Synergy Blog

Are you Cutting A Check to the IRS this Year?

Are you Cutting A Check to the IRS this Year?

By Daniel J. Alvarez, J.D. and Anthony F. Prieto, Jr., CFP®

As the tax season draws to a close, you may be reviewing your tax return with some displeasure.  Did you cut too large of a check to the Department of Treasury for your 2014 tax bill? If so, there are several options for you to consider to lessen the tax burden for 2015.

Due to the contingent nature of compensation as a plaintiff lawyer, unique pre-tax and tax deferred retirement planning options are available. Herein we will compare and contrast traditional small business retirement plans with some of the unique tax deferred options available when you earn a contingent fee.

The following are common advantages to deferral in general:

  • Creating an automatic investment program to help augment your retirement
  • The possibility of paying less tax on the withdrawal than the current tax rate
  • Potentially manipulating tax brackets during the deferral years and the withdrawals years
  • Earning interest on money that would have gone directly to your immediate tax burden
  • Being able to invest 100% of the money pre-tax instead of after tax

Given these obvious advantages, which of the following is the best fit for your practice?  The information below may be helpful in determining which plan or combination of plans makes the most fiscal sense.

Traditional Small Business Retirement Plans

A few examples of those that would fall under the traditional options include 401(k)s, Defined Benefit Plans, Profit Sharing, SEP IRAs and Simple IRAs are a few that would fall under the traditional options. These plans allow employees/owners to contribute funds on a pre-tax basis into the plan. The plan typically has a myriad of investment options to consider. All taxes are deferred until the funds are withdrawn.

Pros:   

  • Easy to install
  • Each employee/owner makes independent deferral and investment decisions

Cons:   

  • The plans typically have low deferral limits ($25k or less)
  • Most small business plans require the employer match employee contributions
  • These plans are typically subject to withdrawal penalties before age 59.5 and RMD withdrawals beginning at age 70.5

Attorney Fee Structured Settlement Plans

Attorneys are allowed to defer their fees by utilizing structured settlement annuities similar to those that are used for planning purposes with personal injury clients. The fee structure is not tax free, but is instead tax deferred. One hundred percent of the fee can be put into the fee structure or just a portion of the fees. It is done on a pre-tax basis so that taxes are not recognized until the year in which future periodic payments from the fee structure are received. For example, an attorney can earn a $250,000 fee in 2014 but set up a payment plan that pays him from 2020 to 2030.  There would be no taxable income in 2014, the entire $250,000 fee would go into the fee structure annuity and the tax burden would be spread out from 2020 to 2030.

Pros:

  • Easy to use
  • No investment risk
  • Unlimited deferral amount
  • No early withdrawal tax penalties
  • Ability to create a lifetime income

Cons:

  • Plan cannot be modified after the release is signed (No acceleration or deceleration of payments)
  • Fixed investment option only
  • Coordination with Client and Defendant required

Alternative Fee Deferral Programs

Several new alternatives have popped up in the marketplace over the last few years that rely on the same premise and case law as the Attorney Fee Structured Settlements. The two that are most commonplace are the use of offshore assignment companies and deferred compensation programs.

Offshore Assignment Companies (non-insurance partners) allow the attorney to defer the fee into the Assignment Company that then invests the proceeds through a variety of investment options.

Pros

  • Variety of investment options
  • Unlimited deferral amounts
  • No early withdrawal tax penalties

Cons

  • Plan cannot be changed after the release is signed (No acceleration or deceleration of payments)
  • Complex investment program involving offshore assignments
  • Coordination with Client and Defendant required

The Deferred Compensation program is done through the use of a Rabbi Trust. This option does not involve an offshore assignment and has flexible withdrawal options.

Pros

  • Variety of investment options
  • Unlimited deferral amounts
  • No early withdrawal tax penalties
  • Withdrawal rights can continue to be deferred
  • Simple language Incorporated in Client Agreement (not release)

Cons

  • Complex investment program for highly qualified investors
  • Ongoing investment management and withdrawal decisions

As this article points out, there are pros and cons to each alternative.  Each attorney should seek out a qualified planner and tax professional to help them navigate the options. In all probability, the best option is a combination of the programs. A fixed income component, such as a fee structure annuity, is a wise piece of any diverse investment portfolio. Plaintiff attorneys should carefully consider whether adding fixed income pre-tax makes the most sense for their financial goals. In addition, other alternative deferred compensation programs should be explored as well.

Please contact Synergy today at 877-242-0022 or info@synergysettlements.com for more information on utilizing these unique planning opportunities exclusively available for contingent legal fees.

TESTIMONIALS

"Synergy provides great service and are very helpful to my clients. Sometimes clients have trouble understanding the annuity concepts and Synergy does a wonderful job making everything clear and understandable. It is a pleasure to work with Synergy on cases."

Glen Wieland
Wieland, Hilado & Delattre

"In my business as a plaintiff’s products liability lawyer, everything begins and ends with our clients. In our firm we never handle a significant case without the assistance of Synergy. Why? Very simple: we trust Synergy with our clients. Yes, Synergy only works with plaintiffs. And yes, they are highly technically proficient and know this business cold. But what makes them different from others is that they listen to our clients, make our clients comfortable with complex issues, and always put the interests of the client first. In my opinion, because of their unique ability to handle people with sincerity and compassion in their time of crisis, they stand head and shoulders above his competition."

Richard Newsome
Newsome Law Firm, Past President of Florida Justice Association

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