How One Smart (and Lucky) Attorney
Outsmarted the Taxman
Good Timing and the Power of a
Structured Attorney Fee
Allows Plaintiff Attorney to Save BIG on Taxes!
It's April! Spring flowers, maybe a nice break from school for the kids and, of course, . . .
(Cue Chopin's Funeral March) . . . Taxes!
That's right. Time to get your check books out and brace for that rite of spring we would all sooner avoid.
Contingency fee-based attorneys can find themselves especially frustrated every tax season due to the nature of the practice which can see income fluctuate from year-to-year. Often, quite dramatically.
For one plaintiff attorney, however, the stars recently aligned nearly perfectly to enable him to transition to retirement and save a LOT of money at the same time. Re-Thinking Retirement
"Abe Laintiff, Attorney" (not his real name in case you were wondering) is a 57-year old plaintiff attorney who had built a successful solo practice over the years but was beginning to feel mortality sneaking up on him. His best friend and former partner's unexpected death last year at a young age (same as him) prompted him to re-prioritize his life and make immediate plans for his own early retirement.
Managing a successful practice for so long enabled Abe to accumulate a comfortable retirement fund (including several structured attorney fees!) which he originally hadn't planned to tap into until he was 62 or 65. But since he had been gradually winding down his law practice in anticipation anyway, accelerating his departure by a few years would be something he could easily attain, he reasoned.
So when a major case in his inventory settled at mediation a few weeks ago, he knew this would be his last negotiated settlement. It was a decent "career ender" which left his client very pleased with the result.
It was the right time to call it quits.Good News, Bad News
Abe earned an appropriate contingency fee of approximately $925,000 for his efforts (that's the good
news) which he assumed would be sufficient to allow him to "fill in" the income gap between ages 57 and age 62 while his retirement fund continues to grow. He owns a boat free and clear and wants to spend time living on the water while seeing the world and experiencing all that life has to offer while he can enjoy it. When his wanderlust is satisfied, he plans to move to a tax-friendlier state where he hopes to retire peacefully with no regrets.
A quick call to his CPA prior to finalizing the terms of the settlement brought him the sobering bad
The bulk of his fee was going to be taxed at 51.3% (Not a typo!) as follows:
35% Maximum Federal Income Tax
9.3% Maximum California State Income Tax
7% Alternative Minimum Tax (AMT)
This was something he knew he needed to remedy before this deal was closed and he could comfortably set sail. Better News, GREAT News!
Since Abe had structured a number of his attorney fees with me over the years, he already knew the benefits of Structured Attorney Fees. But he was in for a real treat when he learned how valuable it would be to him this time around.
Assuming interest rates were "dreadfully low," he admitted he almost didn't even call.
But he did call, not really expecting much, to ask what would happen if he structured $750,000 of his fee over a five year period. He expected a low return but hoped he might save at least some money by simply spreading out his tax burden over a couple of years.
Abe was right. The Structured Attorney Fee didn't "earn" much at all. Total payout over the five years was only $753,500, a whopping $3,500 gain. At first blush, a 0.19% Internal Rate of Return seems only marginally better than putting your money in a mattress.
But because he is spreading out his tax burden over five years, a whole lot of money NOT paid in taxes actually goes into his pocket instead. His CPA, who once told Abe that structuring his fees was "the smartest thing (he) ever did," estimates the following:
Abe's Structured Attorney Fee income will be taxed at 35% over the next five years saving him approximately $121,000 in taxes!!!
By comparison, if Abe chose to take his fee in cash this year, he would need to earn a guaranteed Internal Rate of Return of 19.79% on his after-tax net of $365,250 ($750,000 less 51.3%) just to equal what the Structured Attorney Fee would yield him.
That concept is worth highlighting again:
By structuring his fee under these circumstances, using the assumptions his CPA provided, Abe would need to earn a guaranteed return higher than 19.79% on his after-tax net in order to do better than the structured attorney fee.
Absent a time machine to the 1980's, I'm pretty comfortable saying that guaranteed returns of almost 20% are impossible to find anywhere today. And this is not some make believe, phony baloney guarantee, by the way. This guarantee is from a highly secure company - in an industry that's tightly regulated - that's been in business for more than 100 years.
It, quite literally, doesn't get much better than that!
A Dollar Saved is a Dollar Earned
In fairness, not every situation works out quite as perfectly as this one did. Abe's timing and situation were exceptional to allow him to capitalize on the power of a Structured Attorney Fee.
But you'd be amazed at how attractive a deal this can be for most attorneys. And how comparatively few of them ever take advantage of this unique opportunity.
With all the typical caveats that we don't offer tax advice, tax laws and brackets are always subject to change, every situation is different, et cetera, et cetera, clients will hopefully take one thing away from today's newsletter offering:
You are wise to analyze YOUR unique situation before you settle any case for cash.
We'll even help you "do the math."
You never know how much money you can save. After all, a dollar in your wallet, whether actually "earned" or saved because you didn't have to pay it in taxes, is still your dollar, not someone else's.
So unless you are a plaintiff attorney personally committed to helping retire our nation's deficit, I hope you'll call me next time you settle a case for one of your clients. You'll never know how much money you can save unless you ask!
Thank you for the continued opportunity to be of service and best wishes for continued Struccess in your practice!