Litigation

We've all been there, a long exhaustive day of mediation ends up with a settlement and the next thing you know everyone of tired mind is scrambling to cobble together a mediation agreement or perhaps the mediator has his/her own version.

WARNING! Avoid torching all your hard work after a long day of settlement negotiations at mediation by blowing it on flawed "cookie cutter" documentation!

If a structured settlement is to be part of the resolution of a claim or suit, then the consideration for the structured settlement is the stream of periodic payments. While I know it's important to know the cost, THE COST IS NEVER THE CONSIDERATION IN A STRUCTURED SETTLEMENT. Documentation, including a mediation agreement that is binding, must reflect the correct language.

Here's how easy it is to blow if you're not paying attention:

Assuming no court approval is needed, if parties sign a mediation statement that states the parties agree to settle for the sum  of $2,000,000 and that the receipt of said sum will release all claims and mediation agreement is a binding agreement AND all parties are represented by counsel and they all sign it, is there anything else standing in the way of the plaintiff receiving the money?

Plaintiff attorneys

If your client expects to receive tax-free periodic payments as a result of a negotiated settlement, or you are structuring your attorney fees, be sure the mediation agreement does not include language that will cause constructive receipt of the money that will fund the future payments. On a large case with lifetime payments, the cost of constructive receipt could be in the millions in lost tax-free interest (tax-deferred in the case of attorney fees structures or employment settlements).

Defendants and Claims Representatives

Constructive Receipt means that there can be "no structure". If the structured settlement has somehow managed to slip through the processing, that means you are potentially exposed to an unwind of the qualified assignment and your company owning an asset where interest will now be adversely taxed . If properly structured, the qualified assignee has an income tax exclusion for owning the "qualified funding asset". If you, or who you represent, is not a tax-exempt entity you will be left holding the bag with an asset that may no longer be qualified.

Constructive receipt is the doctrine that taxes income before the income is actually received. It is contained in Treasury Regulations § 1.451-2(a) as follows:

"Income although not actually reduced to a taxpayer?s possession is constructively received by him in the taxable year during 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".  Thus, to have ?constructive receipt,? the plaintiff must have both the right to the income and the power to compel payment.

Under the constructive receipt doctrine, an individual who has an existing right to receive income payable immediately cannot defer taxation of that income by refusing or delaying receipt. Critical to the constructive receipt analysis is whether the individual has an unrestricted right to the funds and turns his or her back on them.

Mediators

We know you like to keep it simple.  So do we! Consider having one form for settlements that have a structured settlement component, or contemplate a structured settlement as part of the resolution, and another for cash settlement.