Tax Reduction and Deferral Strategies for Trial Attorneys – Part 4

Tax Reduction and Deferral Strategies for Trial Attorneys – Part 4: The Trial Attorney’s Pension Plan

Overview

Part I of this series focused on tax reduction and deferral strategies for trial attorneys with contingent fee income using private placement variable deferred annuities in lieu of fixed annuities for structured settlement payments.

Part 2 of this series focused on the use of closely held insurance companies (aka captive insurance arrangements) to provide tax reduction and deferral of contingency fee income. In Part 2, the captive insurer can function as a multi-line insurer (property and casualty as well as life insurance) and issue the structured settlement annuities for contingency fee deferrals referenced in Part I of this series.

In Part 3, the trial attorney was able to gain a charitable tax deduction equal to the amount of the contingency fee and invest that money on a tax-deferred basis using PPLI contracts. Part 3 combined several sophisticated planning techniques such a Charitable Lead Annuity Trust with back loaded payments to a charity; a preferred partnership to transfer growth in excess of a preferred return to a family trust; tax-free treatment on investments using private placement life insurance, and lastly, a family investment management LLC owned by the trial attorney in order to generate some income from tax deferred assets that will ultimately pass outside of the taxable estate.

In Part 4, we will investigate how a trust established under IRC Sec 468B- a Qualified Settlement Fund- is really an unlimited pension plan for trial attorneys. I have noted several times already that qualified plans are pretty useless to a high income trial attorney.

A qualified retirement plan such as a defined contribution plan has a contribution limit of $50,000 in 2012 and a salary cap of $250,000. Defined benefit plans have a maximum annual benefit of $200,000 per year. However, defined benefit plans are very expensive because of the contribution and participation requirements of qualified plans.