Settlement Professionals, Inc.

The Recovery Trust solves one major problem affecting almost all taxable damage cases: double taxation, or “Tax Hell,” as we often refer to it as.

Put simply, in just about any case where the plaintiff receives taxable damages (as opposed to tax-exempt damages received from a personal physical injury settlement or verdict), the plaintiff, your client, is taxed upon the entire gross amount of the settlement. This includes those amounts paid to their attorney as fees, which you as their attorney also pay tax on.

The result? Double taxation, which is not supposed to happen under our tax code.

The good news is that there is a rescue strategy available through the strategic use of a Recovery Trust which, when applied using effective settlement planning, and possibly including the use of advanced recovery strategies including structuring the settlement, can result in dramatic differences in the amount that a plaintiff is able to retain of their settlement.

In one of our more recent cases, our client was initially looking at an after tax net settlement of only 1.94% of their total $4,000,000 settlement, a paltry $77,409. Why?  Tax Hell.

Fees and costs totaled $2,030,000, resulting in a pre-tax net settlement to the client of $1,970,000. Federal, state, and Medicare taxes were calculated based on the gross settlement of $4,000,000 and totaled an astonishing $1,892,591, leaving the plaintiff with only $77,409 as their net settlement. Tax Hell.

Instead, this client employed the Recovery Trust, RT, (and another time-tested strategy, in tandem) to help plaintiff counsel rescue this plaintiff.

This meant that, come tax time, through the use of the RT, this step alone resulted in the plaintiff improving their effective net settlement from $77,409 after-tax to $1,850,000 pre-tax. Had they stopped at this step their net, after tax, was calculated to come out to $1,015,682.

Our client then took advantage of an optional additional step to further improve their ultimate outcome.

That (time-tested) additional step is that they opted to create a structured settlement out of their pre-tax net settlement of $1,850,000. This resulted in payments of $12,000 monthly for 20 years, or $144,000 annually. After state & federal taxes they will be left with $106,000 per year, which adds up to $2,120,000 over the 20 year period.

To sum this all up, without the RT our client may have been looking at a $77,409 net result, their attorneys likely would net $990,000 after tax (plus recovery of their $350,000 in costs) and a whopping 67.5%,  $2,700,000, would have been paid to the tax collectors.

With the RT alone, our client would have netted over $1,015,000. Combining the RT with a structured settlement annuity should net this client approximately $2.1 million over the next 20 years.

This approach has been discussed in multiple journals, including Bloomberg Tax. The RT specifically addresses the double-taxation Tax Hell.

There is no fee to create an RT. Once the recovery is obtained, the trustee’s fee is 3% of the taxable damages, which we included in our example calculations above. If there is no recovery, then there is no fee.

Settlement Professionals Inc., has worked with top trial lawyers and plaintiffs facing Tax Hell in taxable damage settlements for the past 21 years, and we collaborate with many of the top tax lawyers that have created or commented favorably on the RT. With their assistance, we facilitate the creation of a unique RT tailored for each of your clients, and then handle each and every additional detail until the case is completely finished and closed.

Is a further discussion of the RT warranted? If so, schedule a call and let’s determine whether the RT is right for your case by running tax projections that are specific to your clients’ state domicile, and then discuss the critical factors and timescales that are crucial to implementing an RT correctly.

The Recovery Trust is also known as the “Plaintiff Recovery Trust”.