By Sam Dolce-Powers, Esq.
If you’re a financial advisor with clients who are attorneys and/or plaintiffs, you already know how valuable they are to your practice and your AUM. But as planning for settlement and attorney fees evolves, you’ve got to stay with the times. Investment-backed structures are the talk of the town in 2021, and it’s important to understand how this planning option works so you can properly serve those clients. Through structured arrangements, you can set your clients up with tax savings and greater growth, offer this latest option to potential clients, and stay ahead of your competition.
“Structure” is an overarching term for settlement proceeds that a person receives as a periodic payment obligation. The IRS allows plaintiffs to turn a lump sum settlement into a series of guaranteed payments according to a set schedule – helping them to plan long term and get the most out of their settlement monies. Likewise, attorneys can set up a similar arrangement with their contingency fees while also spreading their tax burden over time. When placed into a periodic payment obligation, funds can grow tax exempt (for example, for personal injury plaintiffs) or tax deferred (for trial attorneys who structure their contingency fees). This arrangement can result in hundreds of thousands of dollars more for the client and double the AUM for the financial advisor.
Here is a basic example to explain how it works uniquely for an attorney and his client. Let’s say a $3 million case settles. The plaintiff receives $2 million, and the attorney receives a fee of $1 million. The client chooses to place the full $2 million amount into a structure, backed by an investment account with you, her financial advisor. She chooses a payment schedule that pays $100,000 out of the account per year. The account grows by six percent, and your fee is one percent. Therefore, the $2 million grows by $120,000 a year, of which the client sees $100,000 in growth. The periodic payment obligation is merely paying out gains on the account. And, since it is a periodic payment obligation arising from a personal injury settlement, the payments AND the growth are tax-exempt.
The attorney also places a structure backed by an investment account with you. He chooses a payment schedule that will pay him $100,000 out of the account per year after the funds are left to grow for 10 years. Let’s say the account grows by six percent, and your fee is one percent. Therefore, the $1 million grows by $60,000 a year, of which the attorney sees $50,000 in growth. This is compounded upon itself for 10 years. Since periodic payment obligations push out the date of receipt by years, the growth is tax deferred in the meantime. Instead of the original $1 million being taxed at a very high rate, the client can snowball the tax deferred growth and then receive the funds over a period of years, allowing him to be into a lower tax bracket. It is also worth noting that the amount invested upfront will be almost double, since it is pre-tax money – translating to a greater AUM for you.
Below is a visual representation of the growth on this deferred $1 million fee.
With an investment-backed structure, the investment options are endless. The periodic payment obligation, while fixed, is completely customizable to any fixed equation, and the tax savings and growth advantages are significant. If you are unable to offer your clients and potential clients these options, it is likely they will seek such advantages elsewhere. If you’d like to learn more about structured arrangements, please feel free to give us a call.
A West Point graduate where he served as captain and military aviator, John Bair continues his commitment to our country through his efforts within the settlement planning industry. He has represented families of victims lost in the Flight 3407 crash, offered pro bono services to the families of 9/11 victims and drafted the first consumer protection bill for plaintiffs (H.R. 3699).