Why interest rates will stay high, taxes will stay high and bond defaults will increase

In today's installment of my six part series on how to successfully work as a settlement, retirement or income planning expert in this era of historically low interest rates, I outline what I believe are some foundational economic concepts and their likely impact on how we plan for them and what strategies best serve our clients in the months and years ahead.

First, let me drive home again as I have in other posts and in each video installment that I am NOT saying that those looking to retire and others who need planning for a personal injury or litigation settlement, should be totally out of the stock market, or totally avoiding real estate. Any balanced financial or settlement plan would be incomplete unless there are elements of the plan tied long term to equity, bond and real estate markets.

However, what I am saying is that for the vast majority of my clients, who are made up almost entirely of personal injury or settlement recipients, those saving for or in retirement or lawyers planning how to structure income into future years or retirement plans, that their primary need is not to time markets but instead to obtain secure, guaranteed income that they can't out live or out spend and will show up on time every single month.

Given those facts, my analysis and economic outlook is tilted toward other planners, advisors, lawyers or savers who are sitting on cash in the bank, expecting a lump sum of cash soon or are wondering how to generate sufficient income to live, so that they don't have to seriously invade principle or take excessive risks in these markets. These are typically not people who can wait for the market to come back long term, who can wait for real estate to once again turn into a positive cash flow generator or who can handle the potential of a bond market collapse if rates take off in the future.

So, if we understand the type of person I am speaking to here, you can better appreciate what I am about to say next, which is that if you are an advisor you can not plan or explain that which you don't understand or believe firmly yourself. You have to frame up a market outlook and planning method that is based on sound principals that not only helps your client today, but protects them long term against market and political forces that would undermine their ability to provide for themselves or their families.

What we believe at Wahlstrom & Associates after several months of careful review is that the U.S. economy and markets are in for another tough 24 to 36 months of low economic growth, low interest rates, cash hoarding by savers and corporations and the inevitable exhaustion of the federal government to provide further stimulus. However, once we get through this cycle, which we believe was prolonged by the massive stimulus that averted a depression, but which didn't address the systemic tax, business and investment issues suffocating the US economy, that we will inevitably see both asset and monetary inflation that will spike interest rates to record highs. To support these beliefs, I suggest you check out the following commentators and market facts:

• Arthur Laffer's WSJ article on the coming 2011 recession due to subtantially higher income tax rates in the US and most states. Excellent reading from someone who understands that economic activity is driven by millions of individual decisions that are shaped by incentives such as how much tax they pay for their economic activity and hard work.
• Bill Gross of PIMCO and his monthly commentary on "The New Normal" of substantially lower equity and real estate market returns in a US economy buried in debt and with limited ability to shape it's market destiny until it is worked off.
• New home contracts plunge 25% immediately after the $8000 stimulus is gone and new loan applications drop despite historic low mortgage rates. You can't restart real estate and building with out jobs, secure income and wage growth which there is no evidence of at this time.
• Companies and banks are holding record amounts of cash on hand due to fears of a double dip recession and lack of access to capital that a second recession would bring. If they aren't investing but hoarding cash, economic slow down is becomes a self fulfilling event.

So, with a short term certainty of painfully low rates, increased credit risks, high marginal tax rates and with equity and real estate markets flat or declining, all coupled with the substantial risk in the future of monetary inflation and interest rate hikes, what is a settlement planner to do to assist their clients?

Mark Wahlstrom, National Expert in Structured Settlements, Host of Speaking of Settlements

Tune into next weeks installment to look at some strategic ideas we are using at Wahlstrom & Associates to assist injury victims, savers and those in retirement who are struggling to secure income and protect their assets. The next segment is entitled " Income is now King, cash is merely a Prince" and goes into why secured, stable, lifetime income is going to have greater and greater value in the new market reality we are facing in the years ahead.

In the mean time, read up on these stories and get over the fact that things aren't going back to what they once were, but that people can survive and even thrive in the coming years if you reshape your planning outlook and start to educate both yourself and your clients about the new risks and opportunities that will appear in the coming years.

( Mark Wahlstrom is generally regarded as the nations leading expert in Structured Settlements, Settlement Planning and Structured Legal Fees)

Why do so few lawyers know about structured attorney fees?

In this wrap up interview and discussion on the month long topic of structured legal fees, Mark Wahlstrom and Randy Dyer sit down to look at the issues facing the structured settlement industry in it's attempts to increase the number of structured attorney fees written. Randy Dyer

As this series has discussed in various ways, structured legal fees are with out a doubt one of the single most unique and valuable tax and financial planning benefits available to trial lawyers. These financial plans in which a lawyer is able to legally, safely and securely design a guaranteed cash flow program that defers taxes into future years are still widely unknown and misunderstood by trial lawyers and tax professionals.

In today's discussion, Mark and Randy look at the reasons why the structured settlement profession has done such a poor job of educating lawyers and their tax professionals on how these work, as well as the impact of the economy and tax rates on lawyers decisions to structure their fees. Some of the items covered are:

• The impact of current tax rates and the fear of higher rates in the future.
• The collapse of the legal finance and lending market and the largely unreported story of how this has dried up sources of capital and fee planning for trial lawyers.
• The horrible job the industry and brokers do promoting the concept to tax professionals.

As I will be doing a series for the rest of the summer on new sales ideas for settlement professionals, you can rest assured a big part of it will reside on the ideas and methods to increase structured legal fees. We as professionals have to stop looking to NSSTA, SSP and our general agents for advice and instead share our experience on what is working so that solid and sound concepts can be promoted nationally. A rising tide lifts all boats and if more brokers are offering and selling legal fees as part of their practice, then it naturally follows that more Lawyers will hear about it and start to follow suit. There is no grand plan, just hard work, effective communication and consistent explanations on how they work and why they need to be considered. 

 ( Mark Wahlstrom is the host of The Settlement Channel and is generally considered to be the nations leading expert in Structured Settlements, Settlement Planning and Structured Legal Fees.)

Converting fully taxable income and awards into fully tax deductible retirement plans

In part six of my summer series on " Investing and saving in a low interest rate/high tax rate world" I discuss the concept of using qualified retirement plans as the most appropriate vehicle for allocating taxable damage awards and cash flows into tax deductible accounts.

This concept, of using taxable cash flows to fund tax deductible retirement accounts, was first formulated for our trial lawyer clients. The object in those early cases was to take a large taxable fee, structure it over a period of years so as to avoid the big lump sum cash tax it, and then dedicating a part of those future payments to fund defined benefit retirement plans.

In its simplest form, we would take $500,000 for example, spread it out over 5 years in lump sums of $110,000 for five years, with some or all of those funds paid each year into a tax deductible qualified retirement program. The math is more than compelling. You can either pay up to 50% of your $500,000 in taxes immediately, OR, you can spread it out over 5 years and make it fully tax deductible and put the entire $500,000 into your own pocket. You make the call, $250,000 now, or $500,000 in your retirement plan where it grows tax deferred. Not a tough decision is it?

So, once we saw the merit of that approach, my office at Wahlstrom & Associates began adapting it to the other taxable damage cases we work on, such as wrongful termination, wrongful imprisonment, breach of contract, environmental or property loss claims, etc. In each of these it became abundantly clear that the ability to structure payments over time into tax deductible accounts provided the greatest amount of leverage for the least amount of investment risk of any competing strategy.

I cover this in general terms in today's video, but if you want to know more about how to convert taxable damage awards and lump sum settlements into future income and tax deductible accounts, please contact me at my office at Wahlstrom & Associates and we will be happy to explain how this can be done safely, conservatively and using insured or guaranteed rate products.