As attorneys settle more lawsuits each year on behalf of their clients for various types of discrimination, they should consider how the resulting settlement awards will financially impact their clients. Considering the financial and, maybe more importantly, tax impact of the settlement award for the client is a smart and responsible proactive approach for attorneys–and an approach which will have the clients thanking their attorneys in future years through new referrals.
According to historical data from the U.S. Equal Employment Opportunity Commission (EEOC), the total number of charges individuals have made against their employers has consistently increased over the last ten years. The most significant increases have occurred in the discrimination categories of retaliation with 42,018 claims filed in 2016 (an increase of 16% in the last ten years) and disability with 28,073 claims filed (an increase of 10% in ten years).(1) These figures do not include any charges filed with state or local agencies.
Headlines regularly appear about new discrimination cases filed against large companies. For instance, this year alone several headlines continue to grab readers’ attention. In the news last month, three former female employees from Google just filed a class-action lawsuit against the internet giant for equal pay(2). They claim that Google, “discriminated and continues to discriminate against its female employees by paying female employees less than male employees with similar skills, experience, and duties.” In March, April and May of this year, employees at both Fox News and CNN and its sister companies (3,4) sued the cable companies over racial and gender discrimination charges. For disabled people, many suits fall under the Americans with Disabilities Act. In early 2017 the U.S. Supreme Court decided upon the Fry v. Napoleon Community Schools case (5) (case number 15-497) where an elementary school denied the request to have a service dog accompany a child with cerebral palsy to class. The Court clarified:
the definition of “disabled” under the Americans with Disabilities Act (ADA) and allows students to bring lawsuits directly under the Americans with Disabilities Act (ADA) and Section 504 of the Rehabilitation Act of 1973 (Section 504) without requesting an administrative hearing under the Individuals with Disabilities Education Act (IDEA) when their claim is not related to the adequacy of their education.(6)
For all discrimination settlements, the proceeds or award is completely taxable to the plaintiffs, so almost half of the settlement award is lost to Federal and State taxes upon receipt. Because of this, some attorneys have started including CPA’s, financial advisors and structured settlement consultants as part of their settlement team. The CPA can advise on the tax consequences and work with the financial advisor and structured settlement consultant to help minimize the tax impact to the plaintiff by deferring the taxes and create a financial plan to ensure that the settlement proceeds will last for many years in the future.
Two tax deferral solutions are available for plaintiffs involved in these settlements—traditional structured settlements and a new Settlements Plus™ program. While annuities and U.S. Treasuries remain the preferred funding vehicles for structured settlements due to safety of principal and for providing guaranteed growth, Millennium Settlements, through the Settlements Plus™ program can meet the needs of plaintiffs who want a more diversified approach to settlement planning. Settlements Plus™ is an exciting, new program that is suitable for plaintiffs who can afford market-driven growth. Like a traditional annuity, plaintiffs will work with a structured settlement consultant to design a payment stream to meet his or her future needs, but the funds are managed professionally by either the plaintiff’s personal registered financial advisor or a financial institution. The program follows the mechanics of a structured settlement, but rather than an annuity funding the payments over time, a professionally managed portfolio of mutual funds, index funds, or other market-correlated investments is established to fund the future periodic payments. The funds in the account grow and are distributed tax-deferred and allow for asset class diversification.
In order to preserve the tax-deferred status of the settlement proceeds, attorneys should contact their trusted financial advisors, CPAs and structured settlement consultants well before the case settles so that they can help the plaintiff plan for “life after settlement”. Attorneys should make an effort to make all of their clients aware of their one-time opportunity to receive tax-deferred periodic payments in the form of guaranteed fixed income or market-based income payments.
Contact your AVITAS representative today.