ATTORNEY FEE DEFERRAL

Investing your fees in a pre-tax and tax-deferred attorney fee deferral program is a very smart way to plan for the future. Attorney fee deferral programs are created for a variety of reasons. Based upon your specific planning needs and objectives, you can defer your contingent legal fees to accomplish any of the following:

• Cover future fixed costs of your law firm
• Reduce present-day tax burdens by receiving income over time
• Create “golden handcuffs” for key firm employees
• Pay for future personal expenses (for example, college expenses for your children)
• Retirement planning needs

Most attorneys use fee deferrals for traditional retirement planning purposes. Attorneys can utilize normal retirement plans as part of their overall portfolio. They can use IRAs, Roth IRAs, 401(k)s or other traditional options available to non-lawyers. These options are usually the starting point for a retirement savings plan. However, attorneys can utilize fee deferrals to uncap the amount they can invest pre-tax each year and eliminate early withdrawal penalties associated with traditional retirement plans.

The benefits and ways to use attorney fee deferrals are many. The problem is that attorneys generally do not leverage them the way they should. In an industry that creates billions of dollars of contingent legal fees each year, a very small percentage are deferred using attorney fee deferral programs. When it comes to retirement planning, the one mistake you cannot make is doing nothing at all. You must do something!

Choosing the right plan or deferral time frame isn’t as important as creating a systematic program of deferring fees and sticking with it. The program can be modified and new deferrals can account for changes that might become necessary in the future. If you defer too long, you can defer your next one for a shorter time frame. If you defer too short, you can defer your next fee for a longer period. If you think the rate of return in one program is low, you can utilize a different plan the next time. You can change the plans and adapt along the way. The one thing you cannot change is the missed opportunity if you fail to defer.

The power of deferral is a function of two variables: time and interest rate. The earlier you defer and the longer the duration, the more exponential growth you will experience. To illustrate, take a hypothetical 45 year old lawyer whose birthday is July 28. If he or she defers a $25,000 fee on October 1, 2018, here are the numeric differences at 5 year intervals using an assumed 5% interest rate:

Age 50: $31,803.43
Age 55: $40,815.21
Age 60: $52,380.55
Age 65: $67,223.04

As you can see, the compounding of interest starts to multiply very rapidly after 10 years. The 5% used above is a very conservative assumed interest rate. The average rate of return of the S&P 500 over the last 90 years is over 9%. Here is the same $25,000 fee deferral at 9% assumed interest rate:

Age 50: $38,529.18
Age 55: $60,624.42
Age 60: $94,448.88
Age 65: $147,876.70

The rate of return has a big impact but time is the equalizer. You must do something now to capitalize on the programs available. For my fellow Generation X readers, a study by Nationwide showed that 52% of us do not utilize a financial advisor or seek financial guidance. This percentage is very troubling when coupled with the fact that we are in our prime earning years. We are earning more money and not seeking or receiving any guidance. If you don’t have a plan – you are not going retire the way you want.

Financial stability is also a driver in your mental and physical health. According to the Gallup-Healthways Well Being Index and other studies, Americans with greater financial stability are in better physical and mental condition. Good health into your retirement years can create a longer income-generating life and decrease your overall health costs in retirement. Developing a plan is a win/win!

Fee Deferral must start today if you want to be prepared for when you retire. The decisions about plan design are less important and can be changed as you grow into your plan. The decision to defer a $25,000 fee is not going to have a major impact on your life in 20 years. However, if you wait 5 years to start it will be far less impactful. The Washington Post reported that the biggest regret for Americans was not saving for retirement. Do not become a statistic. Start your fee deferral program today.

Want more?

Watch our previously recorded Third Thursday Webinar.

For more information on the types of programs available to attorneys see our previous blog posts:

The Benefits of Attorney Fee Deferral Programs

The Benefits of Attorney Fee Deferral Programs

https://partnerwithsynergy.com/now-is-the-time-to-defer-taxes-on-contingent-legal-fees-when-does-a-0-rate-of-return-make-sense/

Many attorneys have questions when it comes to how to avoid the spikes in income and the accompanying taxation common with contingent legal fees. There are custom tailored solutions for attorneys who work on a contingent fee basis to avoid these issues. Attorney fee structures and deferred compensation arrangements allow lawyers to avoid taking income all in one taxable year when they earn a large fee. These solutions are pre-tax and tax-deferred investment vehicles only available to an attorney prior to resolving a case and earning the fee. They have to be explored and decided upon prior to signing a release. While these solutions may seem complex, they are actually quite simple. Having an expert advisor such as Synergy who can provide you with different options is critical. The remainder of this blog answers some frequently asked questions about deferral of contingent legal fees.

What is an “Attorney Fee Deferral”?

Attorney’s that work on a contingency fee basis can defer taxation of their fees through the use of several products. An attorney can utilize high end deferred compensation, traditional structured settlement annuities, and offshore assignment programs.

How is it different than a 401(K) or any other retirement plan?

There are two main differences from traditional plans. Traditional plans have deferral limits and a penalty for early withdrawal (prior to 59 ½). To compare:

Deferral Limits: There is no limit on the amount an attorney can defer using these products. Traditional plans are restricted by annual guidelines issued by the IRS. In October, the IRS issued Notice 2017-64 for the calendar year 2018. It reviews the current year 415 plan guidelines. Most of the plans are capped at contributions of $18,500 for this year.

Withdrawal Limitations: Attorney Fee Deferral programs do not have pre-fifty-nine and a half withdrawal penalties or limitations. An attorney can defer his fees early on and start to take distributions with no penalty at any age. In a traditional plan, you would incur a 10% tax penalty for early withdrawal unless you met one of the few exceptions.

How come my CPA or Tax Professional does not know about it?

These programs cater to a very small percentage of the overall US population. Not only is it specific to attorneys, it is specific to the subset that works on a contingency fee basis. Many CPAs aren’t aware of niche tax decisions such as the Childs v. Commissioner decision described below. Once a CPA is educated about these solutions, they quickly see the immense value to the attorney clients they work with on a regular basis.

What is the underlying legal basis that allows this to be done?

In 2001, the Richard A. Childs, et al. v Commissioner of Internal Revenue ruling held that attorneys can defer their fees and pay taxes in the calendar year they are actually received. Under Childs, a lawyer is allowed to defer his or her fees and be paid out over time using a periodic payment schedule and only pay taxes on the amounts as they are received. The programs available all utilize this in their plan design.

Where does my fee go and does it earn interest?

The fee paid over to a life insurance company or trust company which then either funds an annuity contract or investment account. The annuity insurance contract earns a fixed return. The investment account would earn variable interest based on market performance. Similar to most retirement plans, there are a variety of investment choices from fixed interest to high-risk stock portfolios.

Do I need to defer my entire fee?

No, in fact, it is very common to defer as little as $25,000 of a fee. Many attorneys defer portions of several fees each year while others defer in large amounts.

Will deferring my fee guarantee I pay less taxes?

No, the use of a fee deferral does not guarantee that you will pay less in taxes. It does allow more of your money to work for you over time but nobody can predict the future tax tables. The taxes paid will be upon receipt. Some plans do allow you to extend deferrals which may allow you to plan around new tax changes.

Are there limitations I need to consider?

Yes, the main limitation is with accelerating or changing the payment plan. The plan you set up is a part of the underlying settlement agreement and release. It cannot be changed without selling the payments on the secondary market which will result in a loss. Some products do offer loan provisions.

What are some ways you have seen attorneys use the programs?

The primary use of deferred fees is to create a flow of income that can be used for retirement. However, we have clients that use them for a variety of reasons:

• Create recurring cash flows to cover law firm costs
• Create golden handcuffs for associates
• Spread out the tax implication of a large fee
• Bridge retirement income between ages 50 and 59 ½

Conclusion

Tax deferral mechanisms for lawyers are a great way to smooth out those income spikes caused by larger fees or just take better control over the timing of income. Because of the variety of options, there is likely something that will best suit your needs and investment preferences. It no longer is just limited to a fixed investment vehicle. Explore these options so that you can take back control over your income. Learn more by visiting https://partnerwithsynergy.com/service/attorney-fee-deferral/

Leif Lundberg, LL.M and Ben Eisler, JurisPrudent Deferral Solutions

Takeaways

1. Defer compensation like Fortune 500 executives do, so your money grows faster.
2. Tie your fee to the returns of investments that you select – stocks, bonds, real estate, etc.
3. Gain access to low-interest loans, as needed, to fund cases (currently 3-4%).
4. Use “golden handcuffs” to retain key associates, so if they leave too soon their deferred bonus comes back to the firm.
5. Do this with the same benefits and protections offered to Fortune 500 CEOs.

A few months ago, we met a trial attorney in Florida. He was like a lot of people reading this post; well-respected, successful, hardworking. He had just settled a big case for his client, and they were a couple of weeks away from finalizing the release. He was excited about the result, but also frustrated that he had to pay a ton in taxes, when some people, like big wigs at Fortune 500 companies for example, can defer their compensation and taxes, effectively earning interest on the government’s money.

He looked at structuring his fees with an annuity – one way to defer taxes. But he didn’t like that annuities are conservative investments and with a lower interest rate than market based investments. And just as he was about to pay taxes on his fee, Synergy told him about a product provided by JurisPrudent Deferral Solutions. We explained how our program allows you to defer taxes and tie your fee to the returns of a customized portfolio of investments that you (or your financial advisor) select – stocks, bonds, real estate, etc. In that sense it’s a lot like a 401(k) plan for trial lawyers. Though like deferred compensation for corporate executives, there is no limit on how much you can defer.

We also explained how in addition to reducing your tax burden and increasing your wealth accumulation, deferring fees can increase your access to cash to fund cases, because as we get to know your firm, our company will make loans at very low rates – currently 3-4% interest. And we shared how he could use deferred fees as “golden handcuffs” to retain key associates, so if they leave too soon their deferred bonus comes back to the firm.

So ultimately this attorney did his due diligence and decided to defer a large portion of his fee and take some in cash to cover expenses. As a result, he avoided a big tax hit without sacrificing his investment returns. He is now earning interest on the government’s money and has access to low-interest loans.

You may be thinking how do the guys at JurisPrudent know so much about deferred compensation? Combined, our leadership team has more than 100 years of experience in this industry. Our parent company administers almost two billion dollars in deferred compensation plans for some of the largest companies in the country – current clients include Microsoft, Cisco, and Bank of New York Mellon. Our program is administered by Newport Group, the country’s largest administrator of deferred compensation plans for corporate executives, and Bank of New York Mellon is the trustee and custodian of the assets backing the program. No other fee deferral program provides this level of safety and service.

So please consider deferring your fees with us. Synergy is a strategic partner with JurisPrudent and works daily with their highly skilled team to create cutting edge solutions for lawyers looking to pay less in taxes. Visit www.structuredfees.com for more info.

Bet On Your Health!

A pre-tax and tax-deferred attorney fee structure offers great benefits to attorneys who earn contingent legal fees.  In essence, it is an unlimited retirement investment vehicle exclusively for attorneys.  Using annuity based fee structures, an attorney can get a guaranteed competitive fixed rate of return.  The returns are typically similar to other fixed instruments such as bonds.  However, there are ways to boost return by using a life contingent plan.

The traditional attorney fee structured settlement has a fixed payment stream.  The payment is guaranteed for the term of the contract.  However, when you have a life contingent component you add in a variable element.  It is not variable like the returns on a stock.  The variable is your ability to outlive the insurance company’s life expectancy.  The longer you live, the greater the ultimate return.

The pricing methodology for an annuity is based upon the guaranteed payment stream coupled with the mortality tables.  To illustrate this point, an attorney can defer $375,000 into a traditional structured settlement.  Let’s assume the payment stream selected is for life with a 20 year guarantee.  Let’s also assume for easy math the payment is 2,000 per month.  In order to figure out the rate of return, we typically look at the following:

• Rate of Return Worst Case Scenario (Only 240 Payment are Made) –        2.6%
• Rate of Return at 30 years (the last 10 years were not guaranteed) –        5.0%
• Rate of Return at 40 years (the last 20 years were not guaranteed) –        5.7%

For an extremely healthy client with a family history of longevity, betting on your own life expectancy can create a much higher rate of the return.  By analyzing the impact of the guarantee periods in a traditional structured settlement, you can look at the option of taking on more life expectancy risk to create the potential for higher returns.  This is accomplished by potentially using a shorter guarantee period and betting on a longer life expectancy.  In the above scenario, the attorney’s rate of return will be between 2.6% and 5.7% depending on how long they live.

No matter what, it is still a conservative approach to investing by using a fixed annuity.  With proper planning, you can do the assessment with your settlement planner on what guarantee periods make sense for you and your family.  There is risk in all investments.  Using a fee structure annuity with a lifetime component is something every attorney should consider in their retirement planning.  The proper investment and product allocations will ultimately determine the success of your retirement plan.  You should consider all the options for deferring attorney fees as part of your retirement plan.

Synergy offers unique solutions for trial lawyers to invest their fees on a pre-tax and tax-deferred basis.  Visit www.structuredfees.com for more information.

Are you Cutting A Check to the IRS this Year?

By Daniel J. Alvarez, J.D. and Anthony F. Prieto, Jr., CFP®

As the tax season draws to a close, you may be reviewing your tax return with some displeasure.  Did you cut too large of a check to the Department of Treasury for your 2014 tax bill? If so, there are several options for you to consider to lessen the tax burden for 2015.

Due to the contingent nature of compensation as a plaintiff lawyer, unique pre-tax and tax deferred retirement planning options are available. Herein we will compare and contrast traditional small business retirement plans with some of the unique tax deferred options available when you earn a contingent fee.

The following are common advantages to deferral in general:

• Creating an automatic investment program to help augment your retirement
• The possibility of paying less tax on the withdrawal than the current tax rate
• Potentially manipulating tax brackets during the deferral years and the withdrawals years
• Earning interest on money that would have gone directly to your immediate tax burden
• Being able to invest 100% of the money pre-tax instead of after tax

Given these obvious advantages, which of the following is the best fit for your practice?  The information below may be helpful in determining which plan or combination of plans makes the most fiscal sense.

Traditional Small Business Retirement Plans

A few examples of those that would fall under the traditional options include 401(k)s, Defined Benefit Plans, Profit Sharing, SEP IRAs and Simple IRAs are a few that would fall under the traditional options. These plans allow employees/owners to contribute funds on a pre-tax basis into the plan. The plan typically has a myriad of investment options to consider. All taxes are deferred until the funds are withdrawn.

Pros:   

• Easy to install
• Each employee/owner makes independent deferral and investment decisions

Cons:   

• The plans typically have low deferral limits ($25k or less)
• Most small business plans require the employer match employee contributions
• These plans are typically subject to withdrawal penalties before age 59.5 and RMD withdrawals beginning at age 70.5

Attorney Fee Structured Settlement Plans

Attorneys are allowed to defer their fees by utilizing structured settlement annuities similar to those that are used for planning purposes with personal injury clients. The fee structure is not tax free, but is instead tax deferred. One hundred percent of the fee can be put into the fee structure or just a portion of the fees. It is done on a pre-tax basis so that taxes are not recognized until the year in which future periodic payments from the fee structure are received. For example, an attorney can earn a $250,000 fee in 2014 but set up a payment plan that pays him from 2020 to 2030.  There would be no taxable income in 2014, the entire $250,000 fee would go into the fee structure annuity and the tax burden would be spread out from 2020 to 2030.

Pros:

• Easy to use
• No investment risk
• Unlimited deferral amount
• No early withdrawal tax penalties
• Ability to create a lifetime income

Cons:

• Plan cannot be modified after the release is signed (No acceleration or deceleration of payments)
• Fixed investment option only
• Coordination with Client and Defendant required

Alternative Fee Deferral Programs

Several new alternatives have popped up in the marketplace over the last few years that rely on the same premise and case law as the Attorney Fee Structured Settlements. The two that are most commonplace are the use of offshore assignment companies and deferred compensation programs.

Offshore Assignment Companies (non-insurance partners) allow the attorney to defer the fee into the Assignment Company that then invests the proceeds through a variety of investment options.

Pros

• Variety of investment options
• Unlimited deferral amounts
• No early withdrawal tax penalties

Cons

• Plan cannot be changed after the release is signed (No acceleration or deceleration of payments)
• Complex investment program involving offshore assignments
• Coordination with Client and Defendant required

The Deferred Compensation program is done through the use of a Rabbi Trust. This option does not involve an offshore assignment and has flexible withdrawal options.

Pros

• Variety of investment options
• Unlimited deferral amounts
• No early withdrawal tax penalties
• Withdrawal rights can continue to be deferred
• Simple language Incorporated in Client Agreement (not release)

Cons

• Complex investment program for highly qualified investors
• Ongoing investment management and withdrawal decisions

As this article points out, there are pros and cons to each alternative.  Each attorney should seek out a qualified planner and tax professional to help them navigate the options. In all probability, the best option is a combination of the programs. A fixed income component, such as a fee structure annuity, is a wise piece of any diverse investment portfolio. Plaintiff attorneys should carefully consider whether adding fixed income pre-tax makes the most sense for their financial goals. In addition, other alternative deferred compensation programs should be explored as well.

Please contact Synergy today at 877-242-0022 or info@synergysettlements.com for more information on utilizing these unique planning opportunities exclusively available for contingent legal fees.