Fixed Income

FEE Structures

Recently, more plaintiff attorneys have structured a portion of fees earned in personal injury case settlements. The attorney benefits from the income tax savings achieved by spreading income over several years, competitive interest rates of return, and the ability to receive lifetime income payments calculated with the same favorable mortality assumptions used for personal injury claimants.

Currently, marginal federal income tax rates jump from 25% on taxable income over $75,300 in 4 steps to 39.6% on income over $466,950. Plus there is a 3.8% tax surcharge on investment income over $250,000. By spreading income over multiple years, attorneys can possibly reduce their tax rates by 7 - 10%. This could be especially true if the income is deferred to retirement years. The effect of state income taxes enhances the savings from this strategy.

In addition, by receiving and investing a substantial fee over several years, an attorney reduces the risk of investing all of the fee proceeds at a high point in the stock market.

The benefit to attorneys from life annuities occurs because many life companies will group plaintiff attorneys with the pool of injured structured settlement annuitants when pricing their life annuities. Attorneys with less than perfect health can be medically underwritten to receive a "rated age". In contrast, purchasers of non-structured settlement life annuities are assumed to be making the decision to buy a life annuity because they are extra healthy and come from long-lived families and, therefore, the pricing for the annuities is affected by "adverse selection". In spite of the impact of "adverse selection" most financial planners recommend that some portion of a person's retirement assets be invested in an asset paying life time benefits. Plaintiff attorneys generally fund their own retirement plans and have little opportunity for life-time income. By structuring their fees, plaintiff attorneys can enjoy life-time retirement income at favorable rates.