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Trading a Fixed Annuity for an Immediately Funded Investment Account

In 2002 a trial lawyer approached us with a novel issue. He had represented a State in the multi-state tobacco litigation, and was receiving a fee of $400,000 a quarter, which was to continue for 23 years.  He wanted more liquidity and protection against inflation. We converted his installments into a deferred compensation account with a beginning value of $15 million.  Instead of a fixed annuity-like benefit, he was able to invest pre-tax, tax-deferred in the investments of his choosing, and immediately increase his borrowing base by $15 million.

Pre-Tax, Tax-Deferred Investing with Low Cost Leverage

A lawyer had a combined marginal tax rate of 45%.  We enabled him to defer fees and invest pre-tax, tax-deferred in 6% preferred stock which he leveraged at an interest cost of 3%. By investing pre-tax with leverage, he more than doubled his accumulation power.

Reducing Case Financing Costs

A firm was carrying a $10 million line of credit and paying 18% interest, or $1.8 million a year. The firm settled a class action suit, and was entitled to a $20 million fee. The plan was to pay off the loan and invest the fee that remained after the payoff and after taxes. We showed that at a 40% tax rate, it would take $16.67 million of pre-tax fee to pay off the loan, leaving only $3.33 million for investment. By investing the full $20 million fee pre-tax, tax-deferred and refinancing the line of credit at 5%, the firm more than doubled its capital accumulation power.

Retaining Key Producers

A patriarch of a 20-lawyer firm wanted to capitalize on his firm's success and build a more sustainable practice. We helped him invest his fees pre-tax, tax-deferred. To improve retention, we also enabled him to provide deferred bonuses without any tax cost to him.