Having been contacted for a number of second opinions recently , I am increasingly troubled by the number of cases where I've observed that those who hold themselves out as competent advisers to plaintiffs are convincing (or attempting to convince) a plaintiff attorney to take an ultra short term structured legal fee over say 2-3 years, the result being that the attorney actually loses money because of the very low to non existent ultra short term rates. The only person that appears to be making money is the structured settlement broker and that's NOT right!
If the attorney wants to structure $1,000,000 the broker will make or split commissions of close to $40,000. So on a 2 year structure where the the total gross payout shows attorney comes out lower than what the attorney has allocated to the deferral is mostly a losing proposition, enriching the insurance agent at the expense of the attorney. The picture is dramatically worse after one takes into account the taxes that the attorney must pay in the tax year he/she receives the money.
In theory, structured attorney fees are advantageous because during the deferral period, there is implicit interest on that portion of the gross amount that would otherwise have gone to the IRS. While the plaintiff attorney may ultimately pay taxes on that money the net after tax amount MAY possibly be better than simply paying the taxes in year 1. It depends on the cash flow. One should not always fear paying one of life's "certainties".
One structured annuity company told this author today that it WILL NOT accept money to fund a structured attorney fee with one of its annuities in which the projected total payout is less than the premium paid to the company.
Until short term interest rates make a meaningful rise to support better pricing, an ultra short term structure would only have a modicum of benefit if the incremental amount being deferred pushes the attorney into a different tax bracket, or if a large gap in the case pipeline presents a near term projected income void that needs filling and the lawyer or firm is willing to accept losing money for the peace of mind.
For a few years a number of industry colleagues have been marketing "companion" loan deals against structured attorney fees. The gist of it is (1) the attorney structured fees over a period of time; (2) shortly thereafter, in an actually separate transaction, the attorney takes a loan from a specialty finance company which is in substance "appears" to be tied in someway to the structured attorney fee. The sales pitch is that you avoid taxes recognition of income now, but "get use of a percentage of the money" via the loan. The transaction obviously depends on a healthy spread to work financially. Where are those spreads coming from today?
There are still plenty of good reasons to structure attorney fees.
Systematic structuring of attorney fees through laddering annuities and other attorney fee deferral solutions can smooth out highs and lows of interest rates, and payouts.
Attorneys who wish a consultation on structured attorney fees please contact this author, John Darer, at (888)325-8640, (203)325-8640 from within Connecticut