Structured Settlements 4Real® Blog: Structured Settlements | Settlement Planning News and John Darer Reviews

Paul Tudor Jones "Plenty of Room to Raise Taxes, Change Social Security, Cut Health Insurance"

by John Darer CLU ChFC MSSC CeFT RSP CLTC

All the More Reason to Structure Your Settlement or Structure Your Attorney Fees!

Paul Tudor Jones II, the billionaire hedge fund manager is quoted as saying

'There's plenty of room to raise taxes': This billionaire says the US will need to change Social Security, cut federal health insurance to deal with a worsening debt crisis — are you ready? (msn.com)

Higher taxes make structured settlement tax advantages inherently more valuable 

If you lock in a 5% income tax-free rate (IRR) now, what is that worth if tax rates go up? Check out this free resource from 4structures.com LLC in Stamford CT.

Tax Advantages of Structured Settlements | Taxable Equivalent Yield Chart (4structures.com)

• 5% in a 28% bracket is the equivalent to  6.94% taxable
• 5% in a 33% bracket is the equivalent to  7.46% taxable
• 5% in a 35% bracket is the equivalent to  7.69% taxable
• 5% in a 40% bracket is the equivalent to  8.47% taxable

Structured Settlements | What Is a Structured Settlement? (4structures.com)

New York Structured Settlements Experts | Settlement Consulting (4structures.com)

London Market Structured Settlement Experts (4structures.com)

Structured Attorney Fees and Attorney Fee Deferral Experts | 4structures.com LLC

IRC 104(a)(2) Tax Exclusion Denied Because Settlement Agreement Did Not Address Physical Injury

by John Darer® CLU ChFC MSSC CeFT® RSP CLTC

The Ninth Circuit Court of Appeals has affirmed a Tax Court decision, that concluded that a settlement was not excludable from the gross income because neither the settlement agreement nor the facts and circumstances of the case demonstrate that the settlement was based on a plaintiff's physical injury or physical sickness, or her loss of consortium arising from her husband's physical injury or physical sickness.

See

JOSE M. DULANTO; ANA M. DULANTO, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT Tax Ct. No. 19123-12 MEMORANDUM Appeal from a Decision of the United States Tax Court Submitted November 15, 2017

The Appellate Court stated in its ruling:

"Jose M. Dulanto and Ana M. Dulanto appeal pro se from the Tax Court's judgment concluding that a payment that Ana M. Dulanto received in a settlement agreement was not excludable from their gross income and assessing penalties. We have jurisdiction under 26 U.S.C. § 7482(a)(1). We review de novo the Tax Court's conclusions of law and for clear error its findings of fact. Rivera v. Baker West, Inc., 430 F.3d 1253, 1256 (9th Cir. 2005). We affirm.

The Tax Court properly concluded that the settlement was not excludable from the Dulantos' gross income because neither the settlement agreement nor the facts and circumstances of the case demonstrate that the settlement was based on Ana M. Dulanto's physical injury or physical sickness, or her loss of consortium arising from Jose M. Dulanto's physical injury or physical sickness. See 26 U.S.C. § 104(a)(2) (exempting from taxation a settlement payment based on personal physical injuries or physical sickness); Rivera, 430 F.3d at 1257 (to determine whether a settlement is based on physical injury or physical sickness, courts consider the settlement agreement and the facts and circumstances of the case). Read the underlying Tax Court Decision inDulnato v IRS here

The Tax Court did not clearly err in concluding that the Dulantos failed to produce sufficient evidence that they acted with reasonable cause and in good faith, and thus properly found that the accuracy-related penalty was appropriate for the Dulantos' understated taxes. See 26 U.S.C. § 6662(a), (d)(1) (authorizing penalty for substantial understatement of taxes when understatement exceeds the greater of ten percent of the tax required to be shown on the tax return or $5,000); DJB Holding Corp. v. Comm'r, 803 F.3d 1014, 1022, 1028-31 (9th Cir. 2015) (setting forth standards of review and discussing penalties under § 6662 based on substantial underpayment and circumstances for applying exception under § 6664(c)(1) regarding whether taxpayer had reasonable cause for his position and acted in good faith).

The Tax Court did not abuse its discretion in denying the Dulantos' motion to continue because it was filed within 30 days of the trial date and the Dulantos were aware of Ana M. Dulanto's disability before that period. See Tax Ct. R. 133 (a motion for a continuance is granted only in exceptional circumstances, and if filed within 30 days of hearing, it ordinarily will be deemed dilatory and will be denied unless the ground therefor arose during that period or there was good reason for not making the motion sooner); see also Woods v. Saturn Distribution Corp., 78 F.3d 424, 427 (9th Cir. 1996) (standard of review)."

While the decision is not specifically about structured settlements, it does underscore the importance of good settlement documentation.

Tax Issues in Settlements of Claims with Allegations of Sexual Misconduct and Sexual Harassment

by John Darer® CLU ChFC MSSC CeFT RSP CLTC

Victims could be left with a third or less of the settlement, depending on their attorney's contingency fee agreement thanks to Tax Cut and Jobs Act of 2017

Harvey Weinstein at the Tribeca Film Festival 2017 

Image: Dreamstime

Effective in 2018, the Tax Cuts and Jobs Act of 2017 (TCJA) eliminated deductions for settlements or payments related to sexual harassment or sexual abuse when such settlements or payments are subject to a nondisclosure or confidentiality agreement.

If former Miramax CEO Harvey Weinstein, who has been accused by numerous women of sexual harassment (and in a few cases, assault) that have grabbed headlines recently, ends up negotiating settlements with any of his accusers, many of the settlements will be taxable, or have taxable elements. After paying attorney fees and applicable federal state and local income taxes, it could leave a third or less to the victim depending on their attorney's contingency fee agreement.

For example, the New York Times reported that actress Rose McGowan was offered $1 million by Weinstein (which it was reported she refused). If she had deemed it a fair value, she and Weinstein's people could have negotiated a custom stream of tax deferred payments, which Weinstein, or his company, would fund up-front. Structured settlements do not require the victim to be traumatized by receiving a check or having any ongoing interaction with the employer or defendant, if the matter is in suit.

Sexual Harassment Damages | How to Mitigate the Tax

For those with taxable damages, or with an element of taxable damages a non qualified structured settlement offers significant advantages.

• Earn interest tax deferred.
  
• Earn in interest on the deferred taxes tax deferred.
  
• Earn interest on the interest tax deferred.

Many of Harvey Weinstein's accusers have significant incomes and could benefit from tax deferral.  If personal physical injury is an element of damages and qualifies within the meaning of IRC 104(a)(2),  then that portion of the damages will be tax exempt.  Check out the taxable equivalent yield chart to see the value of the structured settlement tax benefit.

Other settlement planning tools may be useful depending on the nuance of a particular case such as a Plaintiff Recovery Trust.  See Plaintiff Recovery Trust | Taxable Settlement Planning (4structures.com)

What is Sexual Misconduct?

Sexual misconduct is a broad term encompassing any unwelcome behavior of a sexual nature that is committed without consent or by force, intimidation, coercion, or manipulation. Sexual misconduct can be committed by a person of any gender, and it can occur between people of the same or different gender.  [ Source: University of Iowa Operations Manual]

Sexual Misconduct in the Workplace 

A 2008 study of 500 respondents and 92 companies found:

• 54% (272) had experienced some form of workplace sexual harassment.
• 27% of the 272 respondents experienced harassment by their colleague, while 17% were harassed by their superior
• 79% of the victims are women; 21% were men.
• 12% had received threats of termination if they did no comply with the requests of the sexual harassers.

While Hollywood scandals involving the "casting couch" are legion, the 2008 study found that sexual harassment occurs most often in the workplace in these 5 industries:

• Business, trade, banking and finance
• Sales and marketing
• Hospitality
• Civil Service
• Education, lecturing and teaching

Source:  Association of Women for Action and Research (AWARE)

What About Harassment in General?

According to the Equal Employment Opportunity Commission (EEOC), harassment is a form of employment discrimination that violates Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967, (ADEA), and the Americans with Disabilities Act of 1990, (ADA).

Harassment is unwelcome conduct that is based on race, color, religion, sex (including pregnancy), national origin, age (40 or older), disability or genetic information. Harassment becomes unlawful where 1) enduring the offensive conduct becomes a condition of continued employment, or 2) the conduct is severe or pervasive enough to create a work environment that a reasonable person would consider intimidating, hostile, or abusive. Anti-discrimination laws also prohibit harassment against individuals in retaliation for filing a discrimination charge, testifying, or participating in any way in an investigation, proceeding, or lawsuit under these laws; or opposing employment practices that they reasonably believe discriminate against individuals, in violation of these laws.

sexual harassment

 'Casting Couch': The Origins of a Pernicious Hollywood Cliché

 

 

 

Tax Benefits of Structured Settlement Payments in Physical Injury and Non Physical Injury Settlements

by John Darer® CLU ChFC MSSC RSP CLTC

Following is a brief summary of the tax benefits of structured settlements in physical injury and non physical injury settlements.

Personal Physical Injury/Physical Sickness Cases  (including Wrongful Death)

Structured settlement payments that are payable as damages, within the meaning of IRC 104(a)(2) and IRC 130, are income tax free.  Such damages payments are income tax free whether the qualified funding asset is a structured settlement annuity, treasury obligations or an indexed linked structured settlement payment [such as the ILAPA offered by Pacific Life Insurance Company and Pacific Life and Annuity Company (in NY)]

Workers' Compensation Claims (post-August 1997)

Structured settlement payments that are payable as damages, within the meaning of IRC 104(a)(1) and IRC 130, are income tax free.  Such damages payments are income tax free whether the qualified funding asset is a structured settlement annuity, treasury obligations or an indexed linked structured settlement payment [such as the ILAPA offered by Pacific Life Insurance Company and Pacific Life and Annuity Company (in NY)]

Wrongful Conviction/Wrongful Incarceration Settlements

Structured settlement payments that are payable as damages, within the meaning of IRC 139F, are income tax free.  Note that since damages subject to the IRC 139F exclusion are not currently covered under IRC 130, the structured settlement transaction must be done as a non qualified assignment even though the payments will be income tax free.

Employment Settlements [Settlement of Wrongful Termination, Sexual Harassment, Failure to Promote,  Gender, Ethnic, Sexual Orientation based lawsuits]

Tax deferred structured settlement payments flowing from a properly drafted release and executed non qualified assignment provided tax breaks for the plaintiff make offers more attractive and there are advantages for both parties.

Long Term Disability Settlements

Tax deferred structured settlement payments flowing from a properly drafted release and executed non qualified assignment provided tax breaks for the plaintiff make offers more attractive and there are advantages for both parties.

Other Non Physical Injury or Physical Sickness Claim Settlements

Tax deferred structured settlement payments flowing from a properly drafted release and executed non qualified assignment provided tax breaks for the plaintiff make offers more attractive and there are advantages for both parties. By deferring compensation over time, plaintiff defers in three ways and effectively earns interest tax deferred on

• principal
• accumulating interest
• the taxes deferred in the year of settlement.

Punitive Damages

Lump sum settlements risk plaintiffs exceeding the Alternative Minimum Tax (AMT) threshold which can, in some cases, be mitigated by spreading the settlement payments over time.

With a qualified assignment or a non qualified assignment the Defendant or its insurer receives a novation of the future payment obligation at the time the assignment is completed.

Can Lawyers Get Rated Ages for Structured Attorney Fees?

by John Darer CLU ChFC MSSC RSP CLTC

Structured attorney fees are a tax deferral option available to personal injury lawyers and one of several attorney fee deferral options we offer in addition to more traditional attorney fee deferred compensation.  [ see Attorney Fee Deferral]

Did you know that it is possible for a lawyer to get a rated age if he or she structuring attorney fees over their lifetime?   A rated age is a pricing consideration for structured attorney fees, where in the opinion of the life insurance company underwriter, the attorney has a shorter than normal life expectancy, and therefore less expensive pricing can be used based on the older rated age than the actual age of the attorney. 

Only Two Companies Give Rated Ages for Annuities Funding Structured Attorney Fees

AIG's structured settlement underwriting companies American General Life Insurance Company and United States Life Insurance Company in the City of New York (US Life) will consider medical documentation outlining an attorney's current medical condition and current prescriptions to provide a rated age. Whether you love or hate AIG,  AIG's structured annuity issuing companies are two on a shortlist of three structured annuity issuers at this time offering medical underwriting on trial lawyers. Upon information and belief, not all structured settlement brokers/settlement planners are appointed with the two annuity issuers.

In addition to AIG, The Prudential Insurance Company of America will also consider medical documentation outlining an attorney's current medical condition and current prescriptions to provide a rated age

Structured Attorney Fees Can Address Longevity Risk

Longevity is a guessing game.  A lifetime structured settlement annuity funded structured attorney fee is an option for a lawyer to address longevity risk.  To the extent a trial lawyer structures a portion of his or her attorney fees over a lifetime, mortality risk can be shifted to the annuity issuer. It can be used as a financial backstop. Putting things into perspective on the topic of longevity,  AIG's New York underwriting company US Life has been in business since the 1850 and Prudential since 1875 which, taking into account shifts in mortality over time, is in the realm of three normal human life expectancies!

Rated Age May or May Not Give the Best Price

As with the pricing of structured settlement annuities for plaintiffs, even with a rated age the best pricing is not a given.  When calculating the cost of a particular stream of payments, the rated age is applied to the current rate series of the annuity issuer. Depending on the rated age and the rate series a company without a rated age could still be competitive.

If you would like to explore attorney fee deferral options or have any questions feel free to call me at 888-325-8640

 

Guide to Personal Injury Attorney Fee Tax Deferral Plans | Overview for Year End Tax Planning

by John Darer® CLU ChFC MSSC RSP CLTC

Personal injury trial lawyers can defer taxes on attorney fees in excess of what qualified plan limits by planning ahead and I can help.

Defer Taxes, Save , Grow

Trial lawyers have a variety of options for deferring their attorney fees:

I. Fixed Income Strategies [Structured Attorney Fees]

• Structured attorney fee funded via structured settlement annuity providing fixed return  (qualified assignment)
  
• Structured attorney fee funded via structured settlement annuity providing fixed return  (non qualified assignment)
  
• Structured attorney fee via periodic payment reinsurance
• Structured attorney funded with index linked structured settlement annuity from Pacific Life insurance Company or, for New York personal injury lawyers,  Pacific Life and Annuity Company with payment adjustments based in changes in the S&P 500 index with 5% cap and no downside adjustments
• Structured attorney fee using US treasuries  (Treasury Funded Structured Settlements)
  

II. Market Participation Personal Injury Attorney Fee Deferral Strategies  [ Attorney Fee Deferred Compensation]

Historically, personal injury attorney fee deferral programs have been established by closely-held companies that lack the institutional backing and legal mechanisms required to assure the long-term security of the assets. They have also operated offshore and offered loans linked to deferrals, creating tax risks. The personal injury attorney tax deferred compensation solution that we offer through our partner, addresses these concerns.

• Large, independent institutions assure accounts are accurate and managed appropriately. Deferred fees held at BNY Mellon, acting as trustee, and tracked by  The Newport Group, the country’s largest administrator of tax-deferred compensation for Fortune 500 executives, with over $75 billion in deferred compensation plans under under management.  Attorneys enjoy 24/7/365 monitoring of values in their attorney fee deferred compensation account.
• “Single-purpose entity” status prohibits unrelated activities that could impact assets
• Onshore domicile and bona fide loans eliminate aforementioned tax risks

Benefits of Attorney Fee Deferred Compensation

• Reduce taxes. Enhanced Wealth Accumulation via compounding on a pre-tax, tax-deferred basis
• Improved investment Options: Participation in U.S. and international equity and fixed income markets via investments in low-cost ETFs. Can be used as  a diversification strategy if you already have a substantial amount in fixed structured attorney fees.
  
• Flexibility of Payments: 5-year rolling income stream. Unlike traditional structured attorney fees, attorney fee deferred compensation payments can be postponed, as provided for in IRC 409A(a)(4)(C), as long as an election is made at least 12 months in advance and the postponement is for at least 5 years. For example, on a payment due in at least 12 months.  You could elect at least 12 months in advance to defer 50% of that for another 5 years.  Just like Fortune 500 executives deferring their compensation, personal injury lawyers can exercise greater control over the timing of income and resulting taxation
  
• A bona fide lending facility to meet near-term cash needs at competitive rates
• Fund a retention plan for key associates and employees, mitigating the risk of important people leaving the law firm,  on a more tax favorable basis than paying the bonus in cash or making the bonus deferred without deferring attorney fees.

To avoid constructive receipt and current taxation the law firm or attorney should make an irrevocable agreement to defer specified fees before there is a legal entitlement to a fee that is currently payable.

 

If you would like to have a more comprehensive discussion of your attorney fee deferral options  please contact John Darer at 888-325-8640

 

Helpful Reference

 

Deferred Compensation | Structured Attorney Fee Alternative for Trial Lawyers Talking Settlement™, featuring John Darer and Leif Lundberg  August 2016

 

Structuring Legal Fees Without Annuities: Offspring of Childs, Vol. 148, No. 3, Tax Notes (July 20, 2015), p. 341.

 

New York Structured Attorney Fees in New York and New York Taxes for Retired Lawyers

by John Darer® CLU ChFC MSSC RSP CLTC

Can retired New York State lawyers with structured attorney fees take an exclusion of up to $20,000 intended for retirees on the structured attorney fees income? 

According to a 1982 tax memorandum concerning Chapter 1043 of the Laws of 1981, enacted on November 11, 1981, amended sections 612(c)(3-a) and T46-112.0(c)(3-a), these amendments provide for the exclusion of up to $20,000 of pension and annuity income received by an individual 59½ years of age and over Pension or annuity income received by an individual before the age of 59½ does not qualify for the exclusion.

How do you qualify for New York's $20,000 retiree exclusion?

• To qualify for the exclusion, this pension and annuity income must be included in federal adjusted gross income.
• It must also be attributable to personal services performed by such individual prior to his or her retirement as an employee or from contributions to a retirement plan which are deductible for federal income tax purposes.

What is a structured attorney fee?

A structured attorney fee is an arrangement in which attorneys elect to defer their receipt of contingent fees from settling legal cases. The structured attorney fee payments must be set forth in the settlement agreement and release between the settling parties. If structured properly, the structured attorney fees are taxable only when received.   By structuring attorney fees, an attorney or law firm can augment retirement income, levels cash flow over future years to make a contingent-fee practice more predictable, or to fund costs for future cases. And it saves money by deferring tax until future years.

Can a New York attorney or law firm structure his/her/its attorney fees if the settlement proceeds are sitting in an IOLTA account?

No

Can a New York legal partnership deduct attorney fees paid to partners?

No

Can a New York lawyer and sole proprietor deduct attorney fees paid to himself or herself?

No

Is a Structured Attorney Fee Subject to ERISA?

No

Is a Structured Attorney Fee a qualified "pension plan"

No

What is qualifying pension and annuity income for the purpose of the up to $20,000 exclusion in New York?

Qualifying pension and annuity income includes:

• periodic payments for services you performed as an employee before you retired; 
• periodic and lump-sum payments from an IRA, but not payments derived from contributions made after you retired;
• distributions from government (IRC section 457) deferred compensation plans, after December 31, 2003; 
• periodic distributions from an annuity contract (IRC section 403(b)) purchased by an employer for an employee and the employer is a corporation, community chest, fund, foundation, or public school;
• periodic payments from an HR-10 (Keogh) plan, but not payments derived from contributions made after you retired;
• lump-sum payments from an HR-10 (Keogh) plan, but only if federal Form 4972 is not used. Do not include that part of your payment that was derived from contributions made after you retired;
• distributions of benefits from a cafeteria plan (IRC section 125) or a qualified cash or deferred profit-sharing or stock bonus plan (IRC section 401(k)), but not distributions derived from contributions made after you retired.

Some New York personal injury lawyers have raised the interesting question of whether "periodic payments for services you rendered as an employee before you retired" means that they are eligible for the $20,000 exclusion, however the June 21, 1982 Technical Service Bulletin TSB-M-81(19)Rev.1 suggests otherwise.  

 

 

 

IRS is Hard Boiled on Poached "Eggs Fu Young"

by John Darer CLU ChFC CSSC RSP CLTC

If you thinking about raiding your ovaries to donate eggs to help produce offspring for someone else in exchange for monetary compensation , don't count on your compensation being tax-free.

Compensation for pain and suffering resulting from the  consensual performance of a service contract is not “damages” under I.R.C. section 104(a)(2) and must be included in gross income 

See NICHELLE G. PEREZ, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent  United States Tax Court Docket 9103-12  January 22, 2015.  Download Perez v Commissioner

Nichelle Perez received $20,000 under 2009 contracts that she signed with a clinic before she underwent a prolonged series of painful injections and operations to retrieve her unfertilized eggs for transfer to infertile couples. The contracts said that she was being paid in compensation for her “in consideration for all of her pain, suffering, time, inconvenience, and efforts.”  The Code says that  damages for pain and suffering are not taxable.

Perez argued that they were in exchange for the pain, suffering, and physical injuries she endured as part of the egg-retrieval process; the Commissioner, on the other hand, argues Perez was simply compensated for services rendered.  The Tax Court found in favor of the IRS.

IRC 104(a)(2) is a fundamental Code section for structured settlements.  The  Tax Court's reasoning here underscores why you just can't "shoehorn" everything into a prayer of a tax-free outcome in order to structure,  if it doesn't qualify.

Section 104(a)(2) excludes from gross income the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness.

Damages are defined as “an amount received (other than workers’ compensation) through prosecution of a legal suit or action, or through a settlement agreement entered into in lieu of prosecution.” Sec. 1.104-1(c)(1), Income Tax Regs.

The Tax Court cited a series of long standing cases in reasoning  "moneys paid to any taxpayer as compensation for an advance waiver of possible future damages for personal injuries, would constitute taxable income".

Perez voluntarily contracted to do the procedure twice and the Court found that "her physical pain was a byproduct of performing a service contract, and we find that the payments were made not to compensate her for some unwanted invasion against her bodily integrity but to compensate her for services rendered".

 

 

 

 

How Much Are Structured Settlement Payouts Taxed For The Beneficiaries?

by John Darer  CLU ChFC CSSC RSP CLTC

Structured settlement payments are income tax free to payees provided that the payments are for damages that qualify under Internal Revenue Code Section 104(a)(2)  [physical injury or physical sickness] or 104(a)(1)  [workers compensation]. Payments retain their income tax status when paid beneficiaries.

Structured settlements for damages that do not qualify under these sections of the Internal Revenue code offer tax deferral. Payments are generally taxed when received. For example, in an employment setting,  structured settlements can be used in legal cases involving sexual harassment, wrongful termination, failure to promote and disicrimination settlements. There is a wide variety of lawsuits and disputes where a non qualified structured settlement can be very helpful in resolving cases.

Work with a credentialed structured settlement advisor to be sure that your structured settlement is established correctly.

Consider Structured Attorney Fees and Attorney Deferred Compensation Options Before Year End

by John Darer® CLU ChFC MSSC RSP CLTC

Structuring attorney fees is a fantastic tax deferral option for trial lawyers with any type of contingency fee case. Layer up guaranteed streams of income for your firm's practice, help fund your children's college tuition or help fund your own retirement.

As plaintiff lawyers take stock of what they have earned and are likely to earn through the end of the year, they should consider if structured legal fees make sense for year end tax planning. Plan ahead for year end and avoid pitfalls.  For attorneys that are interested in more than a fixed return, index linked structured settlements and attorney fee deferred compensation is available.

 

Structured Attorney Fees and Attorney Fee Deferral Experts | 4structures.com LLC

To speak with John Darer about structured attorney fees, attorney fee deferred compensation,  financial transitions, insurance or any other settlement planning matter call 888-325-8640, toll-free within the USA, or 203-561-6560.

Last updated October 17, 2023