A disbursement agreement is a binding contract that spells out exactly how a pool of money will be divided and paid out to each person or entity entitled to a share. You sign one at the end of a personal injury case, at a real estate closing, or when a construction lender releases a draw. It lists the gross amount, every deduction coming off the top, and the net figure landing in each recipient’s account, so there’s a written record of who got what and why.
What the Agreement Actually Contains
Every agreement opens by naming the parties. One side is the disbursing agent — the law firm trust account, escrow company, or lender holding the money — and the other side is each recipient entitled to a piece of it.1U.S. Securities and Exchange Commission. Master Disbursement Agreement
From there, a complete agreement covers:
- The gross amount being distributed, whether that’s a settlement, a loan draw, or a sale price.
- Itemized deductions, listed line by line. In a settlement that means attorney fees, case costs, expert witness charges, and medical liens. In a real estate closing it means loan payoffs, commissions, title fees, and recording charges.
- The net amount each recipient receives after deductions.
- Payment instructions, including routing and account numbers for wires or an address for a check.
- A release of claims confirming that accepting the funds closes out further demands tied to the money.
- Indemnification language making each recipient responsible for later claims or tax obligations connected to their share.1U.S. Securities and Exchange Commission. Master Disbursement Agreement
The math has to balance. Gross minus every listed deduction must equal the net paid to the recipient. If the numbers don’t tie out on the page in front of you, don’t sign until they do.
Where You’ll See One
The three common settings are a personal injury settlement, a real estate closing, and a construction loan draw. In a settlement, your attorney receives the insurer’s check, deposits it in a trust account, and prepares a disbursement statement showing how the funds break down. In a residential real estate sale, the Closing Disclosure required by the TILA-RESPA Integrated Disclosure rules performs the same function, itemizing every cost, fee, and credit for both buyer and seller.2eCFR. 12 CFR 1026.38 – Content of the Closing Disclosure In construction lending, a master disbursement agreement controls staged releases of loan proceeds tied to verified progress, with the lender’s inspector confirming completion before each draw funds.
What Comes Off a Settlement
The most common reason people encounter one of these agreements is a personal injury settlement, and it’s also where the gap between the headline number and the check surprises people most.
Attorney fees take the largest cut. Contingency fees typically run around one-third of the gross settlement if the case resolves before trial, climbing to 40% or more if the case goes to a jury verdict. On a $100,000 settlement that resolved in negotiations, the attorney’s fee would be roughly $33,333. On top of that, the agreement deducts case costs the firm advanced: filing fees, deposition transcripts, medical record requests, expert witnesses. Those costs often add $5,000 to $15,000 depending on complexity.
Medical liens are the other major deduction. If a hospital, surgeon, or health plan paid for your treatment and holds a lien against your recovery, those amounts come off before you see a dollar. When your attorney negotiates a lien down, the reduced figure is what should appear on the disbursement statement. The difference between the original lien and the negotiated amount stays with you.
Medicare and Medicaid Liens
Government liens are the ones you can’t afford to mishandle. Under the Medicare Secondary Payer statute, Medicare recovers any conditional payments it made for treatment tied to your injury.3Office of the Law Revision Counsel. 42 U.S. Code 1395y – Exclusions From Coverage and Medicare as Secondary Payer A pending liability case involving a Medicare beneficiary gets reported to the Benefits Coordination and Recovery Center, which issues a Conditional Payment Letter listing every related Medicare payment. After settlement, the BCRC issues a formal demand. Interest starts accruing from the demand letter, and unresolved debts can be referred to the Department of Treasury for collection or to the Department of Justice. Federal law authorizes double damages against parties who fail to resolve a Medicare claim they’re responsible for.4Centers for Medicare & Medicaid Services. Medicare’s Recovery Process
State Medicaid programs have parallel reimbursement rights against third-party liability settlements. If Medicaid paid for injury-related care, it will assert a lien, and the disbursement agreement must account for it before any funds go to you.
Private health insurance adds another layer. Employer-sponsored plans governed by ERISA often contain reimbursement or subrogation clauses letting the plan recover what it paid. Self-funded employer plans enforce these aggressively because ERISA preemption overrides state laws that would otherwise limit subrogation. If a plan lien has been negotiated down, confirm the reduced figure appears on the disbursement statement.
Taxes on What You Receive
How your net is taxed depends on what the money is compensating you for. Getting this wrong can produce a tax bill that eats into the recovery after the fact.
Damages for personal physical injuries or physical sickness are excluded from gross income, provided they aren’t punitive.5Office of the Law Revision Counsel. 26 USC 104 – Compensation for Injuries or Sickness If the whole settlement compensates you for a broken leg, surgery, and physical pain, none of it is taxable. One exception: if you previously deducted medical expenses tied to the injury and got a tax benefit, the portion of the settlement reimbursing those expenses becomes taxable.6Internal Revenue Service. Settlement Income
Several categories are fully taxable:
- Emotional distress damages not stemming from a physical injury. You can reduce the taxable amount by medical expenses paid for the distress that you haven’t already deducted.6Internal Revenue Service. Settlement Income
- Back pay, front pay, and severance, which are taxable wages subject to Social Security and Medicare taxes.6Internal Revenue Service. Settlement Income
- Punitive damages, always taxable, even in a case involving physical injuries.6Internal Revenue Service. Settlement Income
- Lost business profits, taxable as net earnings subject to self-employment tax.6Internal Revenue Service. Settlement Income
- Interest on any settlement, taxable regardless of what the underlying settlement was for.6Internal Revenue Service. Settlement Income
The attorney-fee trap catches people. If your settlement is taxable, the tax is on the gross, not the net you walked away with, which means you can owe tax on money your lawyer kept. There are two paths to relief. In employment discrimination, whistleblower, and civil rights cases, attorney fees and court costs are deductible as an above-the-line adjustment to income, so you’re taxed only on your net.7Office of the Law Revision Counsel. 26 USC 62 – Adjusted Gross Income Defined Starting in 2026, the Tax Cuts and Jobs Act’s suspension of miscellaneous itemized deductions expires, so legal fees in other kinds of cases become deductible again as an itemized deduction to the extent they exceed 2% of adjusted gross income.8Congressional Research Service. Expiring Provisions in the Tax Cuts and Jobs Act The 2% floor and the alternative minimum tax still erode this deduction, so don’t assume you’ll recoup the full fee.
On the payor side: gross proceeds paid to an attorney in the course of business are reported in box 10 of Form 1099-MISC, including when the attorney is a corporation. Attorney fees of $600 or more paid in business go in box 1 of Form 1099-NEC.9Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC In real estate, the settlement agent files Form 1099-S reporting gross proceeds, with exceptions for transfers under $600 and for principal-residence sales when the seller certifies the full gain is excludable under the $250,000 single or $500,000 married exclusion.10Internal Revenue Service. Instructions for Form 1099-S – Proceeds From Real Estate Transactions The right tax ID for each recipient needs to appear on the agreement so these forms get filed accurately.
Check These Before You Sign
Catching errors before signatures go on the page is far easier than fixing them later. A few concrete checks:
Verify the gross figure against the settlement check, the sale contract, or the approved draw request. Then work down the deductions. Compare the attorney fee against your retainer agreement. Confirm case costs match the invoices or ledger your attorney can produce. For each lien, request an updated payoff figure as close to signing as possible, because interest and new charges change the number over time. If your attorney negotiated a lien down, the reduced figure should appear on the statement.
For wire payment, confirm your bank’s nine-digit ABA routing number and your account number, and make sure the name on the account matches the name on the agreement exactly, including middle initials. A name mismatch is one of the most common reasons a wire gets rejected.
In a real estate closing, compare the final Closing Disclosure against the Loan Estimate you received earlier. Federal rules limit how much certain fees can rise between those documents, so a significant jump deserves a question before you close. In a construction draw, line up the contractor’s invoices and completion percentages against what the lender has approved.
Signing and When the Money Moves
All parties sign before any funds move. Real estate agreements usually require notarization. Electronic signatures are valid for most disbursement agreements under the federal ESIGN Act, which prevents a contract from being denied legal effect solely because it was signed electronically.11Office of the Law Revision Counsel. 15 USC 7001 – General Rule of Validity A valid electronic signing process shows clear intent, gives the signer consent to transact electronically, offers an opt-out, and retains a record of the signed document. ESIGN doesn’t apply to wills, trusts, or family law documents, but those aren’t the agreements at issue here.
Once signed, the agreement goes to whoever holds the funds. Domestic wires usually arrive within 24 hours after processing. Checks take longer. The practical timeline from signature to money in hand runs three to ten business days, depending on method and institution.
If You Find an Error
A math error or wrong figure caught after signing is fixed by a written amendment signed by every party. Where both sides agreed to one set of terms but the written document carries a different figure because of a clerical mistake, courts can reform the contract to reflect the actual intent. Proving that means showing the writing materially departed from the shared understanding at signing. Not having read the document before signing doesn’t automatically bar correction, but it weakens your position and gives the other side arguments.
The harder problem is discovering after disbursement that a lien didn’t get paid or a recipient was shorted. At that point, the release and indemnification clauses decide who absorbs the loss. That’s why the review before signing matters more than any remedy afterward.
What to Keep Afterward
Save your signed copy of the agreement along with the wire confirmation, transaction receipt, or canceled check. Together they prove the payor met the obligation and you received the agreed amount.
For taxes, keep the agreement with any 1099 forms you receive. The agreement is the record of how your recovery was allocated across categories, and the allocation drives what you owe. If part of a settlement is for physical injuries and part is for lost wages, the agreement is your primary evidence of that split if the IRS asks.