Presenting a live 90 ‐ minute webinar with interactive Q&A Structured Settlements and Deferred Attorney Fees Leveraging Structured Arrangements to Protect the Client, Facilitate Case Resolution, and Provide Tax ‐ Deferred Benefits for Counsel TUES DAY, MARCH 1, 2011 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific T d Today’s faculty features: ’ f l f Brian Michaels, General Counsel, Brook Hollow Financial , Chicago Christopher J. Princis, S enior Vice President, Brook Hollow Financial , Chicago Robert W. Wood, Partner, Wood & Porter , S an Francisco The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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After Settlement Success What You Need to Know What You Need to Know Brian S. Michaels, Esq. General Counsel, Brook Hollow Financial Christopher J. Princis Senior Vice President, Brook Hollow Financial Robert W. Wood Partner Wood & Porter Partner, Wood & Porter 5
Agenda 1. Settlement Funds/468B/QSF 2. Deferred Attorney Fees 3. Structured Settlements 4. Wrap-up 6
Challenges With Multi-Party Settlements Challenges With Multi Party Settlements • Multiple Defendants Multiple Defendants – Varying settlement timeframes • • Multiple Plaintiffs/Claimants Multiple Plaintiffs/Claimants – Varying settlement timeframes • Liens Liens • Multiple Law Firms • Attorney Fee Opportunities • Structured Settlement Issues Structured Settlement Issues 7
S l ti Solution: • Qualified Settlement Fund – – IRC Section 468B IRC Section 468B 8
Qualified Settlement Funds (1 of 2) • Qualified Settlement Funds (“QSFs”) were ( ) established by Congress. • Fund is established and defendant pays into the fund, gets a release of liability i t th f d t l f li bilit and tax deduction. • Allows plaintiff(s) to settle case and Allows plaintiff(s) to settle case and receive payment from defendant without triggering constructive receipt of the funds. • Routinely used in class actions and mass tort cases of all sizes and comple it complexity. 9
Qualified Settlement Funds (2 of 2) • 3 Requirements to be treated as a QSF - Order approved by any jurisdiction. O d d b j i di ti - Established to resolve 1 or more claims. - Fund is a trust under state law and assets segregated. 10
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Cases Where QSFs Have Been Used • 100’s of mass tort and class action cases • Cook County Building – 50 50+ plaintiffs l i tiff – Multitude of unresolved issues • John Hancock Scaffolding John Hancock Scaffolding – $78 million – 18 plaintiffs • 20 20+ defendants, d f d t all paying at different times 12
Opportunities For Using QSF pp g • QSF by Case/Firm • L Law Firm establishes own QSF Fi t bli h QSF – “similarly situated” cases • QSF by Case/Multiple Firms – Each firm establishes own sub- QSF (Avandia) • Other Other • Why? – Liens, administration, deferred attorney fees, structured settlements, f SNTs, etc. – Away from eyes/influence of defense – Makes everything easier 13
14 Deferred Attorney Fees
Let’s Clarify • ANY contingent fee can be deferred (not just personal injury) • Attorney can defer their contingent fee REGARDLESS if client chooses a structured settlement. • • Create custom portfolio with Create custom portfolio with any investment option! 15
Deferred fees continued • Authorized by Childs v. Commissioner (2103 T.C. 634, 94 TNT 223-15 (1994), and affirmed by the 11 th Circuit U.S. Federal Appeals Court in Childs v. Commissioner , ( aff’d without opinion) 89 F.3d 856, Doc 96-19540, p ) 96 TNT 133-7 (11th Cir. 1996)). • Payable Directly to the Law Firm Payable Directly to the Law Firm or Attorney • • Can structure all or a portion Can structure all or a portion of the fee 16
Why Structure Attorney Fees? • Income Tax Deferral. This is an excellent tool to smooth out income from year to year and minimize problems such as the Alternative Minimum Tax and phase-outs with the very real possibility of lowering taxes actually paid. p y g y p • Retirement Planning. 100% of income can be structured. Unlike other retirement plans there is no income limit on participation rules and no annual income limit, on participation rules and no annual administrative costs. It has been described as an uncapped 401(K) plan. • Overhead Expenses. Law firms have used structured attorney fees to provide for future law firm overhead expenses. By structuring a portion of current fees (or a portion of big blips portion of current fees (or a portion of big blips in income) firms have lowered reliance on lines of credit for future operating costs. 17
Taxable Equivalent Analysis: What you have to earn to match the power of deferral What you have to earn to match the power of deferral 18
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Structuring Contingent Attorney Fee: Structuring Contingent Attorney Fee: Procedural Steps 1. Client and Attorney Fee Agreement 2. Plaintiff and Defendant Agree on Settlement 3. Parties Meet With Settlement Specialist to Determine Amount and Timing of Payments 4 Plaintiff Executes Settlement Agreement and 4. Plaintiff Executes Settlement Agreement and Release, with Attorney Fee payable in Exchange for… 5. Defendants Promises to Make Future 5 D f d t P i t M k F t Periodic Payments to Attorney for fee 6. Defendant Assigns Obligation to Make g g Future Payments to Assignment Company 21
St Structuring Contingent Attorney Fee: t i C ti t Att F Procedural Steps 7. Defendant Transfers Cash to Assignment Company 8. Assignment Company Uses Cash to Purchase g p y Investments to Fund Future Payments 9. Assignment Company (or their Custodian) Makes Future Periodic Payments to Plaintiff Attorney Future Periodic Payments to Plaintiff Attorney 10. Guarantee of the Performance of the Qualified Assignee is Issued g 11. Attorney can structure their fee regardless of what client does with their settlement 22
Deferred Attorney Fees Legal Representation Client Attorney y Pay Fee in Cash +/or Promise of Future Periodic Payments Key Point: Legal fee agreement between Client and Attorney should provide for y p payment of contingent fee in form of lump sum and/or future periodic payments. 23
Deferred Attorney Fees cont… Deferred Attorney Fees cont Cash + Promise of Future Periodic Payments Future Periodic Payments Attorney Defendant Settlement Agreement Settlement Agreement and Release Liability to make Future Periodic Future Cash Payments Periodic P Payments t Investment(s) Investment Investment Assignment Assignment Provider Company Cash 24
Legal and Tax History Legal and Tax History • • Pre-Childs Pre-Childs – TAMs 9134004, 9134005, 9134006 – IRS said FMV of payment rights includible in attorney’s current year tax attorney s current year tax • Childs v. Commissioner – The seminal structured attorney fee case The seminal structured attorney fee case – 103 T.C. 634, 94 TNT 223-15 (1994), aff’d without opinion 89 F.3d 856, (11th Cir. 1996). • IRS has not formally acquiesced, Tax Court y q , bound by Childs in 11 th Circuit, even so, Tax Court usually follows published guidance from another Circuit where no other published guidance exists published guidance exists… 25
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