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The fall season is just days away. Now is a great time for trial lawyers to consider how their financial year is going and what year end will look like. Maxing out your 401K or profit sharing plan might not be enough.  The new jobs act eliminated a lot of deductions, so successful trial attorneys having record years are more than likely hunting for options. The qualified settlement fund (QSF) is a smart planning tool that can safeguard the money from a settlement and provide for time to plan — for both attorneys and their clients. Here are the basics on QSFs and their year-end planning benefits.

A QSF is a tax-qualified trust or account that holds settlement proceeds from litigation and allows for more simplified and organized administration.

The key step to establishing a proper qualified settlement fund is to hire the right QSF administrator. Get a proper order from a court that will make your QSF a qualified settlement fund; your administrator will do the rest, more than likely under an escrow agreement and/or scope of services agreement. The administrator will provide your firm with the tax ID, W9 and payments instructions. The only change to your general releases is to designate the QSF as the payee.  Defendants that understand QSF prefer them, as payment to a QSF is absolutely final (assuming your releases are in order).

With a QSF, everyone has enough time to plan. For example, a lawyer may want his or her fees right away, but the client needs more time to set up a trust. Or, a client may want the funds right away and the lawyer would like to have more time to see what year end looks like. Either way, QSFs are a great way for trial lawyers to “set the stage” for planning. These kinds of circumstances can be remedied by a QSF, which separates the business interest between the lawyer and client.

Most lawyers groan about how much time post-settlement issues take up in their practices, so having an adept QSF administrator working with your legal team can make a world of difference. Think wrongful death cases, cases involving minors or incompetents, cases with complex liens, or subrogation interests, or even the run of the mill special needs trust.  These issues can take months.  New York State passed a new law under the EPTL 5-4.6 for exactly this reason, giving trial lawyers in NY the relief to set up a QSF on their wrongful death cases and take their fees while the surrogate process takes its course.

Most QSF are only in existence for six to nine months on average. They make a tremendous amount of sense for individual tort cases as well as inventory of mass tort cases. Lawyers involved in class actions can also use them to “capture” their fees for potential deferral. See Rob Woods article here on class action fees.

Financial Planning with Qualified Settlement Funds

QSFs also offer year-over-year planning for attorneys. Many lawyers settle big cases in the first eight months of a year. However, they may collect the cash, as they are likely conditioned as business owners to believe they need those fees for marketing, business overhead or new opportunities. It has always been safer to just take the fees as they come when settlements are achieved. Qualified settlement funds can allow a year to “mature.”

Look at it like this.  If you settle a big case in March, but you could make the decision on December 1 about whether to do a deferral, wouldn’t you agree that the decision is easier? You’ll know what kind of year they have had. By creating a QSF for your law firm, this is exactly the power of time that you can achieve. Because QSF are administered by trustees, your legal fee is a valid claim they must pay, so you haven’t made any decisions with regard to your fees, other that to stow them away till year end for safe keeping and tax planning. Talk to your CPA.

When you combine accumulation of pretax earnings in a QSF, with the tax deferred strategies available to plaintiff attorneys in the form of  a structured attorney fee (think SP500 like investments, or annuities), contingency fee attorneys have the ability to save pretax like no other.

At Milestone Consulting, our experts find the best method to reach clients’ goals and meet government compliance. Planning-focused rather than product-oriented, we walk a client through the process to help them make the most informed decisions possible. Together, we develop the best course of action and guide our clients specific to their challenges. Contact Milestone today to learn more about QSFs and other planning options.

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