Hold on to Your Big Wins - It’s Not About What You Make, it’s What You Keep!
Potential Strategies to Keep More of What You Make
As we proceed in to the second case study of three, I’ll share two stories that demonstrate how attorney’s shelter large tax implications after a major case victory! Every situation is unique which is why it’s important to ensure you have experienced professionals working as a team. Your CPA, Financial Advisor, and Third Party Administrator need to partner together in an effort to create the best outcome for you and your practice.
A solo practicing attorney had recently won a case receiving a payout of $333,333. Rather than pay the tax bill in full she was curious to see what her options were for a tax deferment through a qualified retirement plan. In consultation with her, she desired to pay as little taxes as possible for that year and then have flexibility for the future (no contributions if there was no cash flow, or high contributions if there was another big win).
The key for these types of scenarios is to collect as much data as possible. After reviewing the most recent 10 years of corporate earnings, the TPA and actuary were able to apply past service credits and justify a high first year contribution to “front load” the plan, and add 50% of next year’s contribution, which is referred to as a “cushion”. This resulted in the option to contribute a maximum of $320,000 for the first year. Since she ‘pre-contributed’ for the following year, her second year contribution requirement was low. However, a high income during year two of the plan could justify a high contributions as well, in the $200,000 - $300,000 range.
Some key words and considerations you may have missed in the paragraph above were ‘required contributions’. When establishing these types of plans, there is a commitment that needs to be made. While every situation is different, there are several exit strategies available should the client be unable to maintain the plan beyond three years. Again, to aim for an optimal outcome it’s imperative to have a knowledgeable team of advisors on your team.
In a larger case settlement an attorney had a major win of $4M. As you can imagine, the taxes on those earnings quickly impact the euphoria of such a victory, unless you can properly structure the outcome.
In this situation the attorney was able to structure the settlement to payout $800,000 over 5 years. This allowed for a high contribution defined benefit plan that allowed for tax savings well over $1M, which went towards his retirement fund.
Again, as I mentioned before, every situation is different which is why it’s extremely important that you’re working with someone that has the experience, attention to detail, and partnerships to keep your plan in compliance and your options at the forefront.
Case Studies may not be representative of the results of all clients and are not indicative of future performance success.
This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.