Structured Settlement or Lump Sum? How to Choose in New York
Once a case settles, one decision is left: take the money at once, or take it as a stream of payments over years. A lump sum gives you control. A structured settlement gives you a guaranteed income whose growth is not taxed. Neither is the right answer generally — the answer depends on what the money has to do, and for how long.
This is a decision most people meet exactly once, near the end of a long case, with a signature deadline. It is worth understanding before you get there.
What a structured settlement actually is
It is not the defendant sending you a check every month. The defendant's insurer pays a single amount to a life insurance company, which issues an annuity that pays you on an agreed schedule. The obligation is then the annuity issuer's, and the schedule is fixed at the outset.
The schedule can be shaped around almost anything: level monthly payments for life, payments that start when a child finishes school, a larger payment every fifth year to replace a vehicle, a deferred stream that begins at retirement. It is designed once. That flexibility exists only before you sign.
The tax difference, which is the part most people miss
Compensation for a physical injury is generally not taxable income under 26 U.S.C. § 104(a)(2). That is true of a lump sum and of a structured settlement alike.
The difference is what happens next. Take a lump sum and invest it, and the earnings on that money are ordinary taxable investment income. Take a properly qualified structured settlement under 26 U.S.C. § 130, and the entire periodic payment — the original compensation and the growth built into the annuity — stays outside gross income.
Over twenty or thirty years that is not a rounding error. It is also the single reason a structure can beat a lump sum on paper even when the headline number looks smaller.
Two caveats. Interest and punitive damages are taxable whichever route you take. And nothing here is tax advice — the numbers turn on your own situation, and a structure is worth pricing with an accountant before you commit to it.
What each one is genuinely good at
A lump sum is the right answer when the money has a job to do now: paying off medical debt, clearing a mortgage, buying an accessible vehicle, funding a business, or replacing income for a defined and short period. It is also the right answer if you would rather manage the money yourself and accept the risk that comes with that.
A structure is the right answer when the injury has changed the shape of the next thirty years — a spinal cord injury, a serious brain injury, a claim on behalf of a child — and the risk that matters is not investment risk but the risk of the money being gone in five years. It is also useful where a beneficiary should not be handed a large sum at once, for reasons that have nothing to do with judgment: cognitive impairment, addiction, or simple pressure from relatives.
Most sizeable settlements end up split. A lump sum large enough to clear the immediate obligations, and a structure for the rest.
Three New York rules that constrain the choice
Settlements for a child require a judge. Under CPLR § 1207 an infant's settlement has to be approved by the court, and the court decides how the money is held. It is very common for a child's recovery to be structured to pay out at eighteen, or in stages afterwards, rather than sitting in an account. Parents sometimes expect to receive the funds directly. They will not.
Selling future payments is not a private transaction. New York's Structured Settlement Protection Act, General Obligations Law § 5-1706, requires court approval before you can transfer structured settlement payment rights to one of the companies that advertise cash for them. A judge must find the transfer is in your best interest, taking account of anyone who depends on you, and you must have been advised in writing to get independent professional advice first. This exists because the discount rates on those deals are severe. Treat a structure as illiquid, because it substantially is.
Means-tested benefits can be lost. If you receive Medicaid or SSI, a lump sum can disqualify you overnight, and the payments from a structure can count as income in the month received. The usual answer is a special needs trust, which has to be set up as part of the settlement rather than afterwards. Raise it early; it is much harder to fix later.
Questions worth asking before you sign
- Which life company is issuing the annuity, and what is its rating?
- Is there a guaranteed period, so payments continue to my family if I die early?
- What is the total guaranteed payout, and what is the cost of the annuity today?
- How is the attorney fee calculated on the structured portion?
- Can any part of it be accelerated if my medical situation changes? (Usually not — ask anyway.)
The last question decides more of these than people expect. A structure is a commitment. If your circumstances are still moving, that argues for keeping more of the recovery liquid.
Common questions
Is a structured settlement taxable in New York?
Payments from a properly qualified structured settlement for a physical injury are generally not taxable, including the growth built into the annuity. A lump sum is also not taxable, but anything you earn by investing it is. Interest and punitive damages are taxable either way.
Can I change my mind after I choose?
No. The structure is designed and priced before the settlement is finalized, and once the annuity is purchased the schedule is fixed. This is why the decision belongs at the start of the settlement discussion, not at the signing.
Can I sell my structured settlement payments later?
Only with court approval under New York's Structured Settlement Protection Act, and only if a judge finds the sale is in your best interest. The discount applied by buyers is typically steep, so this should be treated as a last resort rather than a planned exit.
What happens to a child's settlement?
A judge approves it under CPLR § 1207 and directs how the funds are held — frequently a structure that pays out at or after eighteen. Parents do not receive the money to manage.
Does taking a structure change my legal fee?
The fee is normally calculated on the cost of the annuity rather than on the total the annuity will eventually pay out. Our contingency fee guide explains how fees work on a New York injury case.
This page is general information about New York law. It is not legal or tax advice, and reading it does not create an attorney-client relationship with Davidov & Cohen Law. To talk about your own situation, tell us what happened.
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