ATTORNEY FEE DEFERRAL

If you have ever considered deferring some of your contingent legal fees, now is the time to take a harder look.  With looming changes to the tax scheme, now more than ever it may make sense to do so even if the rates of return are lower.  There are two primary ways that attorney fees can be deferred. The first involves using an attorney fee structure.  An attorney fee structure is either a fixed annuity or an indexed annuity.  The second involves a deferred compensation mechanism that is widely used for highly compensated executives.  Either method achieves the same thing which is deferral of taxes on the contingent legal fee earned in that particular year.  To learn more about these options, visit https://synergysettlements.com/service/attorney-fee-deferral/

With the change in administrations last year, new tax rates are coming down the pike.  We all have seen that the President continues to try and push his agenda forward.  He does want to reduce the tax rates and continues to work on his campaign promises.  Now is the time to consider doing some planning to take advantage of what likely will be a lower effective rate for attorneys and other investors with tax deferral methods.   President-elect Donald Trump released his plan earlier this year. For the purposes of this blog, we will use his proposed plan and the current estimated 2016 plan under President Obama to illustrate what the tax differential is likely to be. Both of these charts were obtained from The Tax Foundation website ( www.taxfoundation.org )

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In an effort to keep things simple, we are only going to discuss the marginal tax brackets; however, it is safe to assume that other deductions and credits will also change moving forward. For an attorney, filing jointly, that earns in excess of $231,450, they can see a potential tax savings of 6.6% annually under the new rates. The current 10-year treasury rate is under 2%. If you combine a traditional tax deferred attorney fee structure (the most conservative way to god) with a marginal tax savings, you can see a 3-9% return on your money.  Not bad for taking little to no risk on an investment!

For a better idea of the options available, please review our previous blog that reviews the various options available:

Are you cutting a check to the IRS this year?

Ask us how to start deferring taxation for contingent legal fees today. Don’t delay any longer!

 

As the Republican Party takes control of the White House and Congress in 2017 we can expect some changes to the tax code. Now is the time to consider doing some planning to take advantage of what likely will be a lower effective rate for attorneys and other investors.

President-elect Donald Trump released his plan earlier this year. For the purposes of this blog, we will use his proposed plan and the current estimated 2016 plan under President Obama to illustrate what the tax differential is likely to be. We pulled both of these charts from The Tax Foundation website (www.taxfoundation.org)

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In an effort to keep things simple, we are only going to discuss the marginal tax brackets; however, it is safe to assume that other deductions and credits will also change moving forward. For an attorney, filing jointly, that earns in excess of $231,450, they can see a potential tax savings of 6.6% annually. The current 10-year treasury rate is under 2%. If you can combine a traditional tax deferred attorney fee structure with a marginal tax savings, you can see a 3-9% return on your money.  Not bad for taking little to no risk on an investment!

Ask us how to start deferring taxation for contingent legal fees today.

Leif Lundberg, LL.M and Ben Eisler, JurisPrudent Deferral Solutions

Takeaways

  1. Defer compensation like Fortune 500 executives do, so your money grows faster.
  2. Tie your fee to the returns of investments that you select – stocks, bonds, real estate, etc.
  3. Gain access to low-interest loans, as needed, to fund cases (currently 3-4%).
  4. Use “golden handcuffs” to retain key associates, so if they leave too soon their deferred bonus comes back to the firm.
  5. Do this with the same benefits and protections offered to Fortune 500 CEOs.

A few months ago, we met a trial attorney in Florida. He was like a lot of people reading this post; well-respected, successful, hardworking. He had just settled a big case for his client, and they were a couple of weeks away from finalizing the release. He was excited about the result, but also frustrated that he had to pay a ton in taxes, when some people, like big wigs at Fortune 500 companies for example, can defer their compensation and taxes, effectively earning interest on the government’s money.

He looked at structuring his fees with an annuity – one way to defer taxes. But he didn’t like that annuities are conservative investments and with a lower interest rate than market based investments. And just as he was about to pay taxes on his fee, Synergy told him about a product provided by JurisPrudent Deferral Solutions. We explained how our program allows you to defer taxes and tie your fee to the returns of a customized portfolio of investments that you (or your financial advisor) select – stocks, bonds, real estate, etc. In that sense it’s a lot like a 401(k) plan for trial lawyers. Though like deferred compensation for corporate executives, there is no limit on how much you can defer.

We also explained how in addition to reducing your tax burden and increasing your wealth accumulation, deferring fees can increase your access to cash to fund cases, because as we get to know your firm, our company will make loans at very low rates – currently 3-4% interest. And we shared how he could use deferred fees as “golden handcuffs” to retain key associates, so if they leave too soon their deferred bonus comes back to the firm.

So ultimately this attorney did his due diligence and decided to defer a large portion of his fee and take some in cash to cover expenses. As a result, he avoided a big tax hit without sacrificing his investment returns. He is now earning interest on the government’s money and has access to low-interest loans.

You may be thinking how do the guys at JurisPrudent know so much about deferred compensation? Combined, our leadership team has more than 100 years of experience in this industry. Our parent company administers almost two billion dollars in deferred compensation plans for some of the largest companies in the country – current clients include Microsoft, Cisco, and Bank of New York Mellon. Our program is administered by Newport Group, the country’s largest administrator of deferred compensation plans for corporate executives, and Bank of New York Mellon is the trustee and custodian of the assets backing the program. No other fee deferral program provides this level of safety and service.

So please consider deferring your fees with us. Synergy is a strategic partner with JurisPrudent and works daily with their highly skilled team to create cutting edge solutions for lawyers looking to pay less in taxes. Visit www.structuredfees.com for more info.

Bet On Your Health!

A pre-tax and tax-deferred attorney fee structure offers great benefits to attorneys who earn contingent legal fees.  In essence, it is an unlimited retirement investment vehicle exclusively for attorneys.  Using annuity based fee structures, an attorney can get a guaranteed competitive fixed rate of return.  The returns are typically similar to other fixed instruments such as bonds.  However, there are ways to boost return by using a life contingent plan.

The traditional attorney fee structured settlement has a fixed payment stream.  The payment is guaranteed for the term of the contract.  However, when you have a life contingent component you add in a variable element.  It is not variable like the returns on a stock.  The variable is your ability to outlive the insurance company’s life expectancy.  The longer you live, the greater the ultimate return.

The pricing methodology for an annuity is based upon the guaranteed payment stream coupled with the mortality tables.  To illustrate this point, an attorney can defer $375,000 into a traditional structured settlement.  Let’s assume the payment stream selected is for life with a 20 year guarantee.  Let’s also assume for easy math the payment is 2,000 per month.  In order to figure out the rate of return, we typically look at the following:

  • Rate of Return Worst Case Scenario (Only 240 Payment are Made) –        2.6%
  • Rate of Return at 30 years (the last 10 years were not guaranteed) –        5.0%
  • Rate of Return at 40 years (the last 20 years were not guaranteed) –        5.7%

For an extremely healthy client with a family history of longevity, betting on your own life expectancy can create a much higher rate of the return.  By analyzing the impact of the guarantee periods in a traditional structured settlement, you can look at the option of taking on more life expectancy risk to create the potential for higher returns.  This is accomplished by potentially using a shorter guarantee period and betting on a longer life expectancy.  In the above scenario, the attorney’s rate of return will be between 2.6% and 5.7% depending on how long they live.

No matter what, it is still a conservative approach to investing by using a fixed annuity.  With proper planning, you can do the assessment with your settlement planner on what guarantee periods make sense for you and your family.  There is risk in all investments.  Using a fee structure annuity with a lifetime component is something every attorney should consider in their retirement planning.  The proper investment and product allocations will ultimately determine the success of your retirement plan.  You should consider all the options for deferring attorney fees as part of your retirement plan.

Synergy offers unique solutions for trial lawyers to invest their fees on a pre-tax and tax-deferred basis.  Visit www.structuredfees.com for more information.

 

Are you Cutting A Check to the IRS this Year?

By Daniel J. Alvarez, J.D. and Anthony F. Prieto, Jr., CFP®

As the tax season draws to a close, you may be reviewing your tax return with some displeasure.  Did you cut too large of a check to the Department of Treasury for your 2014 tax bill? If so, there are several options for you to consider to lessen the tax burden for 2015.

Due to the contingent nature of compensation as a plaintiff lawyer, unique pre-tax and tax deferred retirement planning options are available. Herein we will compare and contrast traditional small business retirement plans with some of the unique tax deferred options available when you earn a contingent fee.

The following are common advantages to deferral in general:

  • Creating an automatic investment program to help augment your retirement
  • The possibility of paying less tax on the withdrawal than the current tax rate
  • Potentially manipulating tax brackets during the deferral years and the withdrawals years
  • Earning interest on money that would have gone directly to your immediate tax burden
  • Being able to invest 100% of the money pre-tax instead of after tax

Given these obvious advantages, which of the following is the best fit for your practice?  The information below may be helpful in determining which plan or combination of plans makes the most fiscal sense.

Traditional Small Business Retirement Plans

A few examples of those that would fall under the traditional options include 401(k)s, Defined Benefit Plans, Profit Sharing, SEP IRAs and Simple IRAs are a few that would fall under the traditional options. These plans allow employees/owners to contribute funds on a pre-tax basis into the plan. The plan typically has a myriad of investment options to consider. All taxes are deferred until the funds are withdrawn.

Pros:   

  • Easy to install
  • Each employee/owner makes independent deferral and investment decisions

Cons:   

  • The plans typically have low deferral limits ($25k or less)
  • Most small business plans require the employer match employee contributions
  • These plans are typically subject to withdrawal penalties before age 59.5 and RMD withdrawals beginning at age 70.5

Attorney Fee Structured Settlement Plans

Attorneys are allowed to defer their fees by utilizing structured settlement annuities similar to those that are used for planning purposes with personal injury clients. The fee structure is not tax free, but is instead tax deferred. One hundred percent of the fee can be put into the fee structure or just a portion of the fees. It is done on a pre-tax basis so that taxes are not recognized until the year in which future periodic payments from the fee structure are received. For example, an attorney can earn a $250,000 fee in 2014 but set up a payment plan that pays him from 2020 to 2030.  There would be no taxable income in 2014, the entire $250,000 fee would go into the fee structure annuity and the tax burden would be spread out from 2020 to 2030.

Pros:

  • Easy to use
  • No investment risk
  • Unlimited deferral amount
  • No early withdrawal tax penalties
  • Ability to create a lifetime income

Cons:

  • Plan cannot be modified after the release is signed (No acceleration or deceleration of payments)
  • Fixed investment option only
  • Coordination with Client and Defendant required

Alternative Fee Deferral Programs

Several new alternatives have popped up in the marketplace over the last few years that rely on the same premise and case law as the Attorney Fee Structured Settlements. The two that are most commonplace are the use of offshore assignment companies and deferred compensation programs.

Offshore Assignment Companies (non-insurance partners) allow the attorney to defer the fee into the Assignment Company that then invests the proceeds through a variety of investment options.

Pros

  • Variety of investment options
  • Unlimited deferral amounts
  • No early withdrawal tax penalties

Cons

  • Plan cannot be changed after the release is signed (No acceleration or deceleration of payments)
  • Complex investment program involving offshore assignments
  • Coordination with Client and Defendant required

The Deferred Compensation program is done through the use of a Rabbi Trust. This option does not involve an offshore assignment and has flexible withdrawal options.

Pros

  • Variety of investment options
  • Unlimited deferral amounts
  • No early withdrawal tax penalties
  • Withdrawal rights can continue to be deferred
  • Simple language Incorporated in Client Agreement (not release)

Cons

  • Complex investment program for highly qualified investors
  • Ongoing investment management and withdrawal decisions

As this article points out, there are pros and cons to each alternative.  Each attorney should seek out a qualified planner and tax professional to help them navigate the options. In all probability, the best option is a combination of the programs. A fixed income component, such as a fee structure annuity, is a wise piece of any diverse investment portfolio. Plaintiff attorneys should carefully consider whether adding fixed income pre-tax makes the most sense for their financial goals. In addition, other alternative deferred compensation programs should be explored as well.

Please contact Synergy today at 877-242-0022 or info@synergysettlements.com for more information on utilizing these unique planning opportunities exclusively available for contingent legal fees.

Attorney Fee Deferral Programs

 By Daniel J. Alvarez, J.D. and Anthony F. Prieto, Jr., CFP®

Due to the contingent nature of compensation as a plaintiff lawyer, unique retirement planning options exist especially for you. Below we compare and contrast traditional small business retirement plans with some of the unique tax deferred planning options available when collecting a contingent fee.

The following are common advantages to deferral in general:

  • Creating an automatic investment program to help augment your retirement
  • The possibility of paying less tax on the withdrawal than the current tax rate
  • Potentially manipulating tax brackets during the deferral years and the withdrawals years
  • Earning interest on money that would have gone directly to your immediate tax burden (investing 100% instead of 60%)

Given these obvious advantages, which of the following deferral options or combination will achieve your goals?  The information below may be helpful in determining which plan or combination of plans makes the most fiscal sense for you.

Traditional Small Business Retirement Plans

401(k)’s, Defined Benefit Plans, Profit Sharing, SEP IRAs and Simple IRAs are a few that would fall under the traditional options.  These plans allow employees/owners to contribute funds on a pre-tax basis into the plan.  The plan typically has a myriad of investment options to consider.  All taxes are deferred until the funds are withdrawn. 

Pros:   

  • Easy to install.
  • Each Employee/Owner makes independent deferrals and investments.

Cons:   

  • The plans typically have low limits ($25k or less).
  • Most small business plans require the employer match employee contributions.
  • These plans are typically subject to withdrawal penalties before Age 59.5 and required mandatory withdrawals beginning at Age 70.5.

Attorney Fee Structured Settlement Plans

Attorneys are allowed to defer their fees into structured settlement annuities similar to those that are used for planning purposes with injury victim clients. The fee structure is not tax free but is instead tax deferred. Taxes are not recognized until the year in which payments from the fee structure are received. For example, an attorney can earn a $250,000 fee in 2014 but set up a fee structure with future periodic payments from 2020 to 2030. There would be no taxable income in 2014 and tax would only be due each year that money is paid out from the fee structure during the years 2020 to 2030.

Pros:

  • Easy to Use.
  • No Investment Risk.
  • Unlimited Deferral Amounts.
  • Non-marital Asset. No Early Withdrawal Tax Penalties.
  • Ability to Create a Lifetime Income.

Cons:

  • Plan cannot be changed after the release is signed (no acceleration or deceleration of payments).
  • Fixed Investment Option Only (bond like returns).
  • Defendant Cooperation and Required Language in the Release.     

Alternative Fee Deferral Programs

 

Several new alternatives have popped up in the marketplace over the last few years that rely on the same premise and tax case law as the Attorney Fee Structured Settlement. The two that are most commonplace are: 1. Offshore Assignment Companies and 2. Deferred Compensation Programs.

1. Offshore Assignment Company (Non-Insurance Partners) – They allow the attorney to defer the fee into the Assignment Company that then invests the proceeds through a variety of investment portfolios.  Through the use of the non-qualified assignment, you can unleash the power of deferral utilizing pre-tax dollars to generate tax-deferred cash flows. 

Pros

  • Variety of Investment Options.
  • Unlimited Deferral Amounts.
  • Non-marital Asset.
  • No Early Withdrawal Tax Penalties.

Cons

  • Plan cannot be changed after the release is signed (No acceleration or deceleration of payments).
  • Complex Investment Program involving Offshore Assignments.
  • Defendant Cooperation and Required Language in the Release.                 

2. The Deferred Compensation program is done through similar mechanics as the other deferred fee options. The main difference is in the funds not having offshore involvement and withdrawal mechanics.  This type of program allows you to invest pre-tax, tax-deferred in the investments of your choosing, and to control the timing of benefits and, therefore, of taxation.  It is like a super 401(k) with no limits on contributions or penalties on withdrawals. 

Pros

  • Variety of Investment Options.
  • Unlimited Deferral Amounts.
  • No Early Withdrawal Tax Penalties.
  • Withdrawal Rights can be Deferred.

Cons

  • Complex Investment Program for Highly Qualified Investors.
  • Coordination with Client and Defendant Required.

As this article points out, there are pros and cons to each alternative. Each attorney should seek out a qualified planner and tax professional to help them navigate the options. In all probability, the best option is a combination of the programs. A fixed income component is a wise piece of any diverse investment portfolio. Plantiff attorneys should carefully consider whether adding fixed income pre-tax makes the most sense for their financial objectives.

Please contact Synergy for more information on utilizing these unique solutions.

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