Taxes and structured settlements

In structured settlements, injury compensation is paid in installments over years rather than as a lump sum up front. It has long been argued that arrangements of this sort should be strongly favored by public policy: many accident settlements are premised on the need to cover years of needed therapy or future income lost through disability, and if it’s spent down too quickly through mishandling or “lottery winner syndrome”, the victim could wind up an expensive public charge. For reasons of this sort, structured settlements have been accorded highly favorable tax treatment.

Then an industry sprang up that offered to turn structured settlements into quick cash on the barrel, a choice that many lawsuit beneficiaries might be tempted to make (or might make after being leaned on by family members). Although laws often require that conversions of this sort be submitted for review to a court, judicial review may be cursory in the absence of adversary process to call attention to the potential drawbacks of a conversion. Not only has the structured-settlement-conversion industry managed to thrive, but somehow, as Shaun Martin notes, Congress has even been prevailed on to bestow favorable tax treatment on its doings — the same doings that tend to undermine the public benefits thought to arise from the original tax-favored structured settlement. More details are to be found in this decision, PDF, in which an appeals court recently sided with the factoring companies in a series of Fresno, California disputes (also discussed at this new blog on structured settlements, via Dan Schwartz).

Tax incentives that encourage lottery-winner syndrome? To paraphrase what Martin says, it’s almost as if someone was managing to work the system.


  • An interesting question about structured settlements: is how do they affect the continency fee of the lawyers involved? Presumably the lawyers are not willing to take their fees as an ongoing percentage of the strucured settlements but take their fees directly and immediately from the insurance companies as a lump sum patment to them. But those direct payment fees should be based not on the total actually paid out over the years to the plaintiff, but only on the present value of the settlement or the lawyers will be unfairly enriched. But why do I suspect that, in structured settlements, the plaintiff lawyers somehow end up getting a much higher percentage of the present value of the settlements than they are entitled to? And perhaps that is a reason strucured settlements are so common.

  • Phil, that’s not the way it generally works. Typically, the parties negotiate the settlement as a sum total. From that total, the value of which is determined easily (the present value of a dollar today is a dollar), the attorney takes his contingency, some portion is set aside for repayment of medical bills or liens, and some portion goes to the plaintiff as walking around money, while the insurer sets aside the remainder for investment into one or more annuity funds to pay the structure. All deductions, including fees, are taken from the present value of the total settlement pool.

    I’ve never heard of a plaintiff’s attorney attempting to charge his client a contingency based on the expected payout over the life of the structure. I can’t say this has never happened, but it would be a matter for the bar where I practice, and I suspect it would be in most jurisdictions.

  • In NY the fee is taken when each payment is made.

  • In Michigan, the fee is charged against the current value of the structured amount.

    >I’ve never heard of a plaintiff’s attorney attempting to charge his client a contingency based on the expected payout over the life of the structure.

    It’s been tried here. But our lawyers generally have a lower shame level.