself or others in the past, it’s not unusual to be unprepared to deal with large sums of money. Below are some considerations for those expecting or who have already received their settlement or award from the court.
Learn how the tax implications will affect you
Depending upon the nature of your settlement, you could wind up owing quite a bit to Uncle Sam come April 15. For instance, if you sued a former employer for back pay or sought punitive damages in your case, you’ll be on the hook for the federal income taxes that are due on those amounts.
However, an asbestos settlement for a mesothelioma diagnosis or, more broadly, a settlement dealing with most personal injury claims doesn’t carry a tax burden. Often, settlements and judgments include both tax-free and taxable portions. Because it can be difficult for a layperson to understand the complexities of our federal tax code on these types of financial windfalls, it is best to seek advice from a financial advisor to avoid running afoul of the IRS.
Structured settlements versus lump sums — which is better?
Not all plaintiffs will have the option of choosing to accept a lump sum or structured settlement, but those who do need to give serious thought to the decision. There are pros and cons to both, and your situation will dictate the better option to choose.
If your settlement comes from a career-ending workers’ comp lawsuit, a structured settlement can provide a reliable means of supporting yourself. The same is true for personal injury cases that result in long-term disability and a need for ongoing medical and personal care.
Structured settlements are often tendered in wrongful death cases where the breadwinner was killed and his or her spouse and minor children require financial support. If a plaintiff is worried about blowing through a lump sum settlement irresponsibly, selecting the structured settlement can offer some needed financial boundaries.
Hire a financial advisor you trust
Receiving a windfall can fundamentally alter the relationships you have with the people in your life. Friends, relatives and even total strangers may approach you with sad stories of financial woes designed to separate you from your money. Without a gatekeeper in charge who can filter these requests for support and turn them down, you could wind up broke and needing assistance yourself in only a couple of years.
There is nothing wrong with taking care of your loved ones responsibly with some of the proceeds from your settlement or jury award. A financial advisor can set up trusts for the education of children or grandchildren, or provide for them in other ways, so that you won’t have to repeatedly deal with requests for loans or investment capital.
Eliminate the burden of debt
According to statistics from the Pew Charitable Trust, 80 percent of American adults are indebted to creditors. Shedding financial burdens is quite liberating, but it’s important to have a debt reduction plan in place.
- Your first goal should be to pay off any debts that carry high interest rates, e.g., credit cards and some loans.
- Then, check and see whether you have any outstanding medical bills that need to be paid and wipe those out.
- Calculate how much you will need to live comfortably for a month, multiply that by six, and deposit that amount in an interest-bearing account that carries no penalties for withdrawal. Now you have an emergency fund to tap if necessary.
- If you owe a mortgage on your home or need to pay off some auto loans, tackle those next.
- Plan for a comfortable retirement. Your golden years should be the time of your life when you no longer have to worry about money woes. Make sure that you wisely invest enough to cover your future needs.
- Draw up an estate plan. Depending upon the size of and manner in which your windfall is structured, your heirs may continue to reap the rewards after you’re gone. Your financial advisor can assist you with this as well.
Buy property or remodel your existing home
Those who have never been homeowners may find taking that leap to be daunting, but homeownership has many benefits. If you already own your property but it needs some refurbishments, now is the time to turn your home into your castle. You don’t have to make ostentatious improvements, but if you always wanted that man cave, in-ground swimming pool or spa bathroom, this is your chance to get it exactly as you like it.
Make charitable donations
One way to lighten your tax burden is by donating to qualified charities. If you have a special cause that’s dear to your heart (animal welfare, Alzheimer’s research, funding a scholarship, etc.), funnel some money in that direction. Establishing your own charitable trust is another possibility for you and your financial advisor to explore.
Enjoy your life
You are in the enviable position of no longer having to worry about making ends meet. This is what most people strive for their entire lives, so once you have covered all the basics, have fun with your money. Take the cruise or European vacation, buy the RV and tour North America, invest in collectibles that interest you or buy a few valuable pieces of jewelry or a hot sports car you’ve always dreamed of owning.
Money can indeed change people, but it does not have to be for the worst. By becoming a responsible steward of your finances, you will have the peace of mind of knowing that your responsibilities have all been met.
If you handle your settlement correctly, you should be able to enjoy the proceeds of your settlements for many years to come.