Structured attorney fees. Will increased income tax rates lead to renewed interest by trial lawyers?

One of the greatest untapped areas for growth in the structured settlement profession is the structured attorney fee, aka, structured legal fee market. While there are no hard numbers to be gleaned from life and annuity industry data, casual evidence indicates that only a small minority of trial lawyers and attorneys take advantage of this incredible tax planning tool. The reasons why that has been the case prior to 2013 are quite clear, among them:

  • Interest rates were low compared to historical averages on annuity programs and lawyers thought they could do better in the market. 
  • Tax rates were historically low and there was the lingering fear rates would go up, thus making deferral an unwise business and tax planning option.
  • Lawyers often have major case debt that needs to be repaid, making structuring income forward an unrealistic option. 

Now that 2013 has arrived and with it much higher state, federal and Obamacare taxes, the reality of paying well in excess of 50% on taxes for large fees is facing lawyers every day. The solution, as Mark Wahlstrom points out in this weeks commentary on Speaking of Settlements is to aggressively begin to educate trial lawyers and tax professionals on structuring attorney fees and why it makes sense for lawyers today. The tax savings alone can offset a great deal of financing debt and the ability to allocate funds into retirement vehicles can help to rebuild depleted pension accounts for trial lawyers all over the country.

Watch this weeks edition of Speaking of Settlements and learn more about the options lawyers have to structured their legal fees in 2013.

Structured legal fee, will 2013 be the year they take off?

In 2013 it is almost a 100% certainty that tax rates for the highest income earners are going to go up, and most likely they will go up dramatically. This out come is almost guaranteed as the political parties battle about the "fiscal cliff" deadline and the result is that trial lawyers all over the country are going to be facing huge tax bills on large case settlements in 2013 and beyond.

The structured settlement profession has one of the most power tax planning tools available to trial lawyers and that is the structured legal fee, also referred to as the structured attorney fee. This technique which is battle tested and backed up by tax court and SCOTUS decisions, allows a lawyer to move taxable income from one year into future years so as to reduce the tax hit, spread out income and get off the roller coaster of simply paying off taxes and case debt when the big settlement or fee comes in.

Mark Wahlstrom in this weeks edition of Speaking of Settlements looks at what to expect in 2013 and beyond when it comes to structured legal fees. There are new planning options, funding options and techniques coming online that both advisors and lawyers need to be aware of. Watch this weeks edition on structured legal fees and start to become more aware of how trial lawyers and their tax planners can work with structured settlement experts nationally to design safe, secure and predictable cash flows.

The fiscal cliff and structured settlements, what you should know for year end

Few metaphors have been more over used in the last month or so than that of "The Fiscal Cliff".  

That said it is important for the next four weeks ending 2012 that professionals and others be aware of the issues and questions related to the certain tax law changes and how they relate to structured settlements, structured sales, structured legal fees and oil&gas lease bonus deals.

Structured Settlements:  For all intents and purposes people who are considering a tax free, section 103 qualified structured settlement should be more comfortable with the decision given the almost 100% certainty that marginal tax rates are going up on the federal level. The ability to obtain guaranteed, tax free income that is not subject to state or federal tax is going to have greater value just due to the tax savings, but also in comparison to other investment options such as dividend stocks, which are scheduled to be taxed at a much higher rate under anticipated tax plans in 2013. 

Structured Sales of real estate or farm property: Under anticipated tax plans we are almost certain to see a rise in the capital gains tax. No matter how foolish this might be in the big picture of our economic policy, we can pretty much take this to the bank. Furthermore, all income will now be subject to the Obamacare tax of 3.8% on top of what ever the marginal rate is for a particular year, so it is safe to say that capital gains tax rates are as low now as they are going to be for some time.  With that knowledge I strongly encourage anyone who can complete a sale in 2012 to close it, pay your taxes at the lower rate and invest your money. I see no strategic advantage in 2012 to structuring sales out into future years at higher rates of taxation. 

The fiscal cliff...are you ready for 2013?

The fiscal cliff...are you ready for 2013?

Structured Legal Fees: Much in the same line as structured sales, which allow for the deferral of currently taxable income into future tax years, structured legal fees are designed to secure guaranteed future income by pushing it into the future in an orderly, structured plan. Again, given the certainty of much higher marginal rates at the top end, coupled with the 3.8% Obamacare surtax on income, a lawyer is well advised to take as much income in 2012 as is practical and to begin to devise structured legal fee techniques on income that you know is going to fall into 2013. No responsible settlement advisor would suggest structuring income at the end of this year given the certainty of the tax increase, so don't let yourself get talked into anything unless you have a substantial planning reason for doing so. 

Oil and Gas Lease Bonus structures: Again, the rule on taxable income or ordinary income or gains that qualify to structure hold here, if the tax rate on your income is certain to be higher in 2013, then take as much income in 2012 as you can and pay down debt or build up your cash reserves. However, once 2013 rolls around and we see what rates are, the value of structuring taxable income from oil and gas lease bonus payments will be much greater. 

In summary, if you have tax free income via a structured settlement option there is no reason to delay as the tax free nature of the payment increases in value when tax rates rise. However, if you are considering a taxable transaction you are well advised to take the funds in 2012 and being to acquaint yourself with deferral options in 2013 and beyond.