At Truist, our Legal Specialty Group works with some of the most successful plaintiffs’ law firms and attorneys in the country—and we’ve done so for many years. It’s afforded us an unprecedented insight into the unique challenges that come with managing highly unpredictable and uneven cash flows. And it’s allowed us to cultivate successful strategies for meeting your distinctive capital, investment and tax mitigation requirements.
When banks look at boutique litigation firms, they tend not to be able to see past the wildly unpredictable revenue and cash flow fluctuations. One year you might have considerable revenue and the next year far less. Most lenders instinctively shy away from the business, because they simply don’t know how to lend when firm income is predicated on a percentage of recovery (high risk/high reward) rather than a predictable hourly billing rate.
This same unpredictability doesn’t just complicate lending arrangements; it also poses significant tax mitigation difficulties.
Traditional fee structuring
In the same way that client funds are often placed into a structured settlement, you have the ability to similarly structure your fees as a highly beneficial tax mitigation strategy. Let’s assume you close a $10 million settlement ($4 million of which is coming back to your firm in fees). Let’s also assume $500,000 worth of case costs. Even after repaying all of your sunken costs for discovery and litigation, you’re looking at $3.5 million in net money distributed to you personally—approximately 50% of which will end up going to federal, state, local and other taxes.
Traditionally, attorneys smoothed out the taxation impact of these large periodic settlements using the same vehicle that the courts typically approve for their clients’ settlements: an annuity. However, while beneficial for protecting clients from spendthrift risk and the potential for friend/family exploitation, the annuity structure is far from ideal for attorneys due to:
- Cost – the internal expense of an annuity product can be high when compared to the relative return;
- Access – if you need access to the assets held in an annuity, you’re essentially out of luck unless you sell the contract to a factoring firm at a significantly discounted value; and
- Investment Options – annuities typically have a limited number of investment options that are pre-determined by the issuing insurance company.
Because of these limitations, more and more litigators have been foregoing the annuity structure and opting instead to utilize a market-based instrument such as a structured settlement trust. With this type of vehicle you typically have lower costs than with an annuity, access to liquidity, and possibly more investment flexibility. Of course, because it’s a trust, there needs to be an investment policy statement and defined roles: someone to serve as trustee, someone who will act as custodian, and someone to function in an investment advisory capacity.
But even structured settlement trusts come with some obstacles. Since fee structures are specific to a particular case matter, each individual settlement requires a separate structure. It’s restrictive from both a privacy and cash flow perspective. You have to build into the settlement agreement specific language that acknowledges your intent to structure your fee—language that has to be signed off on by both the client and opposing counsel. Upfront, you’ll also need to define a distribution schedule for the funds, which cannot be changed. And because the assets are allocated in a time-sensitive manner, modifying investment strategy to any changes within your particular financial plan and individual needs can be challenging.
Fee deferral programs—a better way
At Truist, we’ve examined structured fees from every angle and explored different ways to approach this business. We know most of the major players who work to create these structures, as they often engage us to handle the trustee work and manage the money. It’s a wealth of experience that has enabled us to uncover an easier and better way to mitigate taxes relating to your fees.
“Instead of structuring your fee, defer your fee—either at the firm or individual attorney level—using our Fee Deferral Services,” explains Ben Hunter, Managing Director of Truist’s Legal Specialty Group. “You can continue deferring fees to the same account, which eliminates the need to establish multiple structures. Signing a simple one-page deferral election acknowledgement prior to each new settlement helps satisfy the IRS requirement to forego constructive receipt.”
When the funds are received in escrow, instead of distributing them to the firm’s operating account, they are sent directly to an administrator who then places the funds with Truist, and we manage them for you based on your financial plan and investment preference.
- You are under no obligation to include language around your deferral election in the settlement agreement;
- Nor are you required to have the client and/or opposing counsel sign off on it;
- Since there are no limits on how much you can defer, you can mitigate your entire tax liability;
- Settlement funds are received on a pre-tax basis and therefore can grow tax-deferred; and
- Because it’s a 99-year platform from the time you establish it, the plan need not terminate when you die. Instead, it can live on as an estate planning tool to support your beneficiaries.
From a planning and cash management perspective, you don’t have to dictate a specific upfront distribution schedule, and because it’s not a pooled fund, your investment allocation can be fully customized based on whatever your financial plan dictates for you or your firm. With full access to our open architecture platform, a fully customizable investment portfolio can be built to your particular needs, based on your risk profile and forecasted time horizon.
Aside from its obvious income deferral and tax mitigation benefits, a fee deferral program can also help you plan for future expenses (e.g., college funding, retirement, etc.) and serve as a risk mitigation tool. Attorneys are always in the crosshairs as potential targets for countersuit. It’s the reason you pay a sizable premium for professional liability insurance. But money that is held in an appropriately structured fee deferral program can be creditor-protected and shielded against claims—a tremendous risk-management benefit.
Why Choose our Fee Deferral Services?
- Pre-tax funded
- Tax-deferred growth
- No contribution limits
- Customized investment portfolio
- Greater privacy & distribution flexibility
- Contingency risk mitigation
Truist is the only bank in the country (and the only legal specialty group) with access to a fee deferral platform of this nature. As in other areas of our business, we partner with administrators who will assist us in developing specific plans and handling documentation and other regulatory/compliance materials.
Each year in the U.S., hundreds of billions of dollars change hands through the course of contingency litigation. It’s a tremendous amount of money that could benefit from the unique features of a fee deferral program.