TAX ADVANTAGED METHOD
FOR KEEPING MORE OF WHAT YOU MAKE
The structuring (or deferral) of Attorney Fees has been affirmed by the U.S. Tax Court in the case of Childs v. Commissioner of Internal Revenue, 103 T.C. 634 (1994). This ruling allows the combined power of 100% tax deferral and compound growth rates to work for the benefit of attorneys. Should you decide to take advantage of this powerful tool, Tory K. Owens can help you determine the best approach to structuring your attorney fees.
Why Should You Consider Structured Attorney Fees?
- Lower Your Taxes and Increase Your Income: The 100% deferral of taxes on Structured Attorney Fees means your money grows and compounds faster to achieve greater pre-tax future income.
- Unlimited Contributions and Flexible Payout: Structuring Attorney Fees does not have an upper limit on the amount of money an attorney can contribute in any year. The attorney can contribute up to 100% of fees earned in any given year. In addition, you have full flexibility in deciding when and how you receive your payout.
- Plan for Future Financial Events: Structuring Attorney Fees allows you to plan for future financial events such as retirement, financing your children’s college tuition, funding your practice or buying-out a partner.
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- Smooth Sporadic Income Swings: Many times attorneys do not know when they will receive their fees from a settlement or a verdict. Structured Attorney Fees can provide the peace of mind that accompanies a guaranteed monthly income.
- Guaranteed Income and Long-Term Security: There is no need to worry about fluctuations in the financial market. The Structured Attorney Fee will provide guaranteed benefits at specific payment dates to assure you of financial security. Structured Attorney Fees are only placed with top rated insurance companies.
Tax Advantages of Structured Attorney Fees:
- All of the money that is placed into a structured attorney fee is 100% tax deferred. This means that the initial portion of the attorney fee that is used to purchase the structured attorney fee is not taxable income to the attorney in the year the purchase takes place. In addition, all of the growth of the money in a structured attorney fee is not taxed while it is increasing. It is only when the funds are paid out that they are taxed. The attorney has full flexibility to decide both when and how the payout shall occur.
- Ability to shift the income from a higher tax bracket to a lower tax bracket. The deferral (shifting) of income (attorney fees) from a year in which the attorney will be in the top-tier tax bracket to a period later in life (i.e., retirement) when the attorney will be in a lower tax bracket is a significant benefit. Again, by virtue of the attorney having full flexibility to decide both when and how the payout shall occur, enables the attorney to decide in which tax bracket he wants to receive the funds.
- Unlimited (without a cap) contributions to the attorney’s retirement plan. The structured attorney fee does not have an upper limit on the dollar amount of money or percentage of income that an attorney can contributed in any year or combination of years. The attorney can contributed up to 100% of annual fees into his or her retirement package, and they can do so year after year.
Thus, the financial impact of the tax-deferred growth to the attorney, whether looked at from either a long-term or short-term perspective, is spectacular.
A Long-Term Scenario: Prepare for Retirement or College Costs
For many attorneys, the long-term perspective comes into plan when they think of using the structured fees to fund their retirement or to pay for a child’s college education. To better understand the significant financial impact of the 100% tax-deferral, let’s consider the following scenario.
A 40-year-old attorney, who plans to retire in 20 years, has just settled with the last of three defendants. Prior settlements, in the instant case, have netted the attorney over $1 million in fees, and the latest settlement will net the attorney an additional $250,000 in fees. The attorney has the option of either structuring his $250,000 fee or paying the tax (50% tax bracket) and investing in a tax-free municipal bond.
If the attorney structures his fee (at current rates), the $250,000 will payout $1,004,000 before tax (or $502,000 after tax) in 20 years (guaranteed). On the other hand, if the attorney pays the 50% tax ($125,000) and invests the balance ($125,000) in a municipal bond (at the current tax-free interest rate of 5.1%), the after-tax payout in 20 years would be only $338,000. This is a shortfall of $164,000 when compared to the structured attorney fees payout of $502,000.
In addition, for the pay-the-tax option to generate the same $502,000 after-tax payout would require the pay-the-tax option to have an after-tax investment rate of return of over 14% per year. The structured attorney fees is the obvious choice.
A Short-Term Scenario: Increase Cash flow and Reduce Taxes
When the structured attorney fees are looked at from the short-term perspective, the financial results are even more impressive. The short-term perspective focuses on increasing cash flow while simultaneously reducing taxes. Consider the following scenario.
A 60-year-old attorney wants to ensure that her office expenses, approximately $10,000 per month (for the next five years) are covered in spite of sporadic case settlements. Her attorney’s fees in a current case are $600,000. She has the option of either structuring the fees or paying the tax (50% tax bracket) and investing the balance in a tax-free municipal bond. If the attorney elects to structure her attorney’s fees (at current rates), the $600,000 will payout $10,000 per month for the next five years guaranteed. In addition, since the taxable income from the annuity matches the tax-deductible office expense, the net tax is zero.
On the other hand, if the attorney pays the 50% tax ($300,000) and invests the balance, $300,000 in U.S. government bonds will generate less than $5,500 in monthly income. The attorney would need an investment return of over 27% per year (on $300,000) to generate enough cash to make the $10,000 per month payment for the full five years. Not even high-yield junk bonds have a yield that extravagant. Again the structured attorney fee is the obvious choice.
In summary, a) the 100% tax deferral, b) the ability to increase cash flow while lowering taxes, and c) the unlimited contribution allowance illustrate that the case for structuring attorney fees is financially clear, convincing and beneficial to the future security of the attorney.
Remember, it’s not what you make, but what you keep. For assistance with structuring your attorney fees, contact Tory K. Owens will be glad to assist you.