Brook Hollow Financial

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The Fiscal Cliff and Attorney Fees…What you need to know

OK……The Fiscal Cliff has come and gone…for now.  What does it mean for the fees that you are going to earn this year and in the future?

Everybody understands the basic concept…”my taxes are going up”, but what does that really mean for you and your fees?

1. Marginal Tax Rate up to 39.6% – most people understand this one.  If your fees are more than $450,000 this year, expect to pay 4.6% more in taxes.

2. Payroll taxes up 2% – This was a temporary benefit passed in 2011 that expired.

3. Itemized Deductions capped.  We’ll go through details in later blogs, but basically ID’s will go back to Clinton era limits.  This means you will pay more in taxes in 2013!

4. Cap Gains rate up 5% to 20%.  This doesn’t directly affect your fees unless like most…you make a huge fee and put some part of it into investments.  Well…expect another 5% taxed on gains.

If I haven’t scared you enough with some of the above (there’s more that we will talk about later)…….let’s look at some of the other tax hikes in 2013 that most people have forgotten about.

1. 3.8% surtax on all Unearned Income.  This one is for all the attorneys who forgot about “Obamacare”.  This was passed in 2009 and went into effect on Jan 1 of this year.  If you want, you could just lump this in to the cap gains increase from above.  It’s not really a 5% increase….its 8.8% in most cases.

2. .9% increase on all Earned Income.  Hope you didn’t forget about this one as well.  It’s the Medicare tax on all attorneys earning above $250.  It used to be 2.9% but is now 3.8%.

One thing is certain….Earning your fees in 2013 and beyond just got a lot more complicated!

Now for some good news.

Brook Hollow Capital can help!!!!!!!!!!!!!!!!!!!!

I could write a book on all the different strategies we have to minimize all the above and in some cases eliminate…..but for that you will have to wait for my future blogs.  There is so much to talk about here….it will have to be covered in multiple blogs over the coming weeks.

Please make sure to sign up in the upper right hand column to receive my blogs automatically.  Don’t rely on me forwarding this to you from my email……THIS MEANS MOST OF YOU READING THIS!

Follow us on TWITTER at @brook_hollowcap, and @etscheid to stay updated on daily news.  This stuff is way to important to ignore.

Talk to you soon.

B.J. Etscheid

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Helping real estate developers maximize capital during the recovery

I used to feel bad for my developer friends. It is bad enough they pay income tax vs. capital gain tax on their gains, and the hit is doubled since their assets do not qualify for a 1031 Exchange.  Talk about a tax deferral double whammy.  But now, there is help.

In this case, the proceeds are eligible for installment sale treatment (IRC 453), which means this income is eligible for a structured sale (see my previous post for more info).   But let’s take it a step further.  With Brook Hollow Capital, they can get a line of credit on their structure – all the way up to 97% of their pre-tax income!  What a great way to maximize capital and reinvest into the business.   In essence developers are taking control of their pre-tax income and becoming their own bank.

Developers now have a powerful tax deferral strategy to take full advantage of the recovery.

Chris Princis [email protected]

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Selling Real Estate or a Business? Consider a tax deferred income stream

We consult many individuals selling real estate, a business, professional practice or personal property who would like to liquidate their investment without having to recognize the entire profit as taxable in the year of the sale. Instead, they would like to sell that real estate or business in exchange for a tax deferred and growing stream of income.

Allow us to introduce a structured sale.

By having some or all of the proceeds payable over time, the proceeds are turned into a stream of income and recognized on an installment sale basis. You may already be familiar with installment sales, but please read on for the special features that can make this unique.

Installment Sale Basics (We ARE NOT Talking About A Contract For Deed)

Key principle: this powerful strategy turns a cash sale into an installment sale – but read on to understand not only how and why this works but why it can be such a powerful strategy.

For a sale to be considered an installment sale, it must be a sale of qualified property where the seller receives at least one payment after the tax year of the sale. Each installment payment received generally consists of the following three components:

nontaxable recovery of the investment

taxable gain

interest

What are the Benefits of an Installment Sale?

Defer the recognition of the taxable gain.

Generate a known cash flow stream.

What Are The additional Benefits of Structuring That Sale?

Rate of return based on risk tolerance and goals.

Alleviate concern about the buyer’s ability to make payments.

Ease concern about investment risk.

Long-term financial security.

Can be used if failing a 1031 Exchange, or on assets where a 1031 Exchange does not apply (primary residence, business sale, etc.)

The structured sale represents a unique and underutilized method of providing a safe and secure option for your clients.  Options also exist where the client of a structured sale can access a pre-tax line of credit based on this cash flow, which further maximizes the use and options of these proceeds.  There are many circumstances where that may be good counsel.

Brian Michaels, General Counsel, Brook Hollow Financial

Chris Princis, SVP, Brook Hollow Financial

Chris Princis [email protected] 312-529-4017

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Lose your money to taxes or defer, 180 days to decide

I recently helped a client who was not quite sure about completing a 1031 Exchange.  Day 45 was coming up quick and the taxpayer was on the fence about staying in for another 135 days.  One thing was certain – losing all that money to taxes was not a very exciting option.

This is where the QI introduced us.  We learned a little more about  each other and introduced them to our 1031 Exchange Fall Back.  We talked about trying to complete the exchange, and if it didn’t pan out they would have the Fall Back to, well, fall back on.  They liked having options and decided to ID and stay in the exchange for another 135 days to determine their best option.   These options included:

1) Close on the ID’d properties,

2) 1031 Exchange Fall Back,

3) Nothing, take the proceeds and pay taxes – but at least they vetted all their options.

Ends up they took advantage of Answer 1 and 2.  One of their ID’d properties worked out well, but they still had a significant amount of equity boot – so they took advantage of our 1031 Exchange Fall Back on these “scraps” to get tax relief on those exposed funds.

When in doubt, use every single day of your 180 to make the best decision for your situation.  There are very, very few scenarios were it is best to lose your hard earned money to tax.

Keep your money.

Chris Princis

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WARNING: Don't touch your money

I just had a call today from the seller of a business.  It is a call have run into, unfortunately, too many times over the years with sellers of a business or real estate.  What makes it more frustrating – it is a simple (so simple it is silly) oversight, but with consequences that can significantly devastate a hard earned gain on the sale of real estate or a business.  

So this business owner was all excited about deferring the gains from the sale of his business.   You could tell in his voice he put his heart in soul into this venture for over 23 years, and had earned his gains.  He understood a 1031 Exchange was not an option for the “good will” gains from the sale of a business, but he wanted to look at a deferral option.  Furthermore, he was interested in starting another business, so he was potentially interested in getting a line of pre-tax credit to start this new business.  So far, so good – a great strategy for his situation. 

And then what to me is the sound of fingernails across the chalkboard…

Client: “Chris, we closed last week.  So what is our next step?” 

Me: “I am so sorry but there is nothing we can do, you have taken what is called constructive receipt.  You owe all those taxes on April 15th”

Client: “Huh, I was told as long as I do nothing with the money I should be ok.  And I have the check right here, I did nothing with it!”

Me: “That is not entirely true, for this to be valid we needed to be involved with you and the buyer (or QI if doing a 1031 Exchange Fall Back) BEFORE closing to make sure all the documents are in place and you DO NOT  touch the money.  I am sorry, we cannot help.”

Client:  Cricket…Cricket…

Needless to say, the rest of the conversation was not very pleasant.  It is a painful lesson to be learned – it is never too early to start considering a tax deferral strategy, but after closing it is 100% too late.    It is so simple to get a 1031 Exchange, Fall Back, or structured sale set up and the paperwork in place.  So please…weather you are looking to do a 1031 Exchange, Fall Back, or traditional structured sale ALWAYS, ALWAYS get your tax advisers involved as soon as possible.

Keep Your Money.

Chris Princis

[email protected]

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Can a class action attorney fees be paid out of a qualified settlement fund?

The answer is most definitely Yes. See In re Electrical Carbon Products, 447 F. Supp. 2d 389 (D.N.J. 2006).

In this case a QSF was established in connection with the settlement of the case (MDL No. 1514). The case was an anti-trust matter dealing with the sale of electrical carbon products.

The settlement fund consisted of $21.9 million reduced by attorneys’ fees of approximately $5.7 million plus expenses of almost $500,000.  The Court approved the payment of the attorney fees out of the Fund.

Practice Pointer:

Attorneys wishing to defer attorney fee income using the innovative options available through Brook Hollow Financial, including the Equity Deferral and the Equity Loan Deferral, can do so out of these types of cases.  We need to be involved as early as possible to evaluate what documentation and procedures need to be in place to facilitate those options for you.  

Brian Michaels, Esq. General Counsel, Brook-Hollow Financial

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Using a structured sale to defer the equity boot from a 1031 Exchange – well done!

How about this for a great tax deferral strategy:

A client had $2M in a 1031 Exchange.  They exchanged into a property for $1.7M.  This left them with $300,000 which they assumed would be exposed to taxation.  But not so fast.  The QI got us involved to see what we could do with that $300,000.  We were able to to do a fall back (structured sale with in a 1031 Exchange) with the clients $300,000 of equity boot (humbly called their “scraps”).

So this client was able to have every penny of the proceeds tax deferred.

Chris Princis

[brookhollow-blog]

Calling All Yaz Attorneys! Best Ways to Manage Settlements

Brook Hollow Capital’s phones have been buzzing a lot lately thanks to Bayer settling and paying out its Yaz cases.  Each call is almost exactly the same…”what’s the best way for me to manage these settlements?”  The answer is simple…Establish a 468B qualified settlement fund, and use Brook Hollow Capital to help manage your cash flow.

What does that mean?

1. Establish a 468B.  These “QSF’S” act as a “weigh station” for your settlement, allowing you the time necessary to take care of lien issues, client financial issues, individual attorney financial issues, and important firm cash management decisions.  468B’s are easy to set up with a simple court order.

2. Borrow up to 97% of your fee from Brook Hollow Capital. Give your firm the power and flexibility of using your whole fee, PRE-TAX.  Use that money to “unlock case-costs”, fund operations, pay partners, or maybe most importantly…..Get more cases!  Mange your cash flow!

3. Give your clients the option to structure their settlements.  Since you already have a 468B set up, you have the time to allow your clients to take a serious look at their finacial options. Structured Settlements offer your clients the chance to have safe guaranteed future payments without the uncertainty of the financial marketplace.

4. Defer your individual taxes.  Don’t pay all of your taxes this year.  Spread it out over a series of years.  Take advantage of your ability to use your fee to supplement your retirement or smooth out your income.

Of course these steps are all over-simplified and don’t go into details, but you really should look at these options to take advantage of what’s available to you and your firm.

Feel free to contact us to learn more about the options available to you.

B.J.

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Does your Law Firm Suffer from “Case Cost Handcuffs”?

As I’m out traveling with the Brook-Hollow Capital team meeting with Law Firms around the country, I see a common theme or problem with many firms. “Case Cost Handcuffs”.  What do I mean?  Oftentimes, a firm’s financing is a challenge because too much capital is tied up in accumulated case costs, a non-deductible expense.  Eventually, those case costs will be reimbursed, but they can’t be deducted along the way and they are extremely inefficient, but necessary.

We’ve met with firms with case costs in the millions and even over ten million as a result of their Yaz, Avandia, Depuy, or Actos pipelines.  These firms can either borrow more to raise money for future case costs, a vicious cycle, or limit their investment in new cases.

Brook Hollow Capital has a solution.

Let’s look at a real world example.  Recently we met with a firm that over the last 5 years has sunk case costs of approximately $5 million in Avandia and Yaz cases.  Over time that firm has had to make about $9-10 million in fees in order to fund those case costs.  (Luckily they had fees coming in or they would have had to borrow at high interest rates.)

Not wanting to be put in this position again, this firm is using Brook Hollow Capital to defer their soon to be arriving Avandia and Yaz fee of $5 million and then borrow back approximately $4.85 million in “pre-tax” funds to “unlock” their case costs by distributing cash to the partners.  When the original case costs are recovered, those tax-free funds can be used to pay back the loan.  This match of the timing of the fee taxability, with the case-cost recovery, results in a tax situation that is much fairer to the attorney, ultimately leading them down the path of “Becoming your own Bank”.

-B.J.

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Minimize the tax bite on the sale of a c corp

Are you selling a c corporation and concerned about the significant tax consequence?  No one would blame you, seeing that most c corps lose more than 50% of your hard earned gains to tax.  Here is a recent interview I did for a blog on how you can put your hard earned money to work for you instead of the government.

http://businessbrokerchicago.blogspot.com/2010/01/selling-c-corporation-tool-to-minimize.html

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What to do with your contingent fees?

When I'm out with the Brook Hollow Capital team consulting with law firms and attorneys, one of the first questions we always ask is...."what have you done with your contingent fees in the past?"  It would amaze you at some of the crazy answers we hear, but usually, the most common answer is some variation of "collected the fee, paid the taxes, and put the rest back into my firm"

When I hear that answer, I always perk up.  Why?  I know we can help.  Before we start going into "our thing", I always try to dig deeper to make sure they really didn't mean, "used the whole amount to fund case costs/marketing, and I'll worry about the tax consequences later."  Surprisingly, this is the answer more often than not.  But...If this is the answer, we can help even more!

How do we help....Let's look at a recent example.  Firm A is about to settle a series Yaz cases for $10,000,000.  Traditionally, they would take the fee, pay on average $4,500,000 in taxes, and have $5,500,000 left to fund case costs, pay for advertising, or whatever.  Now, with Brook Hollow Capital, Firm A can receive as much as $9,700,000...immediately..pre-tax, through our lending program.  Firm A just basically doubled their "financial strength".  They now have almost 2x as much money to spend on advertising, marketing, case costs, pay off debt, etc.

Firm A is now taking that extra ”50%” of that fee and adding to their marketing push for Actos, Avandia, Depuy, Transvaginal Mesh, etc. cases, effectively doubling their clients!

 For more details on how Brook Hollow Capital does this, contact B.J. Etscheid at 312-529-4000, or [email protected].

B.J. Etscheid is one of the founders of Brook-Hollow Financial and Brook-Hollow Capital.  He is considered one of the leading experts in Law Firm Cash Management.

www.brook-hollow.com

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AAJ in Chicago - a success!

Sinatra called it "My kind of town" and we hope after AAJ in Chicago last week everyone agrees! I could not have been more impressed with all the functions...from the NLD events at Public House and The Mid, to Sokolove’s Peninsula dinner event, and wrapping it up with the awesome band at House of Blues. A special thanks to Jenn, Jeff, and the folks at Sizemore Law for a hilarious night of improv comedy.  And yes, that was our Ashley on stage. And finally, a huge thanks to everyone who joined our Brook Hollow Financial co sponsored party with Tor Hoerman’s gang at the Columbia Yacht Club.  From the venue, to the fireworks, to the perfect weather...as another one of my favorite old school Italian gumba’s sang...”Oh, What a Night!”  And special thanks to my wing woman for the event...Jess Hoerman.  You.  Are.  Awesome. See you all in Miami. Until then....Chris Princis

www.brook-hollow.com

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