Justifying the Structured Settlement Tax Subsidy: The Use of Lump Sum Settlement Monies

Abstract

Structured settlements have been subsidized by federal, state, and local taxes for nearly three decades. The subsidy, which comes in the form of a tax exclusion that encourages personal injury claimants to forgo a lump sum settlement in favor of long-term periodic payments, is premised upon the belief that claimants prematurely dissipate lump sum settlements. This belief has long been held within the structured settlement industry, and is frequently cited as a proven fact. Anecdotal evidence from industry practitioners, representing a broad cross-section of interests, certainly suggests the belief to be true. However, this Note examines the available empirical data. It concludes that the danger of the dissipating claimant has yet to be proven, and that citations relied upon as evidence lack applicability, and sometimes substance. Therefore, this Note calls for a modern American study to ground the structured settlement subsidy in empirical and substantiated data.

Keywords: Structured Settlement, Personal Injury, Lump Sum, Dissipation, Squandering

JEL Classification: D10, E21, E65, G22, G23, G28, H24, H30, H50, H55