When You Need to Worry About Constructive Receipt in PI Cases

What is Constructive Receipt?

Constructive receipt is a doctrine — applicable only in situations where a structured settlement annuity will be used — stating that the settlement money is deemed received by the client when the settlement funds are deposited into the attorney’s trust account, even if the client has not physically received any settlement funds.

Receiving Funds into an Attorney’s Trust Account

Annuity companies don’t want the structured settlement annuity funds to be sent to an attorney’s trust account because they believe it may jeopardize the income tax exclusion on those annuities. If settlement funds hit the attorney’s trust account, the life insurance companies treat the client as though he or she has received the funds personally. As a result, the client then loses the ability to place those funds into a qualified structured settlement annuity and benefit from the tax exclusion on the interest that the annuity earns. 

So, if a client wants to place all or a portion of their settlement into a structured settlement annuity, the attorney must ensure that the part of the settlement that will be used to fund the structured settlement annuity goes directly from the defendant’s insurer to the annuity company’s assignment company — without those funds ever being sent to the attorney.

Of course, the cash portion of the settlement that will be used for expenses (legal fees, costs, liens, etc.) can be paid to the attorney’s trust account. The funds at issue are only the amount that will be placed into the annuity.

If you have a case where a client wants to place a portion of the settlement into a structured settlement annuity, we are happy to walk through all of these steps with you and your client. It’s not something attorneys necessarily need to worry about. However, attorneys do need to understand what constructive receipt is and why it’s important in a structured settlement annuity context.

Special Needs Trust and Constructive Receipt

We often receive questions about whether constructive receipt applies if a client wishes to set up a special needs trust. The answer, in most states, is no. Attorneys can receive funds into their trust account without affecting the tax-free nature of the settlement and without jeopardizing the ability to place the funds in the special needs trust.

Settlement funds can then be transferred from the attorney trust account directly to the special needs trust.

Conclusion

If clients want to set up structured settlement annuity, attorneys need to ensure that the funds are sent directly from the defendant to the life insurance company (and not to their trust account). By doing so, the client can enjoy the tax exclusion benefits of the annuity. 

If you have any questions about how constructive receipt in situations involving structured settlement annuities, please feel free to give us a call.

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