Most attorneys know that when it comes to physical injury settlements, traditional financial vehicles such as structured settlements1 are available to help preserve a client’s recovery. What about non-physical injury settlements when the proceeds are taxable? There are several financial products that offer a variety of benefits for non-physical injury settlements and attorney fee deferrals, including tax-favored investments with guaranteed rates of return. However, with an ever-changing landscape of financial options and the ongoing implementation of new tax law, it can be difficult to stay on top of the details. Give us a call or contact your settlement planner if you would like us to answer questions on a case. Here is a quick overview of some new and existing products you and your clients may be able to take advantage of when it comes to non-qualified settlements:
In 2018, MetLife released a new Non-Qualified Assignment (NQA) product. MetLife’s NQA product offers claimants involved in non-physical injury cases the opportunity to place all or a portion of their settlement proceeds in a structured settlement annuity. The claimant receives the proceeds in a series of periodic payments and will only have to pay taxes on the funds during the years in which they are received while earning interest on 100% of the pre-tax settlement proceeds. This approach helps the claimant avoid paying a huge tax bill all at once and provides the added benefit of a stable, long-term source of income.
The NQA product can be used for settlement proceeds from many different types of claims, including, but not limited to: punitive damages on physical injury and wrongful death cases, as well as employment litigation (e.g. wrongful termination, sexual harassment, discrimination, whistleblower, and mental anguish). The MetLife NQA product can also be used for attorneys who want to defer all or a portion of their fees using a fixed annuity.
MetLife’s NQA does have specific guidelines that must be adhered to, including that the periodic payments must: begin immediately, be substantially equal, payout in regularly scheduled intervals, and at least annually; additionally, no lump sum payments are permitted.
A Treasury Funded Structured Settlement (TFSS) is similar to a structured settlement annuity, but it uses United States Treasury Bonds as the underlying investment. A TFSS can be used for non-physical injury settlements or attorney fee deferrals. While the return may not be as high as that of other investments, a TFSS is a safe alternative to traditional investing.
With the passage of the Tax Cuts and Jobs Act, new questions have arisen when it comes to deducting attorneys’ fees in sexual harassment cases involving nondisclosure agreements. Under the newly added provision found in 26 U.S.C. § 162 (q),
“No deduction shall be allowed under this chapter for—
Many tax experts agree that the new provision was likely added in the wake of the “Me Too” movement to protect victims of sexual harassment by removing the tax incentive for companies who sign nondisclosure agreements in these types of cases. Unfortunately, the new language is not specific enough to indicate whether a nondisclosure would also preclude the claimant from deducting attorney fees. Until the IRS releases formal guidance, the tax liability for these types of settlements is unclear. In the meantime, it is advisable for claimants to consider all options for preserving their settlement proceeds, including deferral options.
In addition to the NQA and TFSS products, attorneys have additional options for fee deferrals:
Vanguard or DFA Funds: For those seeking an alternative to fixed annuities, certain products allow attorneys to place up to 100% of their attorney fees in pre-selected Vanguard or DFA funds. This approach allows attorneys to defer the taxes on their fees until the years in which payments are received, but at the same time, offers the potential for a higher rate of return than what one might expect from an NQA or TFSS product.
Provided certain controls are met, there are a couple of other products on the market that allow the attorney to use their personal investment advisor to manage their investment portfolio via a defined selection of funds. Additionally, there are products that allow the attorney to borrow against their annuity for items such as overhead expenses.
It is important to note that depending on the fee deferral option you choose, certain set-up and/or annual administrative fees may be associated. Minimum investment requirements also vary by product.
For more information about financial options for non-physical injury settlements, contact me today.
1 Structured settlement annuities provided through Sage Settlement Consulting.
2Traci Kaas does not provide legal or tax advice. For detailed information regarding tax liability, please contact an experienced tax advisor.