Every day, we at Milestone Consulting have an opportunity to elaborate on the concept of deferred income or structured attorney fees with lawyers, professional athletes, and business owners who are finalizing a significant payday for themselves in the near future.
Trial lawyers working on cases via a contingency fee agreement should know that through the use of periodic payments, they have the opportunity to defer an unlimited amount of income.
Why Can Attorneys Structure Contingency Fees?
A structured fee or attorney fee deferral is unique to lawyers practicing on contingency. The practice began in the early 1980s, when interest rates were in the double digits. The IRS challenged an attorney taxpayer, Kenneth Childs, which became the landmark case. Upheld by the 11th Circuit in 1996, the court found that if an attorney has not “earned” the fee, even though a case may be settled in principle (or formally been put on the record), the payment of the fee has yet to occur. This case covers “the intent of the parties” in creating a payment other than cash.
What You Need to Know About Structured Fees
If you are an attorney enjoying success in your practice — and you are looking for ways to save more money before federal and state income tax — the attorney fee deferral is a method to consider.
Most attorneys who have gotten to the point of considering a qualified settlement fund (QSF) and periodic payments to defer income have spent a significant amount of time talking to their peers, doing their own research, and finding industry experts who provide these tax deferred solutions. Let me save you some time.
If you need tax advice, Robert Wood is the most credible and professional authored tax attorney expert in the country when it comes to lawyers fees, QSFs, and attorney fee deferral. I have known Rob for 18 years, and our practices frequently collaborate.
You will most likely want your own QSF. Regardless of an already existing master settlement agreement for a mass tort or multidistrict litigation, a class action with its own class administration, or a single tort case with a handle full defendants, your firm’s own QSF is a professional standard of care in our business. The trustee or fiduciary of the QSF should be versed in its administration but especially sophisticated in properly documenting and creating a periodic payment for the parties.
The First Rule of Establishing an Attorney Fee Deferral: Someone — the defendant, insurer, or a QSF administrator — must create a “promise to pay” or “periodic payment.” This right should be set forth in the release document that releases the party making payment. HINT – USE of your own QSF is advisable.
Every obligation must be assigned to an “assignment company” that is independent of the defendants and insurance companies in the cases. The owner of the obligation is critical to making any periodic payment deferral work. If you are willing to stick to a fixed guaranteed annuity, you can stay onshore, and create a payment plan backed by a major insurer, like Metropolitan Life. Even in these transactions, attorneys are forced to be a creditor of the assignment company.
The advent of offshore assignment companies was born in the 1990s to give litigating attorneys options on taxable settlements. Basic tax spreading couldn’t be accomplished through traditional IRC 104a2 and 130 assignments. Major insurance companies like Prudential, Allstate and Liberty Mutual created assignment companies in Tax Treaty-friendly Barbados. This legacy of work is why we founded our independent Global Periodic Payment Assignment Company (GPPAC) in Barbados. These transactions should be 100 percent transparent, and it should be obvious to any lawyer doing due diligence where there fee assets will be, and what their security protections are. Remember, in order for the tax deferral to work, someone other than you, the attorney, has to own the account.
If you are going to trust a company to hold millions of dollars of your fees for 10 to 20 years, there should be a bulletproof security guarantee. Our GPPAC provides a automatic guaranteed account ownership transfer to our attorney beneficiary, should there be any incidence of failure to pay or default or a breach. These contractual provisions are further strengthened with an escrowed default judgment executed by the periodic payment obligor, GPPAC. We believe this is the only security measure of its kind in the U.S.
Professionally administered attorney fee deferral program, the assets should be custodied in the U.S. with a major third party custodian like DA Davidson, Charles Schwab, TD Ameritrade, or a trust company as the independent trustee.
Some Major Players in Attorney Fee Deferrals
Integrated Financial Settlements (IFS), a predominantly defense-oriented structured settlement brokerage firm, which owns a majority of the defense brokerage firms in the country that do defense structured settlements, to include EPS settlements Group (now known as Acadia Settlements), Henrys Strong firm, Millennium, SFA and others. IFS offers an annuity based deferral.
Kenmare Assignments and Brook Hollow offer a Ireland based Assignment, and a predominately wealth management approach to managing the assets during accumulation and through distribution to the attorney making a deferral. This program offers a line of credit, or loan facility against the assets, which we believe to be a clear violation of the economic benefit doctrine and in our opinion is dangerous for attorneys to consider. See economic benefit doctrine here.
Liberty Mutual, Allstate, and Prudential, manage Barbados jurisdiction assignment companies that fascinate the creation and assignment of a periodic payment obligation to an independent assignee, and then the obligation is backed by a fixed guaranteed annuity. These are the only programs that major insurance companies like AIG, Zurich, Aetna, will participate in directly.
*This makes the use of a qualified settlement fund important for planning the settlement of cases. Fixed guaranteed annuities offer 2.5% to 3.5% fixed interest. *Prudential and Allstate no longer actively write non qualified annuities at the time of this post.
A Truly Plaintiffs’ Attorney-Based Comprehensive Corporate Structure
Through our holdings, Milestone Consulting, Seventh Amendment Holdings, and our wealth management firm we provide a plaintiff attorney-centric corporate structure that provides the attorney with the most options, security, disclosure, and support in determining the tax position and whether deferral is appropriate.
Our consulting approach is to provide a comprehensive expert team that will provide the attorney with client resources, information and research, unbiased opinions, experience, and advice on strategies. Uniquely, our program offers four types of assets to back our periodic payment obligations. These are:
- Wealth management accounts: The investment options are limited to any stock, bond, mutual fund or ETF or ALP listed on a US exchange. The accounts are custodian at major US Custodians like Fidelity, Schwab, or TD Ameritrade.
- Permanent life insurance: This option provides an immediate death benefit, which may be useful in reducing after tax insurances that partnerships may already be purchasing for buyout, key man, or other risk management.
- Indexed annuities: These provide guarantee no risk of principle and market participation.
- Fixed guaranteed annuities: Your traditional structure.
To set up and administer a QSF, the annual fees will run $2,500 to $10,000. Based upon the assets mix that you choose, you are looking at one of the following:
- A four percent commission on annuities,
- Eight to 15 percent of life insurance, or
- One to three percent annually on the management of the assets.
We believe our program is the least expensive in the country with the QSF running $2500 all in, and the professional wealth management fee of 1.5 percent annually on the assets managed. Our program also uniquely offers you to designate a Limited Power of Attorney and have your own trusted advisor have access to the account and to provide their professional advice on your deferred portfolio — just as they do for your individual accounts and perhaps retirement accounts.
Feel free to contact Milestone Consulting with any questions about attorney fee deferrals.
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).