Managing Dissipation Risk through Education

Dissipation risk is the risk that a person will blow money irresponsibly. This risk is particularly present when a person receives “sudden money.”  Sources of sudden money may include an inheritance, lottery winnings or a tort settlement. Settlement recipients are particularly vulnerable to dissipation risk and the effects can be devastating.  It is not uncommon for a tort victim to dissipate money intended to replace future wages or pay ongoing medical expenses.

You have probably seen this phenomenon play out for some of your former clients.  It seems that every PI attorney has a story or two. We have heard of clients starting ill-fated businesses, loaning money to greedy family or friends, carefree trips to Vegas, impulse purchases of ostentatious homes or vehicles, and even overly generous gifts to charities or associates.  The money is rarely spent on the damages that were alleged in the lawsuit.  After the funds have been squandered, there is no other source of funds in sight. We have heard stories of living in squalor, reliance on charities and government assistance, depression, self-pity and even suicide.

Why does this sad story happen so often?  The root cause is easy to identify.  Most people are simply unprepared to deal with a large sum of money, having lived paycheck-to-paycheck all of their lives.  They have not yet developed the self-discipline to save, a network of trustworthy financial advisors, or skill in choosing suitable investments – things that you and I take for granted.

What the Attorney Can Do

So, what is an attorney to do?  You can provide the advice and financial help they need.  However, most attorneys have no particular training in this area and walk into this arena without professional liability coverage for financial or tax advice.  This is simply not a practical solution, though we constantly run into attorneys who insist on trying.  Others see the risk, know what is going to happen and attempt to twist their arms until they accept a structured settlement option.  A reluctant acceptance of a structured settlement annuity can save some clients from dissipation, but often leads to a sale of the annuity to a predatory factoring company a few years or even months down the road.

Education is the Answer

A much better idea is to introduce your client to a person willing to provide them with the advice and education they need.  This person should have experience helping injury victims and their families.  This introduction should happen early in the process so that the education can take place without the pressures of decision making that occur at or around mediation.  It has been our experience that a well-educated client is much more likely to make responsible decisions at final settlement.  Some clients will blow the money no matter what, but we may be able to help your clients have more than just a few bittersweet memories of temporary wealth.  In doing this, we will shield you from potential liability from disgruntled clients and help prepare them for the life of security that may result from wise financial planning.

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