- For many attorneys, the excitement of settling a large case is tempered when the reality of the accompanying tax liability sets in. Structuring the big case payoff for future years can be used to pay for office overhead, steady law firm cash flows, and substantially reduce taxes in the year the fee is earned.
- Attorneys have the option to select the start/end date of the payments and the formats of the payments (monthly, quarterly, semi-annual, annual, lump sum), or a combination of these.
- Most attorneys do not have the time or resources necessary to establish and manage a pension plan. Structuring attorney fees allows the attorney to establish a personal pension plan that will pay a fixed amount for the rest of his or her life without the concern of administration fees and stress of typical pension plans.
- Instead of paying a higher marginal tax rate on a lump sum payout, the income can be received in later years when an attorney’s tax bracket may be lower.
- Financial security for you, your family and the firm knowing that you have a predictable stream of income without market volatility .
- Create an additional flow of retirement income with customized payment streams designed by you.
- Allow the money that you would otherwise be paying in taxes earn interest for you.
- Structures provide income stabilization and income is only taxed as it is received. You receive a 1099 in the year that you receive the payments.
- Defer paying income tax to later years when you may be in a lower tax bracket.
- You can structure your fee, even if your client decides not to structure.
- Eliminate the need to constantly monitor and reinvest your income.
- With an attorney fee structure, you don’t have to wait to age 59-1/2 years old, as you would with traditional retirement plans.
- There are NO annual contribution limits like some other retirement investment products.
Don’t give Uncle Sam almost half of your contingency fee now. Put your hard earned money to work for you….pay taxes only when you receive it.
Assuming a 40% contingency fee on a $1,000,000 settlement, your fee would be: $400,000. With the new 2016 tax bracket, your tax liability is higher than it ever was. (Federal up to 39.6%) (NY State up to 8.82%). A fee structure can ease this tax burden, earn you interest, defer your tax liability and provide a predictable stream of income for many years. Why give Uncle Sam you hard earned income as a tax, when the law permits you to invest it, with interest and only pay taxes as you receive the future payouts in a timetable that you determine? Put your own money to work for you.
Benefits:
- Tax-Deferred income
- Estate and Retirement Planning
- Guaranteed income for a specific time period or a lifetime
- Ongoing stream of income for law firm overhead
- Significantly reduce taxes on the year that your case is settled
- Defer income to future years when you may be in a lower marginal tax bracket
- Provide you or your firm with a consistent stream of cash flow
- NO money management fees
- Does not have the volatility and uncertain speculation like stocks or mutual funds
- Structure your fee even if your client decides not to structure
Disclaimer: The information on this website is educational. Tax rules are complex, highly dependent on individual circumstance, and best left to experts. You may wish to consult with your own tax expert / accountant before deciding to pursue or forego a structured settlement.
Sample Quote #1: Let’s assume that a 50 year old attorney settles a case for $1,500,000 and takes a $500,000 contingency fee on the case. They decide to take $200,000 immediate cash payment and structure $300,000. In this year, the attorney would only pay income taxes on the $200,000. With regards to the structure, they decide to be paid out starting at age 65, then guaranteed payable 15 years of monthly payments. The payout would equal $4,012/month and the total guaranteed benefit would be $722,239. A nearly 4.5% rate of return and the Peace of Mind knowing that the attorney has him/herself a $48,000 /year guarantee just on this case alone. If retired, they will no longer be bringing in the large contingency fees and won’t be in the high marginal tax bracket as when they were hitting the home run cases.
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Sample Quote #2: Attorney obtains a settlement where she received a $200,000 contingency fee. Attorney decides to structure $100,000 of her contingency fee. Right now, she is only taxed on the $100,000 that she is taking now. She has 2 year old and 4 year old child. She wants to put the monies aside for a college tuition fund. $100,000 goes into the structure to be paid in semi-annual payments starting 14 years from now when the oldest will be starting college and then payable for 6 years, ending when the youngest would be projected to finish undergraduate studies. The $100,000 will yield annual payments totaling $31,990 x 6 years. ($192,000). While it may not be enough to put (2) children through college, it’s a start. Future attorney fee structured cases can be added to this to build up the college fund portfolio. An internal rate of return of 4.1% with a predictable stream of payments. If it is later decided that one or both children do not attend college, the attorney is free to reinvest or spend the payment however they wish.
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Stacking Structured Settlements to build a tax-deferred, guaranteed portfolio: A few months after settling the above case, the attorney settles a case for $1,000,000 with a $333,333 contingency fee. They decide to structure $200,000 from this settlement with a similar payment stream as the last case. This case will yield $2,674/month with a guaranteed payout of $481,460. The new payout for this attorney’s retirement is now over $72,000/year with both cases. Attorneys do not have to have 7-figure settlements to realize the great potential of an attorney fee structure. By “stacking” a few cases per year over time, they can realize the same benefit of just a few large cases. Another great advantage is that the attorney can choose when the payments will start and stop for each case. If they feel that they haven’t funded a particular age range enough, they can make it up on their next attorney fee case. This client is well on their way with a tax-deferred nest egg by their ongoing structuring of their fees. When they begin taking receipt of the payments during their retirement years, their earned income will be much lower than now when they are settling large cases. They will be in a lower marginal tax bracket.
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Medical / Rated Age Underwriting: Unlike traditional annuities, with an attorney fee structured settlement, attorneys with health risk factors such as diabetes, high blood pressure, excess weight, smoking, history of cancer, etc will receive a higher payout on lifetime payment scenarios.
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Constructive receipt: The attorney fee structured settlement must be set up prior to the attorney taking receipt of the settlement in order to avoid constructive receipt and comply with the IRS rules.
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Working with the financial planning representative / accountant: The attorney may already have a relationship with a financial planning representative. Ray can work with the attorney’s financial representative to assure that the structure is being placed with a highly rated company and timed around what they feel would be the best plan for the mutual client. The financial planner can also look at the attorney’s portfolio and see how a guaranteed rate of return, tax-deferred product can be part of their client’s portfolio and what would be the appropriate timing of the payments to make it a vital part of the portfolio.
