Tort Reform - Rethinking Tax Planning for the Contingency Fee Income of Plaintiff's Lawyers


Overview

The level of Plaintiff's civil litigation approximates $100 billion per year in settlements and verdicts. Nevertheless, structured settlements for plaintiffs only approximate $5 billion per year. The amount of contingency fee deferral by attorneys is even less. The explanation for the very low level of attorney participation in contingency fee deferral can be attributed to several reasons. First, in the low interest environment of the last decade, fixed annuities have been very unattractive investments. Second, prior to the advent of third party lending options for litigation firms, attorneys opted to keep a "war chest" to finance new cases. Third, non-qualified assignment companies create another level of risk in regard to the jurisdiction of the assignment company.


On a practical level, the deferral of contingency fee is generally a good thing versus paying taxes as high as 50 percent in New York and California, but for the high income attorney, how many lifetimes of income does an attorney need in this lifetime? Fee deferral programs suffer from the same attractiveness that Qualified Retirement Plans and IRAs suffer from. Namely, deferred income assets are both subject to income and estate taxation at death. The combination of income and estate taxes leaves the attorney's family with only thirty cents on the dollar, a 70 percent haircut.


Better planning suggests a planning strategy that repositions a substantial portion of the deferred fees into a more tax efficient tax planning strategy that utilizes Private Placement Life Insurance (PPLI) in a family trust so that this fee income is deferred but ultimately passes to the family, income and estate tax-free preserving 100 percent of the fee deferral. You decide which is the better path to follow!