People want money when they know they are entitled to it. This is more true today than it ever has been. If we order a product, or want a service, we can have access to it within a maximum of a week. Our expectations for delivery are at an all-time high, and our impatience just seems to grow.

If you are a plaintiff attorney, especially one who deals with personal injury cases, you have probably experienced this impatience on a much grander scale.

The Scenario:

You just won a large amount of money for a client who was severely injured and will need care for the rest of their lives. That care, as you know, is going to cost them a lot of money over a long period of time.

The Problem:

The plaintiff and/or their family wants of the money in lump sum.

This is understandable because when people know they are entitled to something, they usually want it all at once. In cases where the settlement is smaller, or the plaintiff was killed in a wrongful death situation, a lump sum settlement payment makes sense. But in a situation like the one I described above, it can be much more beneficial to go with a structured settlement.

The sad truth is that most people tend to get irresponsible with their spending when they have just received a lot of money. Look at a lot of this centuries lottery winners and some former professional athletes. When you put a large stack of money in front of someone, they think about what they can do with the money right then. It doesn’t mean they are bad people. It’s just that odds are, they have a lot of bills that have piled up, and probably other debt to take over that existed before they were ever injured. Of course, they’ll clear off all of their debts and try to make their lives as comfortable as possible. They have been through a lot. All of that can distract them from the fact that all of the money is meant to support them for the long run. They could quickly get caught up in spending within the first few years after the receiving it, and end up without enough money to afford the medical care they need when they are older and there’s no family members around to look after them.

Structured settlements help to fix that. It ensures the money has longevity, and that there will always be money to afford the medical care the plaintiff needs. When a client says they want a lump sum payment, think about what all they will need for the rest of their life, especially if they will be unable to provide for themselves. You’ve helped them win the case. Now help them stay on the right course for the best life possible.

Want to learn more about structured settlements vs. lump sum payments? Check out Alanna Ritchie’s article, “Would a Structured Settlement or Lump Sum Make Sense for Your Client?”

Copyright: efired

Today’s guest blogger is Jason D. Lazarus, Esq. of Synergy Settlement Services.  I invited Jason to explain a few techniques that I’ve seen many successful contingent-fee lawyers use to help manage their income stream, tax burden and even plan for retirement.  I hope this is helpful to you.

By Jason D. Lazarus, J.D., LL.M.

Lawyers who earn contingent legal fees have a unique ability to control the timing of their income with either attorney fee structures or deferred compensation arrangements.  While many lawyers fail to consider these vehicles due to lack of information, it is easy to see once one understands the options how powerful this can be for contingent legal fees.   Through these mechanisms, a lawyer can forego taxation of fees earned in one tax year and spread out the income over a number of subsequent tax years.  It allows a contingent fee to be paid out over time and taxed in the years each payment is received instead of in year one.  This method was born out of the landmark tax decision in Childs v. Commissioner[1].  In the Childs case, the IRS challenged just such an arrangement.  The IRS ultimately lost in the 11^th Circuit.  Since it was decided in 1996, Childs has not been challenged by the Service and has even been cited by the IRS as a precedent in a recent Private Letter Ruling[2].  According to Robert Wood, the preeminent expert on taxation of damages, “the IRS has begun uniformly citing Childs favorably, and is apparently quite comfortable with this.”[3]

The benefits of using an attorney fee tax deferral program regularly are significant.  First, it allows a trial lawyer to even out what usually can be uneven cash flows.  Controlling timing of income is a huge advantage over other professions where it can’t be controlled.  Since a lawyer can defer only part of their fee if they so choose, there is complete control over the income a lawyer takes in any given year.  In addition, there is no requirement that the client structure their monies or participate in any way with their attorney.  Second, fees are invested pre-tax allowing one hundred percent of the money to earn interest and no tax is due until distributions begin.  Third, it can help lower the overall tax burden by spreading taxation out over a longer period of years when hopefully the lawyer is in a lower tax bracket.  It can also possibly avoid application of the Alternative Minimum Tax (AMT).  Fourth, the future periodic payments from the fee structure or the nonqualified deferred compensation arrangement can be planned out to match future needs such as college tuition for children, large expenditures or retirement.  The periodic payments can also be paid in the short term to assist with immediate cash flow.  .  Lastly, there are no limits on the amounts to be deferred or restrictions on distributions like qualified retirement plans.

There are two different mechanisms that can be used to defer taxation of fees.  The first is an attorney fee structured settlement and the second is a nonqualified deferred compensation plan using a CaR trust.  For an attorney fee structure, the fee is deferred through either a qualified or non-qualified assignment.  A qualified assignment utilizes a fixed annuity and pays out over a specific time period or life depending on the plan selected by the lawyer.  A non-qualified assignment may use a fixed annuity, high yield fixed payment rights or securities.  With any type of fee structure, the fees must go directly from the defendant to the assignment corporation like a traditional structured settlement.  Special language must be included in the release and an assignment document must be executed.  The terms of the lawyer’s future periodic payments from the fee structure must be contained in the release.

With a nonqualified deferred compensation plan using a CaR trust, the fee is deferred by having the defendant pay the fee to the plan administrator.  The investments inside the trust may be selected by the attorney and can include securities based investments as well as high yield fixed payment rights.  The deferral program goes for 20 quarters with the first payment deferred 5 quarters.  Each quarterly bucket is credited with investment earnings.  When it is due to be paid, it can either be paid out in full, partially or deferred.  If it is deferred, it goes to the end of the line of the 20 quarters worth of buckets.  This allows a lawyer to elect not to receive payments at any given time if their current income necessitates more deferral.  For example, a lawyer has a great year and can then decide he does not want any buckets in that particular year.  With a nonqualified deferred compensation plan there is no need for an assignment or special language in the release.  The details of the arrangement do not have to be disclosed in the settlement documents.  The defendant would still have to make out a check to the deferred compensation plan.  A nonqualified deferred compensation program can be used to retain key lawyers in a firm and potentially can be used for borrowing purposes.

The beauty of both fee structures and nonqualified deferred compensation plans is that there are no limits on the amount you can defer or participation requirements like with qualified plans.  An attorney can also develop a strategy using a portion of each fee earned to create a significant amount of pre-tax and tax deferred investments.  For example, a firm I work with takes a small portion of each fee ($25 to $50k) and sets up deferred fee structures.  Over a 10 year period they accumulated over $1 million in deferred attorney fee structures.  However, because both the fee structure and nonqualified deferred compensation plans are complex planning tools, you should employ an experienced planner to walk you through the options and develop a strategy.  Both options have pros and cons.  They both have technical requirements which require the help of experts.  Learn more about how to maximize the fees you earn and harness the power of pre-tax and tax deferred investment options for contingent fees.

• To learn more about tax deferral of contingent attorney fees, visit www.structuredfees.com
• To learn more about Synergy Settlement Services, visit www.synergysettlements.com

[1] 103 T.C. 634 (1994), aff’d without opinion 89 F.3d 856 (11^th Cir. 1996).
[2] PLR 150850 (2008)
[3] Legal Fee Structures Can Hedge the Insecurities Many Lawyers Face, Los Angeles Daily Journal (Friday August, 28, 2009) at P. 6.