FEE STRUCTURE PLUS. How can you maximize the value of your contingency fees?

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1 How can you maximize the value of your contingency fees? FEE STRUCTURE PLUS Defer Income and Taxation Earn Market-Related Returns on a Pre-Tax Basis Funds can be Managed by Your Financial Advisor or a Highly Rated Trust Company Offered by the Leading Provider of Attorney Fee Solutions in the United States Integrated Financial Settlements Thomas W. Stockett Certified Structured Settlement Consultant Guide. Direct. Provide. Protect. STRUCTURED TO LEAD Toll-Free: info@sgsplanning.com Millennium Settlements Inc. ( MSI ), or any of its affiliates, does not provide advice or services related to the purchasing of, selling of or investing in securities or other financial instruments. Any discussion of securities contained herein is not intended or written to be used, and cannot be used, as advice related to the purchasing of, selling of or investing in securities or other financial instruments. MSI, or any of its affiliates, does not provide legal advice or legal services, nor does MSI, or any of its affiliates, provide tax advice or tax services. Any discussion of legal or tax matters contained herein is not intended or written to be used, and cannot be used, as legal advice or for avoiding any penalties that may be imposed under Federal tax laws. To ensure compliance with requirements imposed by the IRS under Circular 230, we inform you that any U.S. federal tax advice contained in this communication (including any attachments), unless otherwise specifically stated, was not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any matters addressed herein.

2 FEE STRUCTURE PLUS An Innovative Tax Planning Program for Contingency Attorney s Fees Offered by Integrated Financial Settlements In cooperation with selected Trust Companies, Broker Dealers and Registered Investment Advisors

3 Executive Summary Integrated Financial Settlements (IFS ), a leading provider of structured settlements in the United States, has developed Fee Structure Plus TM ( FSP ) an innovative tax management program for attorneys working under contingency fee agreements. This program offers plaintiff attorneys a unique alternative to traditional structured attorney fee options. Fee Structured Plus allows attorneys to have their contingency based attorney fees placed in a trust program that will enjoy market related returns. The tax court decision Childs v. Commissioner 1, affirmed by the 11 th Circuit in 1996, was a watershed event that gave attorneys the ability to defer taxes on contingency fees received as periodic payments. The introduction of Fee Structure Plus represents the next generation of structured attorney fees in line with this decision. Since the landmark Childs decision, attorneys cannot only defer tax on contingency fees, but also allocate a portion of those deferred funds to market related investment portfolios. Further, they can select a passive or active investment management approach using a respected trust company or their own financial advisor. 1. Identifying The Limitations Of Traditional Structured Fees The Childs case provided some measure of tax relief for contingency fee attorneys whose income may fluctuate, potentially resulting in increased taxation. But initial fee planning options under this decision have been limited to the same fixed rate annuity options made available to their personal injury clients. From a timing and security standpoint, these fixed rate funding vehicles were unique, offering broad design flexibility and a proven history of performance through both rising and falling economic cycles. However, as interest rates declined over the past decade, it became more difficult for attorneys to justify allocating 100% of deferred fees to purely fixed income arrangements. Although annuity rates have improved, many still favor diversification of funds allocated for the long term. Many attorney clients would prefer that their deferred fees be allocated in different asset classes, as is routinely done in more traditional portfolio arrangements T.C. 634 (1994); affirmed without opinion, 89 F.3d 856 (11th Cir. 1996). 2

4 A comparison of the fixed income and equity markets in recent years shows why such an arrangement might offer value to attorneys in appropriate cases. The following two charts depict interest rates available on 10 year US Treasury obligations and the movement of the Dow Jones Industrial Average from the year 2000 to the present. Ten Year Treasury Yields Trending Lower. Ten Year Equity Valuations (DJIA) Upward Trending. 3

5 Adding equity investment as an option in addition to the fixed return goes a long way toward addressing two of the most essential considerations of prudent investing: diversification and inflation protection. 2 The central idea behind modern portfolio theory 3 is that investing in a blend of dissimilar securities may achieve not only a more stable investment experience, but actually increase returns relative to risk. For many attorneys, a balanced approach to contingency fee deferral is going to be the right one. While past performance is not indicative of future returns, historic performance over this ten year period indicates that attorney fee payments related to market performance may be a better solution for certain attorneys. Attorneys should consult with their tax, legal, and investment professionals to determine whether Fee Structure Plus is appropriate for their situation. 2. Fee Structure Plus Enjoys Support From Financial And Tax Advisors Successful attorneys rely on many experts to help them manage taxes and make financial decisions. It is not uncommon for attorneys to consult with CPAs, tax attorneys, and financial advisors before making financial decisions. However, even with the availability of qualified experts in these fields, overhaul of the tax code over the past two decades has substantially reduced the number of financial planning options available to them. Of the relative few which remain, many involve hard dollar caps or income limitations which reduce or eliminate the benefit altogether for high income taxpayers. This approach requires additional thought and planning for contingency fee attorneys because compensation for many years work can wind up being paid in a single tax year. This mismatch in timing between performance and compensation may shift attorneys into higher marginal tax brackets, resulting in increased taxation than what might normally be owed if compensation were spread more evenly over several years or deferred until retirement. 2 Investors should familiarize themselves with the principals and considerations articulated in the Uniform Prudent Investor Act drafted by the National Conference of Commissioners on Uniform State Laws (1994) and approved by both the American Bar and American Bankers Associations. 3 The importance of which is highlighted by the 1990 awarding of a Nobel Prize in Economics to Professors Harry M. Markowitz, Merton H. Miller, and William F. Sharpe for their work in its development. 4

6 The Childs case gave tax advisers a mechanism to address the timing issue (tax deferral via periodic payments), but the traditional use of fixed rate funding vehicles was still more limiting than many financial advisors would prefer. With Fee Structure Plus, tax and financial advisors may now offer an enhanced contingency fee planning solution for their attorney clients. There is another feature about this arrangement that pleases attorneys and their advisors: no dollar limit on the amount of fee deferred. 4 Unlike conventional retirement plans like 401(k)s, SEPs, or IRAs, with Fee Structure Plus there is no limit placed on the sum an attorney can defer via periodic payments. Fee Structure Plus may help a practitioner intelligently plan receipt of a large fee, or if their retirement savings are not yet what they would like them to be, FSP can help them catch up quickly on the strength of a few good cases. FSP has enjoyed strong support from both attorneys and their advisors in addressing the need for market related performance. In many cases, the attorneys own tax and investment advisors become Fee Structure Plus biggest advocates. 3. Essential Format Must Be Followed It is important for any attorney considering deferral of a contingency fee to understand the technical requirements that go with that arrangement. The format follows the established routine utilized for injured claimants and will be familiar to veteran practitioners. 5 As with traditional structured settlements, an attorney cannot actually receive or be in constructive receipt of the fees being deferred. Once the attorney has decided on the duration and frequency of his or her future payments, a promise of periodic payments is created in the settlement agreement and then transferred via assignment to a third party. That party (the assignee ) agrees to make the periodic payments as per the terms of the agreement. Before these terms are committed to writing, the attorney will have consulted with his or her various financial advisors and planners and decided on an appropriate periodic payment plan. Attorneys have the option of: 1) guaranteed streams of fixed future payments which are 4 See Treasury Notice , regarding the exemption of contingent legal fees from IRC Section 409A rules. 5 Attorney fee structures do not qualify as non-taxable under IRC Section 104; payments received in future years will be considered fully taxable in the year received. However, the same assignment mechanisms referenced in IRC Section 130 covering Section 104 qualified assignments serve as the model for how attorneys fees and taxable settlements are structured. 5

7 payable for life or a specified duration, 2) future payments for a defined period of time whose final value is tied to market related performance with Fee Structure Plus, or 3) a combination of both. Attorneys seeking market related returns with a structured fee arrangement would consult directly with the assignee s trust company or his or her investment advisor to develop an appropriate Investment Policy Statement. This Statement governs how funds will be managed over time inside the plan. Available choices vary from a fixed allocation approach to a more active asset management approach that would be employed by the trust institution s in house investment team or external investment advisors. As with all attorney fee structures, the settlement and assignment agreements must contain specific language permitting and referencing the utilization of these programs. 4. Certain Other Requirements Similar to traditional structured settlements for injured claimants, an attorney s future periodic payments may not be accelerated, deferred, increased, decreased or in any way changed once they have been established. The attorney is further prohibited from selling, assigning, pledging, or otherwise transferring or encumbering the payments. The attorney must consent to the assignment of the defendant s obligation to pay the periodic payments to the assignment company and agree to look solely and exclusively to the assignee for future payments. Once the assignment is completed, the defendant is released and discharged from any further obligation relating to the periodic payments. The assignee is an unrelated entity to the defendant or the attorney and will hold all rights of control and ownership of funds received in consideration of the assignment. 6

8 5. Concept Case Example Take Fee Utilize in Cash Fee Structure Plus TM Contingency Fee $1,000, $1,000, Less: Federal/State Taxes ($501,273.00) $0.00 Net Fees to Invest $498, $1,000, Invest Fees for 10 years in S&P 500 (1) $1,161, $2,328, Net of Taxes (2) $936, $1,140, Value Created by Fee Structure Plus TM $203, (1) Assumes 10 year average rate of return on S&P 500 of 8.82% from (2) Assumes California resident Conclusion Fee Structure Plus represents a breakthrough in financial planning for contingency fee attorneys. By offering market related performance inside a proven tax deferral format, attorneys may now enjoy an enhanced solution coordinated with their financial goals and risk tolerance. FSP delivers the next generation of contingency fee program solutions for whatever the attorney s financial planning needs may be. For additional information about Fee Structure Plus and how it may be appropriate on your next case, please contact your structured settlement consultant for additional information. 7

9 DISCLOSURE: The information provided herein is provided for general information and educational purposes only and is not intended to be, does not constitute, and should not be relied upon as, legal, accounting, tax, investment, or other professional advice or services. Because every situation is unique and fact specific, you should consult a professional who can thoroughly review and analyze all aspects of your particular situation before making any decision or taking action. Integrated Financial Settlements ( IFS ), or any of its affiliates, does not provide legal advice or legal services, and our services cannot and should not be relied upon as legal advice or legal services. If you engage us to explore this option, we will work with your attorneys and tax advisors to optimize settlement plans to help you achieve your financial and other settlement related goals. Any discussion of legal or tax matters contained herein is not intended or written to be used, and cannot be used, as legal advice or for avoiding any penalties that may be imposed under the Federal tax laws. To ensure compliance with the requirements imposed by the IRS under Treasury Circular 230, we must inform you that if any information contained within these materials is determined to be U.S. federal tax advice, such information is not intended or written to be used and cannot be used for the purpose of (i) avoiding tax penalties, or (ii) promoting, marketing, or recommending to another party any matters addressed herein. IFS, or any of its affiliates, do not provide advice or services related to the purchasing of, selling of or investing in securities or other financial instruments. Further, this material is not intended to provide any investment or securities recommendations. Please consult your financial advisor for specific recommendations or comments regarding this material as individual circumstances and the appropriateness of certain investments may vary. If you have any questions or concerns about these materials, please contact us by telephone at or by at FSP@structures.com. 8