Structured Settlement vs. Lump Sum in Arizona

TL;DR

In an Arizona wrongful death case, choosing between a lump sum and a structured settlement is a critical financial decision. A lump sum provides immediate access to the full settlement amount, offering flexibility for large purchases and investments but carrying risks of mismanagement and higher tax burdens on investment gains. A structured settlement provides guaranteed, tax-free periodic payments over time, ensuring long-term financial stability and protecting funds from poor decisions, but it lacks flexibility and immediate access to the full amount. The best choice depends on the beneficiaries’ financial discipline, immediate needs, long-term goals, and age.

Key Highlights

Lump Sum: You receive the entire settlement amount at once. This gives you total control for investing, paying off debt, or making large purchases. However, it carries the risk of rapid depletion and requires you to pay taxes on any investment earnings.
Structured Settlement: You receive a series of guaranteed, periodic payments over a set term or for life. These payments, including the growth portion, are completely tax-free, providing unparalleled long-term security. The primary drawback is the lack of flexibility.
Arizona Law: Wrongful death damages, as defined in A.R.S. § 12-613, are intended to compensate surviving family members for their losses. The payment method chosen directly impacts how effectively these funds achieve that goal for years to come.
Deciding Factor: Your family’s financial literacy, immediate debt obligations, future income needs, and long-term security goals should guide your decision.
Professional Advice: It is essential to consult with your wrongful death attorney, a certified financial planner, and a tax professional before finalizing your settlement agreement.

The loss of a family member due to another’s negligence is a profound tragedy. In Arizona, when such an event occurs, the legal system provides a path for surviving family members to seek financial compensation through a wrongful death claim. While no amount of money can replace a loved one, a settlement is designed to provide financial stability for those left behind. In 2021, the Arizona Department of Transportation reported 1,180 fatalities on state roadways, many of which may have resulted in wrongful death actions, highlighting the unfortunate frequency of these situations. The financial award from such a claim is not a windfall; it is a replacement for lost income, services, and companionship that a family depended on.

Under Arizona law, specifically the Arizona Revised Statutes (A.R.S.) § 12-611, a wrongful death action arises from a wrongful act, neglect, or default that would have entitled the person to maintain an action and recover damages if death had not ensued. The claim is brought by and for the benefit of specific surviving family members, such as a spouse, children, or parents, as outlined in A.R.S. § 12-612. The damages awarded are meant to be a fair and just compensation for the injury resulting from the death, covering everything from sorrow and mental anguish to the lost earning capacity of the deceased. This legal foundation underscores the purpose of the settlement: to secure the family’s future.

Once a settlement amount is agreed upon, the beneficiaries face a pivotal choice with long-lasting consequences. They must decide whether to receive the funds as a single, large payment or as a series of payments over many years. This decision between a lump sum and a structured settlement is not merely a matter of preference. It is a strategic financial choice that will shape the family’s economic well-being for decades. Understanding the mechanics, benefits, and drawbacks of each option within the specific context of Arizona law is essential to making an informed and protective decision.

What is a Lump Sum Payment? A Deep Dive into Immediate Compensation

A lump sum payment is exactly what it sounds like: the entire net settlement amount is paid to the beneficiaries in a single transaction. This is the most traditional and straightforward method of receiving compensation from a wrongful death claim. It represents a clean break, providing the family with the full financial resources from the settlement at one time.

How a Lump Sum Works in an Arizona Settlement

The process for receiving a lump sum is relatively simple. Once the wrongful death settlement agreement is signed by all parties, the defendant or their insurance company transfers the funds. This money is typically sent to the plaintiff’s attorney and deposited into a client trust account. From this account, the attorney deducts their agreed-upon legal fees and case expenses. They also use these funds to satisfy any outstanding liens against the settlement, such as those from hospitals, health insurance companies, or government programs like Medicare or the Arizona Health Care Cost Containment System (AHCCCS). After all fees, costs, and liens are paid, the remaining net amount is disbursed directly to the beneficiaries.

The Advantages of Taking a Lump Sum

Many families are drawn to the idea of a lump sum payment for several compelling reasons. The primary advantages center on control, flexibility, and opportunity.

Immediate Financial Relief: A lump sum provides the resources to address pressing financial needs instantly. Families can pay off the mortgage, eliminate high-interest credit card debt, cover outstanding medical bills from the deceased’s final care, and pay for funeral and burial expenses without delay.
Total Control and Flexibility: With the full amount in hand, beneficiaries have complete autonomy. They decide where to deposit the money, how to invest it, and when to spend it. This control allows for major life purchases, such as a new home or starting a business, that would be impossible with smaller, periodic payments.
Potential for Greater Growth: For those with financial knowledge or who work with a skilled investment advisor, a lump sum can be invested in the stock market, real estate, or other assets. These investments have the potential to generate returns that are significantly higher than the conservative growth rate of an annuity used in a structured settlement.
Simplicity and Finality: A lump sum is a one-and-done transaction. Once the check is cashed, there is no further financial entanglement with the defendant or their insurance company. This provides a sense of closure for many people.

The Significant Risks and Disadvantages

Despite its attractions, a lump sum carries substantial risks that can undermine the very financial security the settlement was meant to provide. History is filled with stories of individuals who received large sums of money, only to find themselves in financial trouble a few years later.

Risk of Mismanagement: This is the single greatest danger of a lump sum. Without experience in managing large amounts of money, it is easy to overspend, make poor investment choices, or fall victim to bad advice. Studies on lottery winners often show that a significant percentage deplete their winnings within a few years. A wrongful death settlement must last a lifetime, and the temptation to spend can be strong.
Market Volatility: While investments can grow, they can also shrink. Placing a large sum of money into the stock market or real estate exposes it to market downturns. A significant loss early on can be devastating and difficult to recover from, jeopardizing the family’s long-term security.
Tax Implications on Growth: This is a critical and often misunderstood point. While the wrongful death settlement itself is received tax-free under federal law, any income generated from investing that lump sum is taxable. Interest, dividends, and capital gains must be reported to the IRS and the Arizona Department of Revenue, reducing the overall net return.
Unwanted Solicitations and Pressure: Sudden wealth can change relationships. Beneficiaries may face pressure from family and friends for loans or handouts. They may also become targets for unscrupulous financial advisors or predatory investment schemes. Managing these social pressures requires a strong will and can be emotionally draining.

Understanding Structured Settlements: The Mechanics of Long-Term Security

A structured settlement offers a completely different approach to receiving compensation. Instead of a single payment, the settlement is paid out over time as a series of guaranteed, periodic payments. This method is designed to provide a stable and reliable income stream, protecting the settlement funds from risk and mismanagement while offering unique tax advantages.

The Anatomy of a Structured Settlement Annuity

When a beneficiary chooses a structured settlement, the defendant (or their insurer) does not give the money directly to the family. Instead, they use the settlement funds to purchase a high-quality annuity from a major life insurance company. An annuity is a financial contract that guarantees a series of payments to the annuitant (the beneficiary).

The life insurance company then becomes responsible for making all the future payments as detailed in the settlement agreement. This process is typically facilitated by a structured settlement specialist who helps design the payment schedule and selects a financially sound annuity provider. The defendant is released from all future liability once the annuity is purchased, and the beneficiary receives the security of a contract with a highly-rated insurance corporation.

The Core Benefits of a Structured Settlement

Structured settlements are favored in many wrongful death cases, especially those involving minor children or beneficiaries without financial expertise, because they prioritize long-term security.

Guaranteed, Stable Income: The payments are contractually guaranteed. They are not subject to stock market fluctuations, economic recessions, or changes in interest rates. This provides a reliable source of income that can be used to replace the deceased’s lost wages, ensuring that monthly bills are paid and a consistent standard of living is maintained.
Complete Tax-Free Status: This is the most powerful financial advantage of a structured settlement. Under Section 104(a)(2) of the Internal Revenue Code, compensation from personal physical injury or sickness claims is non-taxable. For structured settlements, this tax-free status extends not only to the principal amount but also to the growth (the interest earned within the annuity). Every dollar received is spendable, unlike the taxable earnings from a lump sum investment.
Financial Discipline and Protection: A structure imposes financial discipline. It prevents the possibility of spending the entire settlement too quickly. For minor beneficiaries, Arizona courts often require or strongly prefer a structured settlement to ensure the funds are preserved until they reach adulthood. It acts as a safeguard against poor financial decisions, exploitation, and the pressures of sudden wealth.
Customization and Flexibility in Design: The payment stream can be tailored to meet the specific future needs of the family. For example, payments can be designed to:
- Provide a monthly income for a set number of years or for the beneficiary’s entire life.
- Include larger, periodic lump sum payments to coincide with major life events, like a child starting college or paying off a future mortgage balloon.
- Increase over time with a Cost-of-Living Adjustment (COLA) to help offset inflation.

The Drawbacks and Limitations

The security of a structured settlement comes at the cost of liquidity and flexibility, which can be significant disadvantages.

Lack of Flexibility and Liquidity: Once the settlement agreement is finalized and the annuity is purchased, the payment schedule is locked in. It is extremely difficult, and often impossible, to change the terms. If an unexpected emergency arises or a unique investment opportunity presents itself, the beneficiary cannot access the principal of their settlement.
Lower Potential Returns: The rate of return on an annuity is typically conservative, often comparable to high-grade corporate bonds. An individual who invests a lump sum wisely in a diversified portfolio of stocks could potentially achieve a much higher rate of return over the long term, even after accounting for taxes.
Inflation Risk: While COLAs can be included in a structure, they come at a cost, often reducing the initial payment amount. If a structure has fixed payments, its purchasing power will slowly erode over time due to inflation. A $3,000 monthly payment today will not buy as much in 20 years.
Insolvency of the Annuity Provider: There is a very small but real risk that the life insurance company providing the annuity could fail. To mitigate this, structures are almost always placed with highly-rated companies (A+ or better). Furthermore, each state has a guaranty association that protects annuitants up to a certain limit (in Arizona, this is typically $250,000) in the event of an insurer’s insolvency.

Key Factors to Consider When Making Your Decision in Arizona

The choice between a lump sum and a structured settlement is not a one-size-fits-all decision. It requires a careful and honest assessment of your family’s unique situation. An Arizona wrongful death attorney can provide legal guidance, but the final choice rests with the beneficiaries. Here are the critical factors to evaluate.

Your Family’s Immediate Financial Needs

Start by making a comprehensive list of all immediate and short-term financial obligations.

Outstanding Debts: Do you have a large mortgage, car loans, or significant credit card balances? A lump sum can provide the means to eliminate this debt, freeing up monthly cash flow and providing peace of mind.
Final Expenses: Consider the costs of the funeral, burial or cremation, and any final medical bills not covered by insurance. These must be paid promptly.
Major Purchases: Is the family car old and unreliable? Does the house need major repairs? A portion of a lump sum might be necessary for these essential capital expenditures.

If your immediate needs are substantial, an upfront lump sum, or at least a partial one, may be the most practical solution.

Long-Term Financial Goals and Stability

Think beyond today and consider what your family will need 5, 10, and 20 years from now.

Income Replacement: The primary purpose of a wrongful death settlement is often to replace the income the deceased would have earned. A structured settlement is specifically designed for this, providing a predictable “paycheck” for years to come.
Children’s Education: If you have young children, you need a plan to fund their future college education. A structure can be designed with lump sum payouts scheduled for when they turn 18.
Retirement Security: For a surviving spouse, the settlement may need to fund their retirement. A lifetime annuity from a structured settlement can guarantee they never outlive their money.

The Beneficiaries’ Age and Health

The age of the beneficiaries plays a huge role. A settlement for a minor child is treated very differently by Arizona courts than one for a 60-year-old spouse.

Minor Children: Courts in Arizona have a duty to protect the interests of minors. They will almost always favor, and sometimes mandate, a structured settlement for a child’s portion of a wrongful death award. This prevents the funds from being spent before the child reaches the age of majority (18) and ensures the money is available for their education and future.
Young Adults: A young adult beneficiary might lack the financial experience to manage a large sum responsibly, making a structure a safer choice.
Older Adults: An older beneficiary might prefer a lump sum for estate planning purposes, allowing them to distribute the assets to their heirs as they see fit.

Financial Literacy and Discipline

This requires an honest self-assessment.

Do you have experience managing investments?
Do you have a detailed budget and stick to it?
Are you susceptible to emotional spending or pressure from others?

If the answer to these questions raises any doubts, a structured settlement provides an invaluable safety net. It removes the burden of complex investment decisions and the temptation of easy access to a large pool of cash.

The Current Economic Climate

Broader economic factors can also influence the decision. When interest rates are high, the returns offered on annuities for structured settlements are more attractive. Conversely, a lump sum invested during a bull market could grow substantially. In times of economic uncertainty and market volatility, the guaranteed safety of a structured settlement becomes much more appealing.

The Legal and Tax Implications in Arizona

The legal framework in Arizona and federal tax laws add important layers to the decision-making process. These are not just financial considerations; they are legal and tax realities that must be addressed with professional guidance.

Arizona Wrongful Death Beneficiaries and Fund Distribution

As established by A.R.S. § 12-612, a wrongful death claim is brought on behalf of the surviving spouse, children, parent, or guardian, or the personal representative of the deceased. If there are multiple beneficiaries, the settlement must be divided among them.

When minor children are beneficiaries, the Arizona probate court often gets involved. A judge must approve the settlement to ensure it is in the child’s best interest. In these situations, judges strongly favor structured settlements because they protect the child’s financial future. The funds are shielded from misuse and are guaranteed to be there for the child’s upbringing and education.

A Closer Look at the Tax Treatment of Settlements

The tax treatment of settlement funds is one of the most compelling arguments for structured settlements.

Lump Sum: The initial receipt of the settlement principal is not taxed. However, once you invest that money, all the earnings are subject to taxation. For example, if you invest a $2 million lump sum and it generates a 6% return ($120,000 per year), that entire $120,000 is taxable income. This will be subject to federal and Arizona state income taxes, significantly reducing your net gain.
Structured Settlement: The tax advantage here is immense. Because of the way the law is written, the entire payment received from a structured settlement annuity—both the principal portion and the growth/interest portion—is 100% free from federal and state income tax. This tax-free growth can result in substantially more spendable income over the long term compared to investing a lump sum and paying taxes on the earnings every year.

It is important to note that if a wrongful death award includes punitive damages (which are intended to punish the defendant and are rare in Arizona), that portion of the award is always taxable, regardless of how it is paid out.

Can You Combine Both? Exploring Hybrid Settlement Options

The choice between a lump sum and a structured settlement does not have to be an all-or-nothing proposition. For many families, the ideal solution is a hybrid approach that combines the best features of both options. This allows you to address immediate needs while securing long-term stability.

The Best of Both Worlds: The Partial Lump Sum

A hybrid settlement, often called a partial lump sum and structure, is a highly effective strategy. In this scenario, the beneficiaries elect to take a portion of the settlement as an immediate, upfront lump sum. The remaining funds are then used to purchase a structured settlement annuity.

This approach provides immediate liquidity to handle pressing financial matters. The family can pay off all debts, purchase a reliable vehicle, make a down payment on a house, and establish a robust emergency fund. Once these foundational needs are met, the rest of the settlement can be placed into a secure, tax-free income stream to cover living expenses for years to come.

Case Scenario: A Hybrid Approach for a Young Family

Imagine a scenario where a 40-year-old surviving spouse with two children, ages 10 and 12, receives a $3 million wrongful death settlement.

Lump Sum Portion ($750,000):
- Pay off the $350,000 mortgage, eliminating the largest monthly expense.
- Pay off $50,000 in car loans and credit card debt.
- Set aside $200,000 in dedicated 529 college savings plans for the children.
- Establish a $150,000 liquid emergency fund in a high-yield savings account.
Structured Portion ($2,250,000):
- Use the remaining funds to purchase an annuity. This could be designed to pay the spouse a guaranteed, tax-free income of $6,000 per month until they reach retirement age.
- The structure could also include separate lump sum payouts for each child at ages 18, 21, and 25 to help with college and career-start expenses.

This hybrid plan solves the family’s immediate financial problems while creating a bedrock of long-term, tax-free financial security.

Working with Your Attorney to Design a Custom Plan

It is critical to understand that the decision to structure a settlement must be made before the settlement agreement is finalized. Once you take “constructive receipt” of the funds as a lump sum, you lose the ability to place them into a tax-advantaged structure. Your attorney plays a key role in negotiating not just the settlement amount, but also the terms that allow for these customized payment options.

The Professional Team You Need to Assemble

Making this decision is too important to do alone. Assembling a team of qualified professionals is not a luxury; it is a necessity to protect your family’s interests and ensure the settlement accomplishes its intended purpose.

The Role of Your Arizona Wrongful death Attorney

Your attorney is your primary advocate. They have the legal expertise to explain the ramifications of each choice within the context of Arizona law. They will negotiate with the defense to ensure the settlement language allows for the payment option you choose. While they can provide legal advice, they are ethically barred from providing financial or tax advice. Their role is to secure the best possible settlement and connect you with the other experts you need.

Why a Certified Financial Planner (CFP) is Essential

A CFP can provide a holistic view of your financial situation. They will help you:

Create a detailed family budget based on your new circumstances.
Analyze your short-term and long-term financial goals.
Assess your tolerance for investment risk.
Model the financial outcomes of both a lump sum and various structured settlement scenarios, allowing you to see a projection of your financial future with each choice.

Consulting a Structured Settlement Specialist

If you are considering a structure, a specialist is indispensable. These professionals are experts in designing annuities. They will take the financial plan from your CFP and create a customized payment schedule. They also have access to the market of annuity providers and can shop for the best rates from the most financially secure life insurance companies, ensuring your future payments are safe.

The Importance of a Certified Public Accountant (CPA)

A CPA can provide crucial advice on the tax implications of your decision. If you are considering a lump sum, a CPA can project the annual tax liability on your investment earnings and help you develop a tax-efficient investment strategy. They can also assist with estate planning to ensure the settlement funds are managed and passed on according to your wishes.

Conclusion: Securing Your Family’s Future

The decision between a lump sum and a structured settlement in an Arizona wrongful death case is one of the most significant financial choices a family will ever face. There is no single “correct” answer, only the answer that is right for your specific circumstances. A lump sum offers the power of immediate control and flexibility, but it comes with the heavy responsibility of prudent management and the certainty of taxes on any growth. A structured settlement provides the unparalleled security of a guaranteed, tax-free income stream, but it requires sacrificing liquidity and control.

For many families, a hybrid solution that combines an upfront lump sum with a long-term structure offers the most balanced and effective path forward. This approach addresses immediate financial pressures while building a secure foundation for the future. It allows a family to grieve and rebuild without the constant worry of managing a large investment portfolio or the fear of running out of money.

This decision carries the weight of your family’s future financial health. It should not be made hastily or without expert guidance. Before you sign any final settlement agreement, it is imperative that you discuss these options in detail with an experienced Arizona wrongful death attorney. An attorney can not only protect your legal rights but also connect you with the team of financial and tax professionals needed to make a truly informed choice. Taking this step is the most important thing you can do to ensure the settlement provides lasting security for you and your loved ones. Contact us for free consultation today.

Structured Settlement vs. Lump Sum: Making the Right Choice in an Arizona Wrongful Death Case