As published in the 2004 Kentucky Academy of Trial Attorneys Advocate
Some of the great innovations in the structured settlement industry have come in the area of using structured settlements for attorney fees.
For several years, advisors recommended that attorneys not structure their fees until a 1994 tax court ruling clarified the ability of attorneys to defer income taxes. Now structured settlements for attorney fees are common and acceptable.
Several innovations have come from insurance companies that market structured settlements.
Some of the innovations include concepts like allowing attorneys to do structured settlements on their fees even when their clients do not participate in structured settlements; allowing for attorneys to receive a “rated” age; allowing attorneys to receive payments over their lifetimes; and allowing attorneys to commute the stream of payments in case of emergency or death.
Structuring Attorney Fees When the Client does not Accept a Structured Settlement
For a number of years, insurance carriers have only accepted structured settlements on attorney fees when the injured client also structured part of their settlement. Several companies wanted the client to structure as much or more of the settlement as the attorney.
In recent years, more and more carriers accept “stand alone” structured settlements for attorney fees, even when a structured settlement is not something that a client desires or needs. Thus allowing attorneys to utilize this financial planning tool on every case.
We have seen attorneys who literally structure every fee that they receive and set up long term retirement planning to ensure that they have cash flow over the upcoming years to meet case and office expenses. Others will do it on large cases where they have a significant potential tax liability or future financial needs, such as their children’s’ college education, to fund.
Allowing for a rated age for attorneys.
One of the better innovations that structured settlement carriers do for injured people is allow for medical underwriters to look at their medical history and see if they can get a better stream of payments because of health conditions. Many companies now offer that same opportunity to attorneys structuring fees to pay out over their lifetimes.
An analogy that is often used is that the criteria for the rated age are the opposite of those for life insurance. If someone is overweight, smokes, has high blood pressure or other disease, that person pays more for life insurance than someone the same age who is healthier.
In structured settlement annuities, you get a higher payment on lifetime payments if your medical history shows something that can reduce your life span. It does not have to be a terminal illness or injury; something like smoking or high blood pressure will increase the payments one will receive.
Payments over a lifetime
The most common structured settlement for an injured person is one that pays out over a lifetime, as it assures that a claimant will always have money coming in, no matter how long the lifespan.
The same concept can now be offered in structured settlements for attorneys. This can be a tremendous retirement planning tool and provide safety and security on top of a traditional retirement plan.
Commutating payments at death or for emergency.
A concept that has developed great popularity in structured settlements for injured people is that of being able to commute the stream of payments at death or in cases of illness or financial hardship.
Many companies now allow for structured settlements for attorney fees to be commuted at death as well. This allows for an estate to have extra money for estate taxes or to allow beneficiaries to have more options with their money.
At least one company offers attorneys the ability to take remaining structured settlement payments in a lump sum in the event of an emergency. With recent changes in tax law to favor this concept, we expect it to be commonplace with all companies soon.
Qualified Settlement Funds
The qualified settlement fund is a tremendous tool to help injured people.
A good primer on the topic is “Is a Qualified Settlement Fund Right for Your Clients” in the January, 2002, edition of Trial. The most popular web page on the subject, according to Yahoo and Google, is www.qualifiedsettlementfund.net
Qualified Settlement funds are a way for money to be held in an escrow-like account while clients can make decisions on topics such as structured settlements, special needs trusts and how to make allocations among competing interests. It allows the client to be able to do a tax free structured settlement without the original insurance company’s approval or involvement.
The same concept holds true for attorneys who want to structure their attorneys’ fees. When money is paid into a qualified settlement fund, attorneys still have the option to structure their attorneys’ fees, even if the defense did not want to cooperate and even if the client doesn’t want a structured settlement and wants the money in cash.
Structuring payments over just a few years can result in substantial tax and financial planning opportunities for attorneys.
Not having to involve the defendant in a structured settlement for attorney’s fees has numerous advantages for an attorney. Some defendants only allow for structured settlements to be done by a life insurance company affiliated with the same insurance company paying the claim. These companies may not have good rates and may not have high ratings with rating services such as A.M. Best, Fitch, and Standard and Poors.
Also, some insurance companies have innovative features for structuring attorney’s fees while others are not as progressive.
By structuring fees that have been placed in a qualified settlement fund, the attorney can pick the plan that has the best rates, features, and security for the payments. He or she can take as much time as needed to research the company where his or her money is going to be placed.
With a qualified settlement fund, the defendant would not be privy to the attorney’s fee agreement with the client or other sensitive information.
There are still opportunities to use a defendant for a structured fee agreement and many defendants will allow the attorney to use all the options in the market. However, the qualified settlement fund gives more flexibility and opportunity.
Retirement and Financial Planning Options
There are three primary reasons that attorneys structure their fees. One is to avoid a large tax liability in a single year. The second is to spread payments over several years to assure that office expenses and payroll are covered. The third is to use the structure as a retirement planning vehicle.
Avoiding Tax Liability in a Single Year
Attorneys who receive a large fee, or number of fees in the same tax year have a strong motivation to defer income to future years. Not only can a high income year put an attorney into the highest tax bracket, but, at this higher level of compensation, itemized deductions phase out and are even eliminated past certain income levels. An advantage of deferring income is that the phase out is eliminated in 2009 and reduces in the years leading up to 2009. Also, there is a maximum percentage of income that can be paid into retirement accounts or other tax deductible savings devices.
Deferring income for just a few years, allows the attorney to take advantage of more itemized deductions and to pay the maximum allowed into a retirement plan.
Assure that Office Expenses and Payroll are Covered
A constant headache for personal injury attorneys is cash flow. Attorneys must tie up large amounts of money in cases and case expenses and are not sure when or if a case will settle. Also, not all cases result in income for attorneys and their clients.
Many attorneys use structured settlements to give them monthly income or to make sure they have extra money when taxes are due in April. This alleviates some of the stress of worrying about cash flow and gives attorneys confidence in preparing complex cases.
Using a Structure as a Retirement Plan Vehicle.
Unlike other retirement concepts, allocations do not have to be made for employees or co-workers with a structured settlement.
Unlike other forms of retirement planning, such as 401k or profit sharing plans, attorneys do not have to make contributions for employees or follow any restrictive allocation rules.
Assuring Lifetime Payments in Conjunction with a Retirement PlanAnyone who has had money in a 401k or profit sharing plan since 1999 understands how those accounts can fluctuate with changes in the economy and stock market.
Often attorneys balance their retirement planning by having secure monthly payments from a structured settlement start when they are close to retirement age. This allows them to be aggressive on their retirement plan investments and not be compelled to pull money out of the plan during a down market. Lifetime payments from a structured settlement assure that they have money coming to them, no matter how long they live.
Attorneys also use structured settlements as a primary way to fund retirement plans and other investments.
There is a concept called dollar cost averaging that most investment professionals recommend. Dollar cost averaging means to make investments on a periodic basis, such as monthly or quarterly, so that all of a person’s money is not put in the market at the same time. A structured settlement allows the attorney to dollar cost average on retirement contributions or investments and maximize returns.
We have also seen attorneys do sophisticated retirement planning using a combination of structured settlement and various forms of retirement plans or trusts.
Conclusion
Structured settlements are one of the best financial tools available for injured people but have tremendous opportunities for attorneys who utilize them as well.