Structured Settlements vs. Lump Sum: Making the Right Choice in Georgia

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The choice between a lump sum and a structured settlement turns on a few questions that federal and Georgia law answer differently for each form: how the money is taxed, whether the payments can be changed later, what a stream of payments is worth today, whether it can be sold, and, for a child, what a court will approve. Federal tax law treats injury damages the same way in either form, but the earnings on a lump sum after it is paid are a different matter, and the periodic payments of a structured settlement funded through a qualified assignment are fixed. Georgia adds court-supervised rules for anyone who later wants to sell those payments for cash.

Taxes: The Same Exclusion, a Different Afterward

Under 26 U.S.C. 104(a)(2), gross income does not include “the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness.” Two limits in the same section apply to both forms: punitive damages are outside the exclusion, and “emotional distress shall not be treated as a physical injury or physical sickness,” except for damages “not in excess of the amount paid for medical care” attributable to emotional distress.

What differs is what happens after payment. A lump sum becomes the recipient’s money to spend or invest, and earnings on it are not damages; the Internal Revenue Code’s list of gross income includes “Interest” and “Dividends” (26 U.S.C. 61(a)(4), (7)). Each periodic payment of a structured settlement, by contrast, is itself an amount of damages received “as periodic payments” under section 104(a)(2).

Fixed Payments: What a Structured Settlement Gives Up

A structured settlement can be funded through a “qualified assignment,” in which an assignee takes over the obligation to make the payments from a party to the suit or agreement. Federal law requires, for the assignment to qualify, that the payments be “fixed and determinable as to amount and time of payment” and that they “cannot be accelerated, deferred, increased, or decreased by the recipient of such payments” (26 U.S.C. 130(c)). The assignee’s obligation may be funded with “any annuity contract issued by a company licensed to do business as an insurance company under the laws of any State, or any obligation of the United States” (26 U.S.C. 130(d)).

Georgia defines a “structured settlement” as “an arrangement for periodic payment of damages for personal injuries or sickness established by settlement or judgment in resolution of a tort claim,” and “periodic payments” as including “both recurring payments and scheduled future lump sum payments” (OCGA 51-12-72(10), (13)). A schedule can therefore combine regular payments with larger payments at set future dates, and under a qualified assignment the recipient cannot change it.

Comparing the Two: What a Payment Stream Is Worth Today

A stream of future payments and a single payment today are not measured in the same dollars. Georgia’s structured settlement statute uses “discounted present value,” defined as “the present value of future payments determined by discounting such payments to the present using the most recently published Applicable Federal Rate for determining the present value of an annuity, as issued by the United States Internal Revenue Service” (OCGA 51-12-72(4)).

For example, imagine a schedule of $12,000 a year for 20 years. The payments add up to $240,000. At an assumed discount rate of 4 percent a year, chosen only for illustration and not the actual federal rate at any date, the present value of that schedule is about $163,084, which is $12,000 multiplied by (1 minus 1.04 raised to the minus 20th power) divided by 0.04. When structured settlement payments are sold, Georgia requires the buyer to show the payee both figures: the aggregate amount and the discounted present value (OCGA 51-12-76(2), (3)).

Selling the Payments Later

A recipient who later needs cash cannot simply sell the payments. Under OCGA 51-12-77, no transfer “shall be effective” unless it “has been approved in advance in a final court order based on express findings by such court” that “[t]he transfer is in the best interest of the payee, taking into account the welfare and support of the payee’s dependents”; that the payee “has been advised in writing by the transferee to seek independent professional advice regarding the transfer, and has either received such advice or knowingly waived in writing the opportunity to seek and receive such advice”; and that the transfer does not contravene any statute or court order.

“Not less than ten days prior to the date on which a payee signs a transfer agreement,” the buyer must give the payee “a separate disclosure statement, in bold type no smaller than 14 point font,” stating the amounts and due dates of the payments, “[t]he aggregate amount of such payments,” “[t]he discounted present value of the payments to be transferred,” the gross advance amount, the transfer expenses, “[t]he effective annual interest rate,” and the net advance amount, and stating “[t]hat the payee has the right to cancel the transfer agreement, without penalty or further obligation, until the transfer is approved by the court” (OCGA 51-12-76). The application is made “in superior court in the county in which the payee is domiciled,” and the payee “shall appear in person at the hearing, unless the court determines that good cause exists” (OCGA 51-12-79(a), (c)). “The provisions of this article shall not be waived by any payee” (OCGA 51-12-80(a)).

A Child’s Settlement

For a minor, the choice runs through a court. With an order of approval “based upon the best interest of the minor,” a guardian or conservator may compromise a minor’s claim “without receiving consideration for such compromise as a lump sum,” and the compromise may “[i]nvolve a structured settlement or creation of a trust on terms that the probate court or court in which the action is pending approves or creates.” It may also be in exchange for an arrangement that defers receipt of part of the consideration, “not to exceed a total distribution of $25,000.00 prior to a minor reaching the age of majority,” or all of it “until after the minor reaches the age of majority” (OCGA 29-3-3(d)).

Weighing the Choice

No single form of payment is right for every claimant, and the statutes do not choose for anyone, but each of them settles part of the decision.

  • Access to cash. A lump sum is available at once. Payments under a qualified assignment cannot be accelerated by the recipient (26 U.S.C. 130(c)), and turning them into cash later takes a court order finding the sale in the payee’s best interest, after a disclosure that states the discounted present value and the effective annual interest rate the payee will in effect be paying (OCGA 51-12-76, 51-12-77). The disclosure is where the cost of that later cash shows up.
  • Changing needs and prices. The schedule must be fixed and determinable as to amount and time, and the recipient cannot later increase, decrease, or defer a payment (26 U.S.C. 130(c)). Any increase over time has to be written into the schedule at the start, and larger needs at known dates can be met with scheduled future lump sums, which Georgia counts as periodic payments (OCGA 51-12-72(13)).
  • Who stands behind the payments. Under a qualified assignment, the assignee takes over the obligation to pay, and the obligation may be funded with an annuity contract from a company licensed as an insurance company under the laws of any State or with an obligation of the United States (26 U.S.C. 130(d)). The recipient’s future payments depend on that obligor.
  • Taxes and investment. The damages exclusion covers both forms (26 U.S.C. 104(a)(2)), but a lump sum leaves investment decisions to the recipient, and the earnings on it are gross income (26 U.S.C. 61(a)).
  • A child’s recovery. For a minor, the form is not the family’s choice alone: a court approves the compromise based on the minor’s best interest and may approve a structured settlement or a trust (OCGA 29-3-3(d)).

Frequently Asked Questions

Does a company that buys structured settlement payments have to be registered?
Yes. A person or entity may not act as a transferee or file a transfer proceeding in Georgia “unless the person or entity has registered with the Secretary of State to do business in this state” (OCGA 51-12-73(a)), and the initial registration must certify a surety bond, letter of credit, or cash bond “in the amount of $50,000.00” (OCGA 51-12-73(b)(1)).

What does the effective annual interest rate in a sale disclosure show?
OCGA 51-12-76(6) requires the buyer to state, based on the net amount paid and the payments transferred, the rate at which the payee “will, in effect, be paying interest” to the buyer.

After a court approves a sale, who pays the payments that were sold?
The structured settlement obligor and the annuity issuer may rely on the approving order to redirect those payments to the buyer, and as to everyone except the buyer they are discharged from liability for the redirected payments, even if a party to the transfer failed to comply with the statute or the order (OCGA 51-12-78(a)).

  • 26 U.S.C. 104(a)(2); 26 U.S.C. 61(a)(4), (7)
  • 26 U.S.C. 130(c), (d)
  • OCGA 51-12-72(4), (10), (13); OCGA 51-12-73(a), (b)(1); OCGA 51-12-76; OCGA 51-12-77; OCGA 51-12-78(a); OCGA 51-12-79(a), (c); OCGA 51-12-80(a)
  • OCGA 29-3-3(d)

Disclaimer

This article provides general information about the federal and Georgia provisions that bear on choosing between a lump sum and a structured settlement. It is not legal, tax, or financial advice and does not create an attorney-client relationship. The suitable form of payment depends on the claimant’s circumstances. Anyone weighing a settlement structure should consult a licensed Georgia attorney and a qualified tax or financial professional about the particular situation.

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