Structured legal fees, why attorneys fail to use them.

One of the big questions in the structured settlement community these days is why so few attorneys take advantage of their ability to structured their legal fees. For those of you who don't know what a fee structure, attorney fee structure or legal fee structure is, ( all of those names describe the same thing ) go over to Wahlstrom & Associates and read up on some of the material I have there. It will bring you up to speed. In short it is a perfectly legal and accepted technique that allows a trial lawyer on either a taxable or tax free case to spread their legal fee out over several tax years, all underwritten by A+ life insurance companies and paid on a pre-determined schedule at a fixed rate of interest. Trial lawyers are the ONLY profession in the US that has this unique " income averaging tool" available to them, but evidence indicates that only a tiny fraction of them take advantage of it.

In this blog post I'd like to examine why it is that this unique planning tool is so widely ignored by trial lawyers when they settle cases, and why it hasn't taken off in the last three years since the tax and legislative questions surrounding this technique were resolved. Some observations:

1. Most trial lawyers still aren't aware that they can unilaterally decide to structure their fees on every case. What we have here, in the words of the warden from Cool Hand Luke, is failure to communicate! In the last ten days I have sat across the table from some of the top trial lawyers in the country, men and women making well in excess of $5 million per year and with 20+ year track records litigating cases. In every single conversation when I asked them about structured legal fees they each had at least one reason for why they didn't take advantage of the opportunity to structure, with almost every single one of those reasons being based upon erroneous information or flawed assumptions. Among the reasons were they didn't know you could structure out of a mass tort, structure out of a 468b QSF, didn't know their firm could structure, didn't realize they could work with a plaintiff structured settlement expect, etc, etc, etc. In short a long list of incorrect information that no one had attempted to correct.

2. Most trial lawyers don't trust defense brokers to work with them on what is essentially a financial planning decision. Lets face it, the decision for an attorney to structure their legal fee is at it's core a financial planning and tax decision. In most cases the only structured settlement advisor at the table is a broker who has been brought in by the defendants, the same broker who is aligned with defense firms and casualty carriers that the trial lawyer quite naturally see's as their adversary. I've had a lot of trial lawyers over the years tell me that they would have been interested in structuring their legal fee but didn't want to bring an " in house" structure guy into their financial decision making when considering the options they have. Essentially there is a natural reluctance to share tax, financial and practice management information with someone who, in the eyes of the trial lawyer, works for the defense.

3. Most trial lawyers do a very poor job of financially managing their legal practices with the result being continual cash flow issues. Why this is important is that in most cases you will hear this refrain, " I'd really like to structure and save the taxes, but i've got a lot of case expenses/debt/personal debt/deferred spending to take care of." Essentially they need that cash to get caught up financially and despite clear evidence that they are going to pay a great deal more in taxes they just aren't in a position to defer the income. The problem is compounded on larger cases that require substantial investments such as mass torts, environmental cases, complex product liability litigation or medical malpractice where the expenses can run into the hundreds of thousands of dollars, if not millions, invested into the litigation. As long as they face big case debt most trial lawyers will never structure their fees and it would help a great deal if the LIFE MARKETS started to grasp this fact and be more supportive of some of the industry solutions being crafted to assist the lawyers on this issue.

4. Trial lawyers are naturally skeptical and have a lingering fear that the tax status of structuring legal fee's is going to be yanked away from them. As we all remember, structuring legal fees was a common and accepted practice through most of the 1980's and early 1990's, up until the Childs case made big headlines as the IRS attacked the assumptions on which tax deferral was based. The facts are we WON the Childs case and this is the strongest tax and legal basis we have ever had for structuring fees. Congress created a carve out for the process as part of the regulations following the passage of the American Jobs Creation Act of 2004 ( AJoCA), as well as the Supreme Court decisions in the Banks and Banatis cases providing further clarity. It's pretty much bullet proof, but there is still that lingering fear which only education of the TAX community can correct. Telling trial lawyers is pointless unless you have coherent third party confirmation of the tax status of the concept you can show a lawyers tax counsel.

Ok, so those are the trial lawyer obstacles. However, the structured settlement community doesn't get away easily on this issue as they have done an exceptionally poor job of marketing and explaining this to trial lawyers. Some of the issues i've noticed and address in my own practice.

1. Communication to trial lawyers tends to be simplistic, formulaic and uninspired on this topic. One look at the life company literature on structured legal fees and you can see why no trial lawyer would go past a cursory look at the bland brochures. Some companies do a better job then others, particularly Hartford Life who has a very comprehensive brochure that I think is quite good. However most of them are your basic little three fold brochure that tell nothing and don't inspire action on the part of the trial lawyer. There needs to be more dynamic forms of communication created by the life companies who are underwriting these programs. That NSSTA continues to want to fly under the radar on this, fearing IRS ire at helping trial lawyers, instead of creating an industry wide educational and marketing campaign directed at trial lawyers is a sign of timidity that will keep this as a niche product for years to come.

2. There is too much disparity between life markets as to what they will underwrite and what they won't. This goes back to the trust and fear issues. If I have to tell an attorney that company A will underwrite his fee structure for life, but company B won't, then I need to get into the reasons why. It's not my job to say why the lawyers at company B take such a conservative stance, but the fact that they do this raises issues with the trial lawyer. " If company B won't do it, what do they know that the broker isn't telling me?" Ask yourself, would you buy a product where there is such disparity among life underwriters as to the type of programs they will write, for how long and on whom?

3. Brokers do a really poor job promoting the concept. Now I know there are firms that are making a real push in this regard. Millennium was at MTMP last week and I know it was the focus of their lunch time talk and at their booth. I've seen Ringler promote it heavily from time to time and I've certainly done more then a few shows on this topic over the last three years. The problem is that it needs to be a point of industry emphasis on every case! Every broker needs to take a few minutes and ask the question, " Would you like to structure your fee or have information on how that is done?" You should have available at every settlement conference a package of information on how it works and what the options are to at least generate conversation as to why it might make sense.

4. Salesman ship and financial planning are not strong points in our industry. The facts are that 90% of our brokers come from a claims or legal back ground and have operated in an environment where the phone rang daily with a claims manager on the other end sending them a new case. A great little business but it doesn't develop the sales skills necessary to make a more complex sale to a trial lawyer that often involves estate planning, practice management, case financing or retirement plans. Quite frankly, it's beyond the expertise of most brokers, and the trial lawyers know it instinctively. The only way to address this issue is for more firms to develop firm specific selling teams that are capable of following up on this multi-faceted sale.

5. Innovation is generally lacking in solving the core problem, which is that most trial lawyers can't afford to structure their fee due to large case expenses. I know I created a few waves with the announcement the other week of my firms ability to help trial lawyers obtain loans on their structured legal fees, but it's just the first step in what is going to be a wave of creative solutions to the trial lawyers financing issues. Our loan product isn't a turn key " buy your structure get your loan" type of deal, but a process that a trial lawyer or firm can utilize if they want to structure their fee but need to pay off substantial case expense debt. I know there are other firms that have been working on similar products for some time and at considerable expense, but there is nothing magical about the process as far as i'm concerned. We are going to see a lot of legal finance and factoring companies move into the arena as it becomes more and more obvious that there needs to be creative solutions to the issue of litigation financing. There is a part the structured settlement broker can play in this but they need to get educated on what the problem is and then start looking at some of the options that are being created.

In summary, I think it is going to be a long, slow pull to build up the structured legal fee business. I know my firm, Wahlstrom & Associates will probably do more fee structure work this year then regular structures, primarily because i've made it a point of emphasis for the last three years. I think if NSSTA started an industry wide push, and then the various brokers made it a point of emphasis on every case, that this concept would explode in acceptance over the next three years. If we continue along stifling innovation, protecting our various turfs and fearing publicity on this product then we can expect further limitations on it's use and acceptance.

Posted on November 12, 2007 .