Structured Settlements: Case Suitability

by Heber G. Smith

This article first appeared in the summer 1997 issue of the Expert Witness.

It has been said that “only the very large cases” merit consideration for a structured settlement. Some suggest that the list should be expanded to include actions that involve minors and/or those otherwise incapable of managing their own resources.

In reality any injury action that has been reserved for $50,000 or more may merit consideration for a structure, but that doesn’t mean that every case in that category should be structured. Typically, files that, if structured, might generate insignificant income, may not merit consideration in the final analysis. For example, actions involving tax-creditable Cost of Future Care under which the claimant may be financially sophisticated, may also not be worth consideration; but only if the claimant is elderly. A young claimant in a high marginal tax bracket may find him/herself in the unfortunate situation whereby the tax credits reduce tax payable at the lowest rate while investment income increases tax payable at the highest rates. The spread between the two rates of tax and the long period over which the investment must compound to offset inflation may tilt the scale in favour of the structure. Such little nuances make it tricky for plaintiff’s counsel to determine exactly when to recommend that his/her client entertain a structure.

Typically, those cases most suitable for structuring include:

  • Infants;
  • Those claimants not mentally capable of managing their own resources;
  • Claimants whose future life expectancy may be in doubt;
  • Claimants who are in high income tax brackets;
  • Cases involving a Cost of Future Care claim;
  • The elderly who wish to control the distribution of their estates;
  • Claims that might entail a Tax Gross-Up or Management Fees; and
  • Excess of Policy Limits cases.

Effects of Taxation

For any Canadian taxpayer, regardless of his/her tax jurisdiction, taxation will have an onerous impact on resultant net income. With 40% taxation on incomes in excess of $30,000 it becomes incumbent on plaintiff’s counsel to introduce the structure option and the tax free nature of the resultant income to a claimant. With a structure analogous to a “matching grant” or “imputed contribution” from Revenue Canada it is no wonder that such a settlement vehicle has become instrumental as the main incentive to conclude many personal injury actions.

Design Development

Input by plaintiff’s counsel to the modeling of the payment scheme is critical to the ultimate success and conclusion of an action by means of a structure. Consideration must be given to medical, rehabilitation, custodial and health care costs, adjusted for anticipated inflation. Future education costs (for both the claimant and/or his/her family) and loss of future income estimates should also be discussed during the settlement negotiation process.

Ideally, the structured settlement specialist should attend that meeting and work with the plaintiff and his/her counsel on the same basis that a mediator caucuses during that process. When accurate estimates of the claimant’s future income and eligible tax credits are known, it is possible to accurately estimate Revenue Canada’s imputed contribution to the proposed settlement — a sum that may very well be sufficient to bridge the gap between the parties.


Heber Smith is the principal of Smith Structured Settlements Inc. a structured settlement and annuity brokerage with offices in Calgary and Vancouver. He is also a partner in Structured Settlement Software, a firm that provides tax driven software to the American structured settlement industry.