Attorney Fee Structured Settlements by. John J. McCulloch, JD, CSSC, FLMI EPS Settlements Group

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1 Attorney Fee Structured Settlements by John J. McCulloch, JD, CSSC, FLMI EPS Settlements Group

2 The Problem With Taking Attorney Fee Compensation in Cash Problem: A lump sum of income is subject to Federal and State income tax. Close to 50% can be lost to taxes, depending on brackets and domicile. Solution: A structured payout to defer recognition of income.

3 Benefits for Structured Payout of Attorney Fees Taxation to payees taxable only as actually received. Payee only receives a 1099-MISC in the year in which distributions are made. Tax deferred benefits not unlike those founds in pension, profit sharing and 401(k) plans.

4 Legal Authority Cases Childs v. Commissioner, 103 T.C. 634 (1994), aff d without opinion, 89 F.3d 856 (11th Cir. 1996) Minor v. U.S., 772 F.2d 1472 (9th Cir. 1985) Cunningham v. Commissioner, 44 T.C. 103 (1965) Sproull v. Commissioner, 15 T.C. 244 (1951) Code & Regulations IRC 451(a) IRC 83 Treas. Reg

5 Legal Authority (cont.) IRS Revenue Rulings Rev. Rul Rev. Rul Rev. Rul Rev. Rul Rev. Rul Notice IRS Private Letter Rulings PLR PLR PLR

6 What is the proper format to Goldsmith v. U.S. (1978) defer compensation? Robinson v. Commissioner (1965) Boxer requested that compensation from match be deferred and paid over period of 10 years. Anesthesiologist requested that portion of future compensation be deferred and requested that Hospital purchase an annuity to fund certain future payments. Childs v. Commissioner, 103 T.C. 634 (1994) Three attorneys entered into a deferred compensation arrangement with the defendants in a lawsuit as part of their settlement agreement.

7 How do you successfully defer compensation? In each case the difference between successful and unsuccessful compensation deferral was based on: 1. Deferral Agreement; 2. Timing of entering into Deferral Agreement; and 3. Financial instrument or method of deferral.

8 Structured Payout Format Payee Future Periodic Payments Insurer/Trust Cash + Promise of Future Periodic Payments Agreement Funding Assets Cash Defendant Cash Assignee Liability to make future periodic payments of fees. Financial Security Irrevocable Guarantee/Corporate Keep Well of Assignee

9 Assignment Company Underlying agreement includes language allowing for periodic payment of compensation. Periodic payment agreement transferred to Assignment Company; Assignee funds the payment liability by purchasing an annuity from a large, A or better rated life insurance company or Treasury obligations held in trust at a large financial institution. Life insurance company issues an irrevocable guarantee on the performance of the Assignee; trust issues a Corporate Keep Well.

10 Tax Impact: Lump Sum vs. Deferral Lump Sum Deferral Contingency Fee Federal Income Tax (35%) Employment Taxes State Income Tax (8.5%) Total After Tax $2,000,000 $700,000 $65,000 $170,000 $ 0 $1,065,000 $2,000,000 $ 0 $ 0 $ 0 $ 0 $2,000,000 Taxes Deferred Net to invest

11 Value of Attorney Fee Deferral Defer taxes and earn interest 3% IRR sounds bad! But don t forget the gross amount vs. net amount. For example, a 20 year certain and life payment for a 45 year old has an IRR of around 3%. But taking into account 35%+ federal and 5%+ state income tax, the net amount would need to earn over 8% just to equal the structure payment stream.

12 Sample Fee Structure

13 Conclusion Attorney Fee Structures provide the full range of options for any firm or attorney: more cash through the loan option, guaranteed long term security through fixed annuity structures, or higher returns through variable fee structures.

14 About John McCulloch John is Vice President of Advanced Marketing for EPS Settlements. Prior to joining EPS John was the Senior Vice President of Structured Settlements for Allstate Assignment Company, a subsidiary of Allstate Life Insurance Company. Prior to joining Allstate, John was the Regional Vice President of Structured Settlements for Aegon/Transamerica. Before joining Aegon, John served as a Sales Manger for Safeco Life s Structured Settlement area, and held the role of Claims Supervisor and Structured Settlement Coordinator at Safeco Property &Casualty. He holds a JD, an MBA and a BA in Business, a well as the following professional designations: CSSC, CMSP, FLMI, WCLS, AIAA, and ACS, and an accounting certification from the Department of Defense. His formal insurance training includes: casualty, property, fidelity and Workers Compensation claims, as well as Life and Health underwriting. John is the author of the 50 State Guide to Workers' Compensation and Structured Settlements (2nd Ed) and the Ratings and Settlement Guide for Minors. He is currently serving on the NSSTA Board of Directors.

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