Attorney Fee Structured
Settlements
by
John J. McCulloch, JD, CSSC, FLMI
EPS Settlements Group
EPS Settlements Group, Inc.
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
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.
EPS Settlements Group, Inc.
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
Legal Authority (cont.)
IRS Revenue Rulings
•
Rev. Rul. 82-122
•
Rev. Rul. 75-457
•
Rev. Rul. 75-25
•
Rev. Rul. 74-157
•
Rev. Rul. 2003-115
•
Notice 2005-1
IRS Private Letter Rulings
•
PLR 200226018
•
PLR 200138006
•
PLR 200836019
EPS Settlements Group, Inc.
What is the proper format to
defer compensation?
Goldsmith v. U.S. (1978)
Anesthesiologist requested that portion of future
compensation be deferred and requested that Hospital
purchase an annuity to fund certain future payments.
Robinson v. Commissioner (1965)
Boxer requested that compensation from match be
deferred and paid over period of 10 years.
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.
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.
EPS Settlements Group, Inc.
Structured Payout Format
Liability to make future periodic payments of fees. Cash Cash Funding Assets Financial Security
Irrevocable Guarantee/Corporate Keep Well of Assignee
Future Periodic Payments
Assignee
Agreement Cash + Promise of Future Periodic PaymentsPayee
Defendant
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.
EPS Settlements Group, Inc.
Tax Impact:
Lump Sum vs. 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
•
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.
EPS Settlements Group, Inc.
•
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.
EPS Settlements Group, Inc.
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.
