Amicus Settlement Planners

The previous article on this topic addressed the myriad uses for structured attorneys fees – including asset and creditor protection, flexibility of payout design, retaining valuable associates, steadying the firm’s cash flow, unlimited contribution amounts, and lifetime guaranteed income to name a few.  While all of these are creative and appropriate uses of structured attorney’s fees, by far the most common objective of most attorneys in utilizing a structured attorney fee is to provide themselves with guaranteed retirement income.

There are a variety of retirement funding options available to attorneys including qualified retirement plans, non-qualified retirement plans, regular taxable investment accounts, and of course structured attorney’s fees.  Qualified retirement plans such as an IRA, SEP, SIMPLE, or 401(k) plan offer advantages such as tax-deferred growth, a current-year tax deduction, creditor protection, and a wide range of investments.  The disadvantages of such qualified plans include low annual contribution limits, compliance costs and risks, and the requirement to include employees in the chosen plan.  Non-qualified plans generally do allow for discrimination against some or all employees and can allow for an unlimited contribution amount.  However, the contributed amount is not tax deductible; the growth in the account is taxable, and the funds are subject to the general creditors of the company.

Attorney fee structures offer retiring attorneys many of the advantages of both qualified and non-qualified plans, and eliminate most of the disadvantages.  Structured attorney’s fees offer creditor protection, have no requirement to include any associates or office staff, have no contribution limits, allow for deferred taxation, and have no administrative costs or hassles.  Perhaps most importantly for retirement planning, structured attorney fees can be paid for the lifetime of the attorney – ensuring that the attorney never outlives his/her income.  Additionally, attorneys desiring lifetime annuities can be medically underwritten to increase the benefit per premium dollar.  The lifetime payment benefit alone makes structured attorney fees a vital planning tool for retiring attorneys.

Of course, no retirement planning tool is perfect in all situations.  The chief disadvantage of structured attorney’s fees is that it is only available in one type of investment – a fixed annuity.  Fixed annuities are very useful tools for retirement planning, but do not offer the liquidity and flexibility as other retirement options may.  Once the fee structure is established, the future payments are fixed, and the attorney cannot access the money before the payment dates unless he/she is willing to “factor” the future payments in the secondary market – which generally bears a hefty discount rate and requires court approval.[1]

The chief complaint among attorneys contemplating the use of attorney fee structures for their retirement planning is generally not the inflexibility, but the perceived low rate of return fixed annuities provide.  While each annuity will yield a unique rate of return depending on the timing and design of the future payments, structured settlement annuities are currently yielding between 4% and 6% for a typical annuity payment design.  Most plaintiff attorneys do not react too enthusiastically to the prospect of a 5% rate of return.  However, upon closer examination, a 5% return on a structured attorney fee is actually better than a projected rate of return of 11% from a typical portfolio of investments.  How?  Consider an example:  A typical portfolio of investments will likely project a gross rate of return of about 11% per year.  The problem is that 3% of that 11% will likely be consumed in annual taxes, and 1% will likely be consumed in investment and planner fees, leaving the attorney with a 7% net annual return.  At first glance it still seems that a 7% net return on the financial planner’s portfolio is better than the 5% return on the structured attorney fee.  However, the 7% net return on the portfolio is calculated based on amount of the attorney fee that the attorney is able to invest in the financial planner’s portfolio after paying taxes on that fee in the current tax year.  The structured attorney’s fee return of 5% is based on the gross attorney fee, not the net.  Because the pre-tax gross amount of the attorney fee is used to fund the structured attorney fee, 5% return is actually better than 7% return, as illustrated below:

Attorney Fee Structure:
$1,000,000 gross attorney fee;
$1,000,000 gross fee directed into attorney fee structure earning 5% annually = $50,000 annual interest;

Portfolio of Investments:
$1,000,000 gross attorney fee;
$350,000 paid in taxes in year fee is earned;
Net attorney fee to place in portfolio = $650,000;
$650,000 earning 7% annually = $45,500 annual interest

Of course, this example is strictly comparing the rate of return, and does not take investment risk into account.  The rate of return on the attorney fee structure is guaranteed by the life insurance company offering the annuity, and will not fluctuate year to year.  The investment portfolio is based on the returns of the investments in the portfolio, and could fluctuate wildly from year to year.  Additionally, most financial planners will admit that maintaining an 11% rate of return on an investment portfolio year to year is extremely difficult to do, and almost impossible to guarantee.

Plaintiff attorneys considering their retirement funding options would be remiss not to consider structuring their attorney’s fees.  Not only do structured attorney’s fees have many practical advantages over qualified and non-qualified retirement planning options, but they will generally even outperform the rate of return projected on most traditional equity-based investment portfolios.