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Structured Settlement Constructive Receipt | Avoid This Fatal Settlement Document Mistake

by John Darer® CLU ChFC MSSC RSP CLTC

What is Destructive Receipt?

If a General Release has been signed and delivered to the defendant's legal representative, the tax benefits of a structured settlement may be lost. The ramifications may be costly for both the plaintiff his or her lawyers. Constructive Receipt is "destructive receipt" from a financial standpoint.

Why Would a General Release Be Fatal to a Structured Settlement?

A standard general release fails to satisfy the requirements to establish a structured settlement because of the fatal words "receipt of which is hereby acknowledged". Even though money has not yet changed hands constructive receipt has occurred.  Where constructive receipt has occurred in a case involving taxable damages such as an employment or commercial damage case, there is potential for tremendous tax exposure that could have been easily avoided and a potential malpractice exposure for the attorney.

A promise to pay future periodic payments to establish a periodic payment obligation is a critical component to establish a structured settlement

A promise to pay future periodic payments to establish a periodic payment obligation is a critical component to establish a structured settlement, regardless of whether the structured settlement is (1) qualified (medical malpractice, wrongful death, workers compensation, auto, product liability involving damages on account of personal physical injury or physical sickness); or (2) non qualified structured settlements (wrongful termination, harassment in the workplace, discrimination in workplace, intellectual property and other commercial claims. Even in mass torts where a qualified settlement fund has been established to aggregate settlement money in a big pot for claimants similarly situated, an obligation to pay on the part of the QSF is a critical component of the establishment of a structured settlement.

Constructive Receipt is the Grim Reaper of Structured Settlements | Avoid Constructive Receipt

by John Darer® CLU ChFC MSSC CeFT RSP CLTC

Constructive receipt can destroy a plaintiff's ability to establish a structured settlement and cause problems for both parties if settlement documents are poorly drafted. 

For example, a signed general release with the words "receipt of which is hereby acknowledged" may represent a lethal papercut.

Surprisingly I see draft settlement documents and Orders which would kill the plaintiff's structured settlement more often than I would like to see.  Thankfully they are just drafts. Settling plaintiff's counsel must be very careful to avoid the "Grim Reaper" for structured settlements.

The intent of the parties must be carefully documented in the language in the release and must be acceptable to the annuity issuer and the qualified assignment company (or non-qualified assignment company, or reinsurer where applicable).

Structured settlement expert John Darer explains "What is constructive receipt?" and how to avoid constructive receipt to take advantage of structured settlement benefits.   

 

Please read my October 4, 2010 blog post " A Constructive Recipe to Avoid Constructive Receipt With Structured Settlements.

Constructive Receipt is Game Over for Structured Settlements (4structures.com)

Structured Settlements | A Constructive Recipe to Avoid Constructive Receipt

by John Darer® CLU ChFC MSSC CeFT® RSP CLTC

Constructive receipt is an important term in the structured settlement lexicon, so pardon me while I adjust my "toque blanche" to address the following Yahoo query:

"In a structured settlement agreement to avoid constructive recipe (sic) the funding annuity is usually by whom?"

The question can best be answered by having a look at the following structured settlement flow chart

To avoid constructive receipt, a key element to the transaction is that periodic payments MUST be first be part of the consideration stated in the settlement agreement, whether that be with the Defendant, its Insurer, or the trustee of a qualified settlement fund. Avoid language that uses cash as consideration and states "the receipt and sufficiency of which is hereby acknowledged".

The qualified funding asset may be purchased by the Defendant, if unassigned, or by the qualified assignment company, if assigned. The plaintiff MAY NOT purchase a structured settlement annuity themselves from their own funds.

Last updated October 2, 2023

Qualified Settlement Funds (468B Trust) | SPI Affiliate Cutting Corners

by John Darer® CLU ChFC CSSC RSP

Another affiliate of Settlement Professionals Inc. is cutting corners-this time with woefully deficient articulation of Qualified Settlement Funds (a/k/a 468B Trust),  a major tool for settlement planners and their clients:

A. For such a major tool Tallahassee, FL and Atlanta, GA based Structure Wise, LLC doesn't even explain what a QSF is.

B. Structure Wise, LLC list two reasons for using a QSF (1) " The QSF is used quite often to protect and shield the plaintiff" Is that a reason, a statement of fact, or an opinion?  (2) The QSF is used to ensure competitive structured settlement annuity quotes. Surely there are wider applications and more significant reasons! Also note that not all life insurers will write structured settlements out of a single claimant qualified settlement fund.

 C. Structure Wise, LLC explanation of the QSF Life cycle is missing critical elements: They say:

  1)  The QSF Trust Agreement is submitted to the court.  You just submit a trust document with out anything accompanying it, like a motion, petition, affidavit?

 2)   A motion is filed with the court establishing the OSF.  What the heck is an OSF? Something that "Plantiffs" use to resolve cases?

 

3)  The court approves the creation of the QSF. 

  

4)  The defendant pays the agreed upon amount into the QSF (per the Settlement Agreement and Release).     

• Is there anything that goes on between #3 and #4?
• What if the QSF is a named party in litigation and the case has not yet settled?

 5)  Once the defendant has satisfied their obligation of payment into the QSF, it is released and the case is dismissed with prejudice.

 

6)  The Qualified Assignment, Release and Pledge are created by the structured settlement planner inclusive of annuity costs. 

• Have you ever seen the annuity cost included in a Qualified Assignment Release and Pledge?
• Doesn't the QSF administrator or trustee have to send funds to the qualified assignee to cover the annuity cost?  That's not what they are saying!
• Isn't there a settlement agreement or release required too, as is set forth in the first recital paragraph of every qualified assignment release and pledge agreement?
• What about structured settlements where there is no secured creditor status offered by the assignee such as when structures are placed with New York Insurance Company, Liberty Life Assurance Company of Boston or John Hancock Life Insurance Company (USA) or John Hancock Life Insurance Company of New York. Are we supposed to believe you use a QAR&P then?

    7)   A motion is filed with the court to approve distribution of the QSF assets and terminating the QSF. Can you say accouting and tax return?  Unless the attorneys and/or administrators do the tax returns Structure Wise, LLC inaccurately states that the only costs are administration costs and attorney fees. At least the business formalities of the QSF must be discussed.

Here's an example an articulate rendering of what a QSF is from tax lawyer Robert Wood, an author of a major legal treatise on Qualified Settlement Funds:

"QSFs receive special tax treatment, generally obviating the constructive receipt and economic benefit tax doctrines. They do so for an enormously valuable policy reason approved by Congress and the IRS: dispute resolution. Monies can be transferred to a QSF and are then deductible by the settling defendant(s), yet will not constitute income to the payees until the QSF distributes them.

QSFs conserve assets; enable the resolution of difficult and sensitive issues among co-plaintiffs; facilitate the resolution of battles among competing co-counsel; and facilitate structured settlements that can provide a fiscally conservative payout of monies to claimants. Such fiscal conservation can assist in their healthcare and life-planning, and can serve a spendthrift and asset protection function as well"

Is it to hard for people to know what they are selling? Competition like this makes my job easier, but it is embarassng for the profession.

More information on Qualified Settlement Fund as a Settlement Planning Tool

 

Constructive Receipt: Mixing Apples and Oranges

by Structured Settlement Watchdog

Settlement Professionals/SPI seems to have things mixed up concerning constructive receipt as it applies to structured sales (which it dubs the  "Ensured Structured Sale")**

SPI:  "The Doctrine of Constructive Receipt taxes income before that income is actually received"

Comment: Governments tax income not tax doctrines. This certainly applies in the United States.

SPI: "It's important to note that Constructive Receipt doctrine only affects your ability to obtain a tax-exempt structured settlement annuity, as part of your settlement plan".

Comments: 

1. It is important to differentiate between a settlement plan, a financial plan and/or an "exit strategy" plan. A "settlement plan" generally does not apply to structured sales unless the injured party in a law suit, or their attorney, is selling low basis/high value property. A settlement plan, incorporating a structured sale, might well apply in a divorce settlement scenario.

2. A structured sale annuity IS NOT tax exempt. Provided  the characteristics of IRC 453 apply, a structured installment sale should help the business or property seller defer capital gains taxes. Like a regular installment sale, when each installment is made, a portion of it represents return of basis in the property, part represents capital gain and part represents ordinary income.

SPI: "Myths That Do Not Trigger Constructive Receipt" (Relating to Structured Sales)

• Negotiating for payment of your full settlement to a QSF, subject to further Court control and oversight.
• You have been awarded a verdict, however the defendants have appealed to a higher court for review.
• Negotiating for multiple annuity issuers to share responsibility for your payments.
• Negotiating for all security interest in any annuities (versus being a general creditor of the annuity issuer)".

Comments:  This appears to just be a cut and paste job from structured settlement annuities. None of these scenarios applies to a structured sale. With respect to the third bullet point only Allstate Life Insurance Company and Allstate Life Insurance Company of New York currently offer this product.

Mind the Crack, Jack!

**as of May 3, 2010 8:00pm EDT

NY EPTL 5-4.6 Avoid the Wrongful Death Legal Malpractice Trap in New York Procedure

by John Darer CLU ChFC MSSC CeFT RSP CLTC

With all due respect to the judiciary and those that support them, under normal circumstances, without any wrinkles, the two court process can seem tedious and clunky for beneficiaries and lawyers. In some jusridictions it can take years not months to resolve.

Delays were then amplified by the coronavirus pandemic as cases backed up before the process began to work through the backlog behind the normal backlog. 

The New York State legislature amended Estate Powers and Trust Law (EPTL) 5-4.6 in 2005, to create a mechanism pursuant to which the lawyer representing a plaintiff in a wrongful death case may have the trial court, the New York Supreme Court, order the Defendant to pay the settlement funding amount into the lawyer's escrow account AFTER the settlement has been reached in the trial court BUT BEFORE the County Surrogate has reviewed the settlement and issued its Decree for proper allocation and distribution. Unfortunately those who fashioned the law did not consider some important issues. 

EPTL 5-4.6 creates an attractive nuisance, that is problematic where there are minor distributees, disabled distributees, unsophisticated distributees, or others who could benefit from a the stable income and tax advantages of a structured settlement and has potential to create legal malpractice exposure. It doesn't look too good when the lawyers has been paid and the client is left without potentially beneficial settlement planning options because they ahve not been considered. Planning ahead, by working with a settlement planner can help mitigate this risk.

What is New York Estate Powers & Trust Law EPTL 5-4.6?

(a) Within sixty days of the application of an administrator appointed under 5-4.1 or a personal representative to the court in which an action for wrongful act, neglect or default causing the death of a decedent is pending, the court shall, after inquiry into the merits of the action and the amount of damages proposed as a compromise either disapprove the application or approve in writing a compromise for such amount as it shall determine to be adequate including approval of attorneys fees and other payable expenses as set forth below, and shall order the defendant to pay all sums payable under the order of compromise, within the time frames set forth in section five thousand three-a of the New York Civil Practice Law and Rules (CPLR) , to the attorney for the administrator or personal representative for placement in an interest bearing escrow account for the benefit of the distributees.  The order shall also provide for the following:

(1) Upon collection of the settlement funds and creation of an interest bearing escrow account, the attorney for the administrator or personal representative shall pay from the account all due and payable expenses, excluding attorneys fees, approved by the court, such as medical bills, funeral costs and other liens on the estate.

(2) All attorneys fees approved by the court for the prosecution of the action for wrongful act, neglect or default, inclusive of all disbursements, shall be immediately payable from the escrow account upon submission to the trial court proof of filing of a petition for allocation and distribution in the surrogate's court on behalf of the decedent's estate.

(3) The attorney for the administrator or personal representative in the action for wrongful act, neglect or default who receives payment under this section shall continue to serve as attorney for the estate until the entry of a final decree in the surrogate's court.

(b) If any of the distributees is an infant, incompetent, person who is incarcerated or person under disability, the court shall determine whether a guardian ad litem is required before any payments are made, in which case the court will seek an immediate appointment of a guardian ad litem by the surrogate's court or, if the surrogate's court defers, the court shall make such appointment.  Any guardian appointed for this purpose shall continue to serve as the guardian ad litem for the person requiring same for all other purposes.

(c) The filing fee in the surrogate's court shall be computed based on the amount of the gross estate prior to any payments made under this paragraph.

(d) The written approval by such court of the compromise is conclusive evidence of the adequacy of the compromise in any proceeding in the surrogate's court for the final settlement of the account of such administrator or personal representative.

(e) Nothing in this section shall be deemed to preclude the attorney for the administrator or personal representative from petitioning the surrogate's court for approval of a compromise and for allocation and distribution thereof.

(f) No letters of administration shall be issued which will in any way serve to abrogate the rights or obligations of an administrator or personal representative or an attorney representing an administrator or personal representative under this section.

Why Plaintiff Lawyers Must Pay Attention in New York Wrongful Death Settlements

Many Defendants or Insurers will want a signed general release before they will release settlement funds. Therein lies the issue.  Who is going to make the promise to make future periodic payments that are then assigned by way of a qualified assignment (or non qualified assignment depending on the types of damages the future payments represent)? The plaintiff lawyer or law firm cannot make that promise

Would a Qualified Settlement Fund Solve the Problem?

468B-1 Relation Back Election. If required, the Administrator will prepare and attach to the income tax return of the QSF a “Regulation § 1.468B-1 Relation Back Election” pursuant to Treas. Reg. § 1.468B-1(j) for execution by the Settling Defendant and the Administrator. The Administrator will forward a copy of the “Regulation § 1.468B-1 Relation Back Election” to the Settling Defendant promptly after filing the same.

Last updated July 12, 2022

 

 

 

Disclosure of Structured Annuity Cost by Defendant Is Not Constructive Receipt

by John Darer® CLU ChFC MSSC RSP CLTC

Every now and then lawyers and mediators have displayed confusion concerning the implications of disclosing the cost of a structured settlement to a plaintiff or a plaintiff attorney.

The confusion by some, centers on the misconception that constructive receipt is triggered by such disclosure, despite the fact that there are two IRS Private Letter Rulings which date back over 40 years!

PRIVATE RULING 8333035 – Refers to Private Ruling 8325054

This ruling clarifies that disclosure of the annuity cost by the defendant has no impact on the income tax free aspects of a Structured Settlement; rather the unqualified availability is decisive.

“This document may not be used or cited as precedent. Section 6110(J) (3) of the Internal Revenue Code.”

SECTION 0451

General Rule for Taxable Year of Inclusion (Year Received V. NOT Year Received) ---Constructive Receipt

DATE: May 16, 1983

REFER REPLY TO: CC: IND: I: 3:3:

Dear * * *

This is in reply to a letter of April 5, 1983, submitted on your behalf by your authorized representative, requesting a supplemental ruling that disclosure by defendant of the cost or present value of an annuity to be purchased to fund its monthly settlement obligation will not cause you to be in constructive receipt of the present value of the amount invested in the annuity.

On March 21, 1983, the Internal Revenue Service issued a ruling that you will have neither actual nor constructive receipt, nor the economic benefit of the present value of the amount invested in the annuity, and the periodic payments will be excludable from your gross income under section 104(a) (2) of the Internal Revenue Code. In that ruling we cited rev. Rul. 79-313, 1979-2 C.B. 74; for the proposition that a corporation will be considered the owner of an annuity if the annuity is subject to the general creditors of the corporation, the corporation can change the beneficiary of the policy and the beneficiary does not have the right to accelerate any payment or increase or decrease the amount of the annual payments specified.

You have asked for a clarification of the above ruling because of your concern that your knowledge of the existence or cost of the annuity might cause you to be in constructive receipt of that annuity.

Section 1.451-2(a) of the Income Tax Regulations provides that income although not actually reduced to a taxpayer’s possession is constructively received by him in the taxable year in which it is credited to his account, set apart for him or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given.

Based on the language in section 1.451-2(a) of the regulations, the Service has consistently taken the position that knowledge is not determinative in deciding a question of constructive receipt, but that unqualified availability is decisive. Rev. Rul. 68-126, 1968-1 C.B. 194; Rev. Rul. 73-99, 1973-1 C.B. 412; Rev. Rul. 74-37, 1974-1`

Private Ruling 8333035 (continued)

C.B. 112; and Rev. Rul. 76-3, 1976-1 C.B. 114; all set forth conclusions consistent with this position.

Re. Rul. 74-37 takes the position that interest accruing in a Uniformed Services savings account subsequent to the time principal and interest on deposit exceeds $10,000 (at which time such interest may be withdrawn at request) is constructively received at that time since it is available within the meaning of section 1.451-2(a) of the regulations. There is no exception to this rule in the case of POW’s or MIA’s who would not be in a position to know of the triggering event.

Based on the information submitted in the original ruling request, we conclude that disclosure by defendant of the existence, cost, or present value of the annuity will not cause you to be in constructive receipt of the present value of the amount invested in the annuity.

This ruling is directed only to the taxpayer who requested it. Section 6110(j) (3) of the Code provides that it may not be used or cited as precedent.

A copy of this ruling should be attached to you tax return for the first taxable year in which those payment are received. We are enclosing a copy for this purpose.

In accordance with the power of attorney on file with us, a copy of this letter has been sent to your authorized representative.

Sincerely yours,

Anthony Manzanares, Jr.
Chief, Individual Income Tax Branch

Enclosures 2
Copy of this letter
Copy of section 6110 purposes

The other IRS ruling, PLR 9017011  ,dated January 24, 1990 stated   "The knowledge of the existence, cost, and present value of the annuity contract used to fund the settlement offer by Individual B's family and its representatives will not cause the family to be in constructive receipt of the amount payable under the annuity contract or the amount invested in the annuity contract".

How Constructive Receipt Doctrine Affects Structured Settlements

by John Darer® CLU ChFC CSSC RSP CLTC

 

If you would like to read more on the subject...

Structured Settlements and the Big Mediation MIstake  September 29, 2009

Structured Attorney Fees 101 and Constructive Receipt  October 17, 2009

Structured Settlement Tips For Lawyers

Constructive Receipt in Wikipedia

Structured Attorney Fees... Is What Website Is Saying Constructive Receipt?

by John Darer CLU ChFC CSSC RSP

A treatise on Attorney Fee Structures by attorney Richard B. Risk, JD, CSSC is posted on the Structured Settlement Services website by his son Robert Risk, CSSC a settlement planner out of Tulsa Oklahoma.

Richard B. Risk, Jr. JD, CSSC, and Robert Risk by publishing the information, suggest that there are advantages of "converting an attorney fee receivable" into a deferred compensation plan.

BUT, can an attorney actually convert a receivable into a deferred compensation plan by structuring such fees? I submit to you that he/she cannot under such circumstances and THAT makes the entire Structured Settlement Services, LLC posting er... Risky Business!

The operative question is "when is a receivable created?".  In the typical personal injury contingency case there is no "receivable" until you win or settle the case, because the attorney can lose the case and get nothing. The attorney can win and lose on appeal and get nothing.  If  the attorney's client has signed a release and the law firm is simply waiting to get paid I submit that there is a receivable created and that the lawyer cannot structure the attorney fees.

Consider the following:

The Business Dictionary definition of "Accounts Receivable"

Sales made but not paid-for by customers (trade-debtors). Accounts receivable are shown as current (short-term) assets in a balance sheet and are, in fact, unsecured promises by customers to pay in the future. These sums are a key factor in determining a firm's liquidity and may be discounted—used in raising a short-term bank loan, or sold to a factor. A provision is usually made in the accounts of a firm to offset uncollectible accounts receivable as losses.

The Accountingcoach .com definition of "Accounts Receivable" is a current asset resulting from selling goods or services on credit

Business Dictionary definition of "Receivable"

Accounting term for amount due from a customer, employee, supplier (as a rebate or refund), or any other party. Receivables are classified as accounts receivable....and represent an asset of the firm!

 

If you are a plaintiff attorney or trial lawyer and wish to structure your fees be careful!

More on structured attorney fees

Where professional malpractice can turn on a single word, settlement consultants should avoid using financial terms unless they are sure of the definition.
 

 

 

 

Avoid Tax Fraud When Setting Up Your Structured Settlement

by Structured Settlement Watchdog

As if "the escrow gambit" wasn't bad enough now I have learned today that some (and hopefully very very few) plaintiff attorneys have said to certain structured settlement brokers that certain other settlement professionals are advising their plaintiff attorney clients to write checks for structured settlements directly from their escrow accounts to the structured settlement qualified assignees or annuity issuers.

A plaintiff lawyer is the agent of the plaintiff. If the plaintiff lawyer or plaintiff has actual receipt neither the lawyer nor the plaintiff may structure. If  the plaintiff lawyer or plaintiff has constructive receipt neither may structure. If a mistake has been made, then put the funds in an alternative periodic payment mechanism like a settlement preservation trust, settlement planning trust or, if within 90 days of settlement,  a post-settlement periodic payment solution offered by MetLife,  but don't set yourself down a potentially career threatening road to cover your butt.

The possibility of tax fraud is perpetuated by the "actors" because many life insurance companies have bank lock box facilities to gather in the consideration for the structured settlements. The perpretrators of this scheme allegedly perceive that the lock box means that the life companies will not notice or check where the money is coming from. Obviously "the nimrods" giving this shoddy advice have not taken an anti-money laundering course or they'd be familar with the record keeping requirements concerning deposits and movement of money.

The sad thing about this is that "the nimrods" are potentially hurting people who cannot afford to be hurt. Shame on them. In my opinion these people, again hopefully very very few in number need to have their insurance licenses yanked and serve some jail time.  This is a MAJOR trustworthiness issue. Any information received by this author about a specific individual engaging in this behavior will be turned over to the appropriate authorities.

For those of you who have already done the deed... consider how do you defend yourself in an audit? You knew it was wrong but you thought they wouldn't notice? What an outrage! Do you really think the settlement professional's errors and omissions coverage will cover it?

Plaintiff attorneys be vigilant. Annuity issuers with lock boxes should have record of where the money is coming from and obtain copies of checks or wiring information.