Why You Should Seriously Consider Structured Settlements by Richard L. Katz
Commissioner v. Banaitis, 543 U.S. 426 (2005). The Court ruled that attorneys do not have a property interest in the settlement recovery. This is a critical element enabling an attorney to defer fees.
The History Behind the Advice
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s experienced trial lawyers know, plaintiffs, in the aftermath of a large personal injury recovery, can waste away their money secured for them, and become destitute. A lawyer’s best advice includes proposing how to avoid these type of consequences. One way is a structured settlement. Initially, structured settlements were pushed by the insurance companies because they could present a settlement offer that, considering its present cash value, seemed larger than its true worth. Despite this motive, if structured correctly, it could be a win-win. The insurance companies could save money, but the clients would have settlements that gave them long-term security. For the past 25 years or so, I’ve strongly recommended to my clients that they take at least part of their settlements in a structured amount. Also, during this time, the law has evolved to allow attorneys to take all or part of their fees by way of a structure as well. It is not the purpose of this article to give tax advice, but rather to present some salient points to keep in mind if you want to partake in using structured settlement for your fees.
A Short Treatise on the Law Structured settlement annuities (SSAs) have been recognized by federal law since 1983. In Childs v. Commissioner, 103 T.C. 634 (1994), aff’d, 89 F.3d 856 (Table) (11th Cir. 1996), the Tax Court ruled in favor of an attorney fee deferral arrangement. The court determined that the attorney did not have constructive receipt of his fees because the attorney did not have any right to a fee until the settlement agreement was signed. The IRS acknowledged the holding in a discussion of construction receipt in FSA 200151003. Section 409A, which was added to the Code in 2004, deals with the requirements for deferred compensation arrangements. In January 2005, the Supreme Court issued a decision in the consolidated cases of Commissioner v. Banks and
How to Avoid Being Immediately Taxed on a Structured Fee You will be taxed at the time you start receiving the payments, but you can avoid being immediately taxed with a settlement agreement. The fee agreement should allow the lawyer to receive all or a portion of contingency fees in the form of periodic payments and this should be noted in the settlement agreement. There are other nuances that need to be met in order to ensure you qualify. Be sure you read the cases above, the Internal Revenue Code sections applicable and follow the requirements set out.
Advantages of the Structured Settlement for Both the Plaintiff and the Attorney Advantages for the client: 1. Ensured lifetime payments. I recommend a client take the structure with biannual or 5-year inflation kickers. This ensures an adequate amount of money will be there when needed, although it does reduce the initial amount of monthly payments. If there are specific anticipated needs, then the structure can allow for periodic lump sums to account for them. By way of example, if there are young children in the house or the client him/herself is planning to go to college, then the structure should be modified to provide for this by paying less initially and more during the college years. Conversely, the structure can be set up to pay more in the earlier years and less later when the children are grown. What to do with a client who has a spouse who is likely to outlive him/her? Make the payments dependent on the lives of both spouses. It will reduce the monthly amount, but will ensure the surviving spouse is taken care of. This can be done with children as well, however, using the life of a child in conjunction with the adult will severely reduce the monthly amount, because the child is likely to live much longer than the client.
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