THE BLOG
09/04/2014 12:32 pm ET Updated Nov 04, 2014

Sudden Wealth From a Legal Settlement?

First, let's define a Life Event. A life event is a significant event that is either expected or a complete surprise that will change your life. It can also come with significant financial changes as well.

A legal settlement is definitely a Life Event.

In some cases, it has taken years to receive compensation for an accident or lawsuit. There may even be physical or emotional stress as a result. Additionally, it may be the largest sum of money you will ever receive.

Many legal settlements are a result of physical injury rendering you unable to work anymore and earn a living. So it's important that you make informed decisions.

Understanding your settlement.
The common denominator with every legal settlement is that they take a long time to complete. The legal system is very slow and frustrating. When the you eventually settle your suit, you'll want to talk with a variety of professionals. You already have an attorney. Now line up a good financial advisor and tax professional. You'll have questions about everything from taxes to spending. Here's what you will want to know:

How you will receive your legal settlement? Typically there are two types of legal settlements. A structured annuity and a cash payout. Many people are forced to take the cash payout to relive medical debt. A cash payout will be a smaller sum than the structured annuity, very much like the options if you win the lottery. Structured settlements allow you to be paid over years or even decades. With a lump sum payout, you'll have to contend with legal fees, investing and taxes.

What are the tax implications of receiving the legal settlement? It depends on the nature of the settlement. If it is for personal injury or property damage, then the settlement would not be taxable.

Will I have enough left over after legal fees, medical bills and any taxes, to stop working? Of course that all depends. You never retire on the sum of money, you retire on the income that the sum of money can generate. If after consulting with a financial planning professional, you have sufficient resources to cover your expenses then you may be able to retire.

What to do if you receive a significant settlement
If your settlement is substantial, meaning hundreds of thousands to millions of dollars, you'll have a different set of decisions to make. Besides developing your risk tolerance and asset allocation for your portfolio, Here are your next steps:

  • Get referrals for a financial advisor that specializes in life events like legal settlements
  • Get referrals for a good tax professional
  • Decide whether you are able to work or want to work again
  • Choose whether you will start a trust or foundation
  • Decide if you will give to charity
  • Decide if you will give financial assistant to family and loved ones
  • Develop a plan to invest your settlement
  • Conclude if you will need income from your settlement portfolio
  • Start reviewing your wills and beneficiaries

It potentially took years to receive compensation for your injury or law suit. Take the time to get a team of advisors to help you make informed decisions. Especially if you are unable to work again.

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