In a thought-provoking article published in *Tax Notes*, Lawrence J. Eisenberg, an experienced tax attorney, describes the perplexing issues affecting individual plaintiffs in litigation recoveries, and considers how those issues can be addressed, including by using a charitably-based trust-based solution. The article “The Individual Plaintiff Tax Trap — A Conundrum and a Solution” delves into the intricacies of the taxation of litigation recoveries and addresses methods to mitigate the adverse tax consequences some individual plaintiffs face. FOR IMMEDIATE RELEASE / PRURGENT
**Background**
Eisenberg’s article highlights the strange and often inconsistent tax treatment of individual plaintiff litigation recoveries under the Internal Revenue Code. Despite the Supreme Court’s 2005 decision in “Commissioner v. Banks”, which held that plaintiffs must report the entire recovery as taxable income—including the portion payable to attorneys—many plaintiffs (and their attorneys and advisors) remain unaware of the potential tax pitfalls when such recoveries do not fall under tax-free categories, e.g., damages for physical injuries.
**The Individual Plaintiff Tax Trap**
The crux of the issue lies in the deductibility of attorney’s fees. Some recoveries are tax-free, so attorney fee deductibility is not relevant, or allow for an above-the-line deduction of these fees. Other recoveries can result a “double tax”, because in those situations, the attorney fee portion of the recovery is taxable, but the attorney fee itself is not deductible. This leads to significantly diminished net recoveries. Eisenberg’s article includes a detailed example demonstrating how a plaintiff’s net recovery can be less than 10% of the total amount, with the government and attorneys each receiving several times more than the plaintiff!
**A Trust-Based Solution**
To address this inequity, Eisenberg proposes that a plaintiff affected by the double tax create a Plaintiff Recovery Trust (PRT). A PRT allows plaintiffs to transfer their litigation claims to a specially designed split-interest charitable trust. By doing so, the litigation claim becomes an asset of the trust, and any recovery is received by the trust, which then pays the net recovery to the trust beneficiaries, including the plaintiff. The PRT uses ordinary trust law principles and aims to achieve fairer tax treatment by separating the ownership of the litigation claim from the individual plaintiff.
**Key Benefits of the Plaintiff Recovery Trust**
- **Equitable Tax Treatment:** By treating the litigation claim as a trust asset, a Plaintiff Recovery Trust results in the plaintiff not being taxed on the portion of the recovery paid to their attorneys.
- **Structured recovery:** The PRT trust structure allows for a more organized and potentially tax-efficient distribution of recoveries. (It also permits the use of structured settlements as part of the solution.)
- **Charitable Component:** The PRT includes a charitable beneficiary, adding a philanthropic dimension to the solution.
**Conclusion**
Eisenberg’s article is a call to action for tax professionals and litigation attorneys to recognize and address the unfair tax treatment many individual plaintiffs face. The PRT trust-based solution offers a way to alleviate the financial burden imposed by current tax law, so that plaintiffs retain a fair share of their recoveries.
For the full article on the taxation of settlement proceeds visit: http://www.easternpointtrust.com/tax-notes-individual-plaintiff-tax-trap
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**About Lawrence J. Eisenberg**
Lawrence J. Eisenberg is an attorney with extensive experience in tax law, with a focus on plaintiff taxation. Lawrence J. Eisenberg PC specializes in providing effective tax solutions and representation for individuals and businesses.
About Eastern Point Trust Company
Eastern Point Trust Company is a leading provider of innovative trust and custodial services dedicated to delivering personalized financial solutions for individuals, families, and institutions. With a steadfast commitment to excellence and integrity, Eastern Point Trust Company offers a comprehensive range of trust-based solutions.
**Disclaimer:** The information contained in this press release is for informational purposes only and does not constitute legal advice. | 
