The plaintiff’s Bar in the trial community is a unique community and often controversial. Personally, I do not have any problem with the contingency system of compensating lawyers. I do not believe for a second that they are the root of all evil. On the contrary, trial attorneys make legal services available when they would otherwise too costly. How does a Regular Joe access the best legal services at rates of $800-1000 per hour? We have all seen the benefits of great legal counsel when Daddy Warbucks from Wall Street is up on inside trading charges. He is hard to convict even when the prosecutor has unlimited resources. Add a few associates to the job and the number might be multiples of that.
From a business perspective, most of us would agree that a risky investment should provide a greater return. The contingency case is a gamle. Time is money and money is time! The civil trial case can take years to settle or make it to trial. In the meantime, the plaintiff’s firm is investing in the case.
It is also no secret that trial attorneys make a lot of money. Last year settlements and judgments were about $250 billion. Assuming a contingency fee of 30-40 percent, that is a lot of income ($75- 100 billion. With the highest rates on an effective tax rate basis between 45-58 percent, it is always a surprise that there isn’t more discussion on on tax reduction and deferral strategies.
Trial attorneys have been able to defer contingency fee income since 1995 but is very surprising that so few do. Why? The structured settlement annuity industry is a small niche group of producers within the life insurance community. Virtually all of the focus is on the actual plaintiffs instead of attorneys. There are about 600 brokers accounting for the annual premium volume of $6 billion. The product being used is a fixed annuity which in a low interest rate environment is a difficult sale. Furthermore, life insurers don’t really want the business either because they have no where to invest the money.
The variable annuity solution has been sorely lacking. Met Life received a favorable private letter ruling in 1999 but never sold the product because it was right in the middle of the Tech bubble. In the meantime, very few structured settlement brokers are licensed to sell variable products.
Solutions currently exist for both qualified and non-qualified assignments to use variable annuity products to structure contingency fee income. Combined with a qualified retirement plan, a trial attorney can effectively reduce and defer income. On the qualified plan side, sophisticated defined benefit design can accommodate the annual fluctuations and minimize contributions for non-partner attorneys.
The brilliant tax professor Greg Polsky wrote an excellent law review article bemoaning the advantage that atttorneys have over other professions to have this unlimited deferral mechanism. The sad irony is that not only do trial attorneys not take advantage of these strategies, they don’t even know about them.
I have a number of tools and strategies for trial attorneys to reduce and defer income. I have written a number of articles and continue to write. Some are in English (non technical) while others may be in Swahili (technical). Let me here from you, and I will send you a few articles. The goal is take advantage of the sophisticated strategies while discovering and using the basic ones.