How It Works
The process for deferring fees is just like that of a traditional fee structure, except in this case the defendant’s approval is not required. Here are the basic steps:
- Enter into a deferral agreement before final settlement (i.e. before signing the release). Each partner decides how much to defer and for how long.
- Instruct defendant to wire the deferred amount directly to BNY Mellon, the trustee and custodian. While not legally required, payment instructions are often included in the release agreements.
A safe and easy alternative to step 2 is to establish a Qualified Settlement Fund (QSF). A QSF allows you the time necessary to carefully plan for your future and to avoid the involvement of the defendant.
Unlike traditional fee structures tied to the meager returns of annuities, you can tie your returns to a customized investment portfolio. Just like with a 401(k), your money grows faster. Below is our menu of hand-picked exchange-traded funds. They are all low-cost (we believe high-cost funds generally aren’t worth the fees).
Accessing your account
Your account will be provided by The Newport Group, the largest administrator of deferred compensation plans in the country. You’ll be able to access it 24/7 through their online platform – the same one used by Fortune 500 executives. Newport can also guide you on how to allocate your portfolio based on personal preferences, and allocations can be changed on a monthly basis.
ACCESS TO DEFERRED FEES
Let’s take an example. Say in 2016 you want to defer $1 million. To maximize liquidity, you can split the $1 million (plus earnings) into 20 quarterly payments over a 5 year period, beginning two years after the deferral. If you don’t need your payments as scheduled, you can roll the payment stream forward as shown below, until you “flip the switch,” triggering your deferral payments to start coming to you for 20 consecutive quarters until completely paid out.
By laddering the payments this way, you can effectively defer for as long as you like, while keeping the option open of receiving your money much sooner.
To be clear, we didn’t invent this concept – it’s been around for over 20 years. A lawyer’s right to defer fees was established by the U.S. Tax Court in Childs v. Commissioner (1994) and affirmed two years later by the 11th Circuit U.S. Federal Appeals Court. The IRS also cited the Childs case favorably in Private Letter Ruling 200836019.
From a legal perspective, fee deferrals are materially subject to the same body of tax rules that govern Nonqualified Deferred Compensation (NQDC), namely the constructive receipt and economic benefit doctrines. Fortune 500 companies have been using NQDC for many decades to attract and retain their top executives.
The legal authority for fee deferrals is well-established. We would be happy to assist you and your tax counsel in reviewing relevant authority and our counsel’s tax opinion.