A Practice Smart ™ Feature
Carole C. Foos, CPA
David B. Mandell, JD, MBA
The Common Causes of Dollars “Left on the Table”
While the causes of “dollars left on the table” in a legal practice can range from poor marketing to unproductive employees, our expertise and focus is corporate structure, tax reduction and benefit planning. In Part I of this article, we focused on using the ideal corporate structure.
Here, in Part II, we will discuss two more tactics:
- Maximizing tax-deductible benefits for the lawyer-owner(s); and
- Utilizing a captive insurance arrangement
1. Maximizing Tax-Deductible Benefits for the Attorneys in the Practice
If you are serious about capturing “dollars left on the table,” tax efficient benefit planning must be a focus. Benefit planning can definitely help you reduce taxes, but that is not enough. Benefits plans that deliver a disproportionate amount of the benefits to employees can be deductible to the practice, but too costly for the practice-owners. These plans can be considered inefficient. To create an efficient benefit plan, lawyers need to combine qualified retirement plans (QRPs) and non-qualified plans.
Nearly 95% of the lawyers who have contacted us over the years have some type of QRP in place. These include 401(k)’s, profit-sharing plans, money purchase plans, defined benefit plans, 403(b)’s, SEP or SIMPLE IRAs (not technically QRPs, but close cousins) and other variations. This is positive, as contributions to these plans are typically 100% tax deductible and the funds in these plans are afforded excellent asset protection. However, there are two problems with this approach: i) many QRPs are outdated; and ii) QRPs are only one piece of puzzle.
First, most lawyers have not examined their QRPs in the last few years. The Pension Protection Act improved the QRP options for many attorneys. In other words, many of you may be using an “outdated” plan and forgoing further contributions and deductions allowed under the most recent rule changes. By maximizing your QRP under the new rules, you could increase your deductions by tens of thousands of dollars annually, depending on your current plan.
Second, the vast majority of lawyers begin and end their retirement planning with QRPs. Most have not analyzed, let alone implemented, any other type of benefit plan. Have you explored fringe benefit plans, non-qualified plans recently? The unfortunate truth for many lawyers is that they are unaware of plans that enjoy favorable short-term and long-term tax treatment.
- Utilizing Captive Insurance Arrangements
For practices with gross revenues over $3 million, a small captive insurance arrangement might be significant way to recapture “dollars left on the table.” Today, there are likely many risks in your practice that are going uninsured – from excess malpractice, economic risks, employee risks, and litigation defense risks from any number of audit or fraud claims. Like most lawyers, you likely just save funds personally and hope that these risks don’t come to fruition. As a result of your de facto “self-insurance,” you are not taking advantage of the risk management, profit enhancing and tax reduction benefits that are available to you with a captive.
By creating your own captive insurance company (CIC), you can essentially create a pre-tax war chest to manage such risks. If structured properly, the CIC enjoys tremendous risk management, tax and asset protection benefits. The potential tax efficiency, in fact, can be in the hundreds of thousands of dollars annually. While an experienced law firm, captive management firm, and asset management firm are crucial, you as the captive owner can maintain control of the CIC throughout its life. It can then become a powerful wealth creation tool for your retirement.
We hope you make tax efficiency planning a priority, so you too can recapture the “dollars left on the table.”
About the authors: David B. Mandell, JD, MBA, is an attorney and author of 10 books on legal, tax and financial issues, including Wealth Secrets of the Affluent. He is a principal of the financial consulting firm OJM Group (www.ojmgroup.com) where Carole C. Foos, CPA is a tax consultant. They welcome questions and can be reached at 877-656-4362 and Mandell@ojmgroup.com.
If you would like a free hardcopy or electronic copy of their book “Fortune Building for Business Owners and Entrepreneurs,” just call 877-656-4362.
This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein.
Practice Smart(™) Features are a service of Michael Blum and Appeal Funding Partners, LLC. The Features are thoughts from a variety of sources on our practices, on being trial lawyers and things of importance to trial lawyers and their clients.
Michael Blum is a trial attorney and CEO of Appeal Funding Partners, LLC. He is a pioneer in the Litigation Funding industry with over 20 years’ experience providing risk mitigation services and non-recourse funding to attorneys and plaintiffs with money judgments on appeal. He has served on the Board of Directors of the Consumer Attorneys of California and of the Marin Trial Lawyers Association and is an active member of the American Association for Justice. He speaks to trial-lawyer groups and has written for TLA publications on the financial management of a contingency-fee law firm. He may be contacted at 415-729-4214 or firstname.lastname@example.org.