This week we saw a monumental victory in the Bayer/Monsanto Roundup litigation. The personal injury law firms that represented the plaintiffs worked for years to make these behemoth companies pay for knowingly exposing people to cancer-causing chemicals in Roundup weedkiller. Unfortunately, Uncle Sam will take a cut of those hard-earned attorney fees come tax time.
In fact, the IRS and state governments are slated to earn around $2 billion from the lawyers who stood up to Bayer and Monsanto and obtained $10 billion on behalf of those suffering from non-Hodgkin’s lymphoma in accordance with the announced settlement. How? The firms representing the plaintiffs in this litigation will earn an average of 33% to 40% in contingency fees — an estimated $4 billion in legal fees in this litigation alone. And since 99% of these trial attorneys’ equity ownerships are pass-through tax entities like PPCs and partnerships, a portion of $4 billion of revenue is about to hit each of the partners’ personal tax returns in 2021 and 2022.
In 2020, the top marginal federal income tax rate of 37 percent will be applied to single taxpayers with taxable income of $518,400 and higher and married couples filing jointly with $622,050 and higher. When you also consider state taxes, the lawyers will likely pay 45% in taxes on this recovery, putting the total tax between $1.5 billion and $2 billion.
Of course, associates, legal staff, and referring attorneys’ payments will somewhat dilute this number. Still, the nature of the modern-day plaintiff law practice is that big chunks of revenue come in every five years or so, leading to staggering amounts of taxes owed.
Solution: Income Spreading with Attorney Fee Deferral
Plaintiffs’ lawyers set to recover significantly in the Roundup litigation are well advised to look hard at national fee deferral options available. For those in a position to receive seven-figure-plus fee revenue from this litigation, leveraging pre-tax investing and tax spreading can significantly reduce or eliminate the taxation of the fees associated with Roundup.
The concept of income spreading is a tax technique starting in the 1980s, which alleviated much of the peak-and-valley nature of plaintiff personal injury fee revenues. In 1996, the 11th Circuit affirmed the 1994 Tax Court’s ruling in Childs v. Commissioner (103 T.C. 634). The Court ruled that: Attorneys involved in tort cases under contingency fee agreements have the unique opportunity to receive their fees in the form of periodic payments. Attorneys may elect to defer all or a portion of their fees. Fees included in the structure will not be taxed until the year(s) in which they are received. The practice of deferring contingency attorney fees has not been contested since 1996.
Under qualified rules, 401k contributions are limited, and even professionally managed profit sharing plans — which carry a census cost for contribution — can max out quickly. Deferring fees does not replace a 401k; rather, it’s an additional investment that offers different benefits than a 401k does.And unlike a 401k, attorneys can access their money if they need to with our feeMaster program. This program uniquely offers a 100% liquidation hardship feature based on state law that makes these irrevocable, professionally managed portfolios come of age.
Another important ingredient in a quality national program is open architecture on wealth management. Good national programs should have no upfront fees and should only assess an annualized fee on the assets in the program. Milestone’s fees range from 0.5% to 1% annually.
If you’re expecting a large fee from Roundup or any other mass tort litigation, we welcome you to contact our team to discuss reducing your tax burden through fee deferral.
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).