The updated member database contains a clickable map of Oregon delineating each county.  A click on a specific county links to a page which contains a listing of all section members practicing in that county (it is also possible to access county information by using the drop down menu).  Each attorney listing contains contact information, a link to the firm website and, when activated, a link to a member profile.  In addition, each county page contains a drop down menu of common practice areas which, when selected, links to a list of section members who practice in that particular area.  These features were included to better serve the referral and marketing needs of section members.

Beginning on August 5th, SSFP section members may log onto the SSFP website to activate their online account and add content to their member profile.  An online profile provides an easy way for section members to locate other member attorneys for practice area referrals.   Members will receive an e-mail from webmaster, Chris Gent (gentweb.net), which contains a user name and password, both of which are required to access member accounts. In order to reduce duplicate feature requests, a phase-in schedule for accessing user accounts has been implemented.  Members are asked not to attempt to access the system until their appointed log in date:

• August 5 – Last names that begin with letters B – F  (*members with last names beginning with “A” should have already received a user name and password and may log in at any time)
• August 12 – Last names that begin with letters G – L
• August 19 – Last names that begin with letters M – R
• August 26 – Last names that begin with letters S – Z

Members who have not received a user name and password by their log in date or who are having trouble accessing the system should contact webmaster Chris Gent at support@osbssfp.org

Other questions may be directed to Janice Hazel at jlhazel@hazellawportland.com

by Troy E. Thompson (1)

Like all catastrophes, the market turmoil of 2008-09 will produce winners as well as losers. With conventional portfolios depleted, and with some overly excitable pundits sounding the death knell of modern portfolio theory, one aspiring winner is the growing market for life insurance policies, known as life settlement.

Life settlement is the purchase of an in-force life insurance policy by an unrelated investor, who expects to profit at the death of the insured by collecting more than she paid to acquire and maintain the policy. Such a buyout can represent a genuine boon for seniors who no longer need life insurance or can’t afford the premium anymore, and who might otherwise expect to recover only the cash surrender value of the policy. Investors are attracted to life settlements as an asset class for their supposed non-correlation—proponents tout relative immunity from stock market volatility and the uncertain credit markets. Other market participants are less enthusiastic. Life insurance companies themselves, who fund the benefits, view life settlements as a drain on mortality cost and a fly in the ointment of their underwriting assumptions. And regulators must confront an industry with a checkered history in an area ripe for abuse.

Life settlement represents a booming business. By one estimate the market for life settlements reached $12 billion in 2007, up from only $2 billion five years earlier. (2) Compared to the size of the life insurance industry as a whole, with over $500 billion in life premiums written in 2008,(3) this may not seem large. But rapid growth and the impact on one of the life insurance industry’s key metrics—lapsed policies—command attention. Not surprisingly, firms like Goldman Sachs, Credit Suisse and Deutche Bank all maintain a presence in this corner of the market. Whether the industry continues to thrive will be influenced part by two important recent legal developments. First, Oregon and a number of other states have enacted new regulatory legislation in the last year that will impact the way policies are bought and sold in the marketplace. (4) Second, the Internal Revenue Service has released formal guidance that will shape the fundamental economics of the transaction. (5)

Background and Legal Framework
The basic legal framework governing life settlements has long been settled. Public policy as well as state laws prohibit taking out an insurance policy on the life of a stranger—someone in whom you have no “insurable interest.” (6) Such a policy is said to represent nothing more than a pure wagering contract. More to the point, it would create an unsavory and perhaps criminal interest in the death of the insured, with no counterbalancing interest in his continued survival. Modern insurance law continues to prohibit so-called “stranger-originated life insurance” or “STOLI” practices. In an important exception to the insurable interest rule, the Supreme Court long ago confirmed in the case of Grigsby v. Russell (7) that the rule does not prevent the subsequent assignment of a policy that was valid when issued.

Except for the number of zeroes before the decimal point, the facts in Grigsby might have taken place last year rather than a century ago. Facing financial difficulty, John Burchard could no longer continue paying the premiums on his life insurance policy. Worse for him, he also couldn’t afford the medical treatment that he badly needed. He agreed to sell his policy to a Dr. Grigsby in exchange for $100. Burchard later died. (Accounts are inconsistent as to whether Grigsby was actually Burchard’s doctor as well as his life settlement provider. If so, the fact aroused no comment from the Court.) In any case, Dr. Grigsby claimed the death benefit under the policy. In the fight that ensued between Grigsby and Burchard’s estate, the insurance company refused payment. The case made its way to the Supreme Court, where the foundation for the modern life settlement marketplace was established.

The Special Case of Viatical Settlements
The modern life settlement market emerged in the 1980s and 1990s with a special form of the transaction known as a viatical settlement. (8) This form of settlement offer was usually made to terminally ill patients and is associated in the public mind with the AIDs crisis. Since the mortality of that disease was so terribly high and the cost of medical treatment so exorbitant, many patients followed John Burchard’s lead and sought cash from their life insurance policies. Investors came forward, seeing the chance for a reasonably certain payout over a short period of time. Especially in the early years of the epidemic, before effective treatments were developed, there was a brief opportunistic surge in market activity.

Regulation of the Viaticals Marketplace
During this early period rules remained sparse. Due in part to well-publicized abuses within the industry, various states moved to regulate the market in the mid-1990s. To supplement enforcement efforts under existing state insurance law, states began to enact consumer protection measures designed to regulate settlement providers in their dealings with policy-holders and investors.

Consumer protection measures derived largely from the draft of a model law and regulations promulgated by the National Association of Insurance Commissioners (“NAIC”). (9) At least 40 states have now adopted some version of this model law or another form of regulation governing life settlement companies in some way. These laws generally require i) licensing of providers and brokers, ii) filing and approval of settlement agreements, iii) mandatory disclosures to insureds and sellers, and iv) periodic reporting by settlement companies. The model legislation also specifically prohibits certain business practices deemed to be abusive. As originally enacted, these statutes were limited in scope, reflecting the predominance of the viatical model at the time.

Oregon Viaticals Law
Oregon’s original viatical settlement statute, which was enacted in 1995, was typical of the period. (10) The scope was limited to transactions involving an insured “with a terminal illness or condition” where a life insurance policy, including the right to name the beneficiary, was assigned for value. (11) Within that narrow field, life settlement providers and brokers were for the first time required to be licensed (12) and subject to examination, bonding and insurance requirements.(13) The settlement contract itself was required to be in writing and contain a 15 day rescission period. The form of the contract was required to be filed and approved in advance by the Department of Consumer and Business Services. (14) The terminally ill insured was required be certified as to both mental competency and physical condition by her own physician.(15) Finally, disclosure to the seller was required as to i) possible alternatives, including those offered by the insurer, ii) possible tax consequences, iii) exposure to claims of creditors, iv) risk of loss or reduction of government benefits, v) the seller’s 15 day rescission right and vi) the source of funds and the date on which funds would be disbursed to the seller. (16)

Federal Taxation of Viaticals
By 1996 the viatical settlement was a well established tool for financing palliative care for AIDS patients and other terminally ill patients. Insurance companies during this same time began to offer accelerated death benefits under limited circumstances, to be used largely for the same purposes. In recognition of these developments, Congress included a provision as part of the Health Insurance Portability and Accountability Act of 1996 that treats accelerated death benefits and proceeds of viatical settlements as non-taxable life insurance proceeds. (17) In the absence of legislative relief, such proceeds would have been subject to erosion by taxation. (18) The exclusion of accelerated death benefits and viatical proceeds from taxable income was perhaps the most important development in the life settlement market since Grigsby. As life insurers jockeyed with the upstart life settlement providers for control over pre-death benefits choices, parity in tax treatment was seen as vital.

Section 101(g)(2) of the Internal Revenue Code of 1986, as amended, generally limits the favorable viatical treatment to transactions between a licensed settlement provider and an insured who is either terminally or chronically ill. Payments to the chronically ill can only be excluded from income if they are used to pay for qualified long-term care services. Most importantly, a policy holder receives exactly the same tax treatment whether he decides to accept an accelerated death benefit or a viatical settlement. Neither life insurers nor settlement providers are favored.

Today’s Marketplace
As the AIDS crisis crested in the 1990s, the certainty of viatical payouts diminished and the investment horizon lengthened. The early investors took their profits, and some later investors were left holding insurance policies on relatively healthy insureds who now expected to live for decades. More generally, increased competition and an effective response from life insurers in the form of more flexible policy loans and accelerated death benefits also drove profits down.

The industry has quietly regrouped as investors, settlement providers and life underwriters have identified broader market opportunities. What has emerged is a market quite removed from the viatical model. Today’s seller is likely to be a high net worth individual in relatively good health. He doesn’t necessarily need the proceeds to pay for medical expenses or anything else. Rather, he has in place a number of large special purpose insurance policies that are no longer useful. His company might hold a key-man policy in connection with his leadership role, but he is now retired. He may have taken out another to support a buy-sell agreement with his partners, but the business has been wound down, or the partners have since died. A target policy typically has a face amount in excess of $250,000. Compared with the number of policies on identifiable terminally ill patients sought by the viatical market, these kinds of policies are more numerous, carry higher face values, and therefore offer a potentially much wider market opportunity. (19)

The economic and financial turmoil of the past two years has impacted the market for life settlements in two positive ways. First, older retirees have seen retirement assets shrink, and many are seeking new sources of liquidity to pay for basic living expenses. Life insurance is often an easy asset to sacrifice. Second, investors who saw what they thought were adequately diversified portfolios plummeting in value are actively seeking alternatives that won’t be as vulnerable to market shocks.

In this environment of opportunity, the industry confronts a basic legal framework that is already well understood. Likewise, the issues facing the special viatical segment have been fought to a draw. Two of the most important remaining areas of contention are broad new consumer protection and regulatory statutes and the proper income tax treatment of the underlying transactions.

S.B. 973
Unlike the earlier wave of consumer protection legislation, which was narrowly focused in scope, recent legislation is the product of broader thinking on the part of the legislature, and more sophisticated lobbying by the private sector players. In July 2009, Governor Ted Kulongoski signed into law Senate Bill 973, which greatly expands Oregon’s life settlement legislation. The legislation includes valuable consumer protection measures and sensible anti-STOLI provisions, but also contains disclosure language designed to shape market perceptions of and participation in life settlement transactions.

The economic tensions between life insurers and life settlement providers are readily apparent. Life insurers expect that a certain predictable percentage of policies will lapse before death and never pay benefits. They price these expectations into the product. They also compete directly with life settlement providers by offering cash surrender payments and various other more flexible forms of pre-death payout. Life settlement transactions upset settled industry expectations and extract value from the insurers.

Settlement providers view the insurance policy as an illiquid investment that can and should be freed-up in a rational market. They also perceive correctly that the value locked up in these policies can be stripped away from the original insurer, and that the policy owner holds the keys. It is no surprise to see these tensions played out in the struggle for regulatory reform.

Consumer Protection
Leading up the consumer and investor protection measures is the flagship 5 year waiting period provision. In general, policy owners are not permitted to enter into settlement transactions within the first five years after a new policy has been issued. (20) Prior law in Oregon and many other states generally required only a two year waiting period, corresponding to the typical non-contestability period for life insurance policies. The measure has been heavily promoted by the insurance industry nationwide as a way to discourage STOLI transactions.

Exceptions are permitted in limited circumstances. Settlement after two years is permitted if the policy has been financed entirely by the insured, a close relative or a person having a substantial economic interest in the life of the insured, and neither the insured nor the policy has previously been evaluated for settlement. (21) Settlement by the insured is permitted at any time in the event of chronic or terminal illness, death of a spouse, divorce, retirement, full disability, or bankruptcy. (22)

Closely allied to the five year waiting period is the 60 day rescission period, increased from 15 days under prior law. All life settlement contracts entered into in Oregon must contain the absolute right to rescind the contract within 60 days of execution or 30 day of disbursement of funds, whichever is earlier. (23) Death of the insured during the 60 day period automatically rescinds the contract. Together these two provisions should go a long way toward reducing the opportunity for STOLI-type abuses.

Responding to the concerns of health privacy advocates, the legislation imposes modest limits on the sharing of personal and health-related information of the insured.(24) It also restricts the frequency of contacts by the new owners and beneficiaries for the purpose of monitoring the health of the insured. (25) In addition, the legislation imposes an ongoing duty to notify the insured whenever the new owner resells the policy or changes the designated beneficiary. (26) These measures are aimed preserving some measure of privacy and sense of control in the face of the unavoidably ghoulish aspect of life settlements—waiting for the insured to die.

Notably, the legislation expands the existing mental competency requirements to all persons entering into life settlements, not just the terminally or chronically ill, regardless of age. The policy owner must have an attending physician certify that the owner is of sound mind and not under undue constraint. (27) Further, the owner must represent in writing and before witnesses that he understands the life settlement contract and consents to it; and that he also understands the benefits of the life insurance policy being given up. (28) Such heightened formality requirements, comparable to those found in real estate and testamentary settings, offer considerable additional protection against elder-abuse and other potentially fraudulent activity.

Disclosures
As important as the consumer protection measures are, the real nature of the struggle between life insurers and settlement providers is revealed in a raft of mandatory disclosures and contract provisions comprising the bulk of the bill’s new provisions. The policy arguments confronting the legislature are reflected to an unusual degree in the text itself. Many of the specific disclosure items appear to have been culled directly from interest group talking points. Putatively designed for consumer protection, the disclosures are perhaps better understood as part of a wider effort to control public perception of the proper role for life insurance and the legitimacy of life settlements.

Most of the required disclosures burden the life settlement side, and express the viewpoint of the life insurance industry. Before even being considered for settlement, policy holders are required to receive greatly expanded written disclosures, including:
• there may be other alternatives to life settlement, including any available accelerated death benefits or policy loans offered by the insurance company under the policy;
• proceeds might be taxable;
• proceeds might be subject to creditor’s claims;
• settlement may affect eligibility for public assistance; (29)
• conversion rights and other rights under the policy may be forfeited and that the settlement may cause the insured to be ineligible for future coverage;
• family members or others under a joint policy may lose coverage;
• the owner’s right to benefits under the policy, including the death benefit, will be transferred to the provider. (30)

The savvy consumer will recognize between these lines many of the most heavily promoted selling points for life insurance.

In addition to policy holder disclosures, the legislation also requires warnings to the prospective investor that:
• the contract pays no dividend or interest;
• there will be no return until the insured dies;
• the actual rate of return cannot be measured until the time of death;
• the investment is illiquid, with no established secondary market;
• the investor must pay premiums to maintain the policy in force;
• benefits may be lost if the insurance company goes out of business. (31)

Investors must further be advised of the risks of policy contestability, either by the insurance company or by the insured’s heirs (remember John Burchard?). (32) Finally, prospective investors must be given the bona fides of the life underwriter who actually estimates the life expectancy of the insured in order to price the settlement offer, and must be shown the policy holder certifications on which the estimate is based. (33)

Not only must the investor and the policy holder be properly advised, the insurer itself must be notified of the intended settlement and given an opportunity to open a fraud investigation before verifying the policy. (34) Special disclosures are required if a policy is settled under the exceptions to the five year waiting period. (35)

Life settlement providers have not been completely forgotten, however. Under the new legislation insurers are not permitted to engage in stalling tactics or obfuscation when dealing with life settlements. Insurers must promptly respond to coverage verification requests by providers and brokers and must take timely steps to transfer policies pursuant to a life settlement. (36) They may not impose documentation requirements or demand waivers or consents other than those set forth in the legislation, and must comply with instructions to change ownership and beneficiary designations without unreasonable delay. (37) Most strikingly, while providers must mandatory warnings about the dangers of life settlement, the new legislation requires life insurers to sing its praises. Whenever an insured age 60 or older offers to surrender a policy for cash, seeks an accelerated benefit under the policy, or is in danger of lapse, Oregon insurers are now required to advise the insured of alternatives, including life settlement. (38) Insureds must also be advised to seek information from the Insurance Commissioner, who is required to provide information on policy holder options. The right to pursue alternatives other than those available under the insurance contract has been one of the major marketing messages for of life settlements.
It is unclear whether consumers and investors will be enlightened by all of this information or simply confused. It is just as uncertain whether a vibrant and established market for life settlements will ultimately develop in Oregon and elsewhere. But if such a market does develop, its features will have been shaped in large part by these legislative ground rules.

Taxation
Income taxes weigh heavily in decisions concerning life settlements, and more so because the rules have been uncertain. Because life insurance contracts are generally afforded favorable tax treatment, life settlement contracts confront a difficult challenge. Policy holders who retain their policies can count on the death benefit being excluded from income of the beneficiary. Those who surrender their policies generally must include only the excess of the cash surrender proceeds over the cumulative paid-in premiums, which is treated as ordinary income. In contrast, the proper treatment of life settlement transactions has been the subject of widespread uncertainty. The prevailing view (perhaps the better word is hope) within the life settlement industry had been that life settlements could be treated at least as well as cash surrender. This would preserve the broad parity between the two options that had been achieved in the viatical context. Optimists had even hoped for more favorable capital gains treatment to place life settlements in a clearly advantageous light. Last May, Treasury (under pressure from Congress) issued Revenue Rulings 2009-13 and 2009-14, upsetting the optimists and potentially eroding the market appeal of life settlements.

Revenue Ruling 2009-13
Revenue Ruling 2009-13 addresses the tax consequences to the holder of a life insurance policy in three Situations: 1) cash surrender for of a cash value policy, 2) sale to a third party of a cash value policy, 3) sale to a third party of a term policy. As compared with cash surrender, Rev. Rul. 2009-13 produces a considerably less favorable tax-free basis recovery for life settlements, and provides only limited capital gain treatment.

Cash Surrender
To begin with, the ruling confirms the treatment of cash surrender. In the facts given, the taxpayer surrenders a whole life policy for its $78,000 cash surrender value, which reflects a $10,000 reduction for “cost-of-insurance” charges imposed by the issuer. The taxpayer has paid $64,000 in cumulative net premiums. Because the policy is being surrendered, the proceeds are considered to be an amount received under the insurance contract, and therefore subject to the special rules of Section 72(e). In general, Section 72(e)(5)(A) requires that the amount be included in income, but only to the extent it exceeds investment in the contract. Thus, only $14,000 ($78,000-64,000) is included in income, without regard to cost-of-insurance charges.

Although the Section 72(e) rules operate in some respects like the capital gains basis rules, the income is treated as ordinary rather than capital gain. The character of the income is not specified in Section 72(e), and it does not otherwise qualify for capital gain treatment because the surrender of a life policy is not a “sale or exchange” of the policy. (39)

Life Settlement
The ruling next introduces the life settlement transaction. In the facts given, the taxpayer sells the same policy to a third party for $80,000 rather than surrendering it for cash. Here, the parties are clearly in a “sale or exchange” setting, with important implications. There is now at least the potential for capital gain treatment of amounts received in excess of basis. And, because, Section 72(e) does not apply, the specific statutory rules give way to more general tax basis concepts. Despite these promising signals, the ruling ultimately produces a disadvantageous tax result, stemming from two complicating factors. First, basis recovery works very differently than in the case of cash surrender. Second, most of the remaining income is converted to ordinary in character through a judicial substitution doctrine.

The first step in the analysis is premised on the dual nature of life insurance, with both insurance and investment characteristics. Because the cost of insurance is personal and not a capital investment, the IRS concludes that the amount paid by the taxpayer must be allocated to the cost of insurance protection on the one hand and the investment element on the other. (40) Thus, although the taxpayer may be said to have a “Section 72(e) basis” equal to the full $64,000 in premiums, the adjusted basis for sale purposes is only $54,000 ($64,000 reduced by the $10,000 cost of insurance) and taxable income is $26,000. As a result, taxable income increases by $12,000 when compared to cash settlement, even though the taxpayer is only $2,000 richer.

The additional income might not be so bad if it could be treated as capital gain. However, although the sale is eligible for capital gain treatment, the IRS determines that a large part of the income is still ordinary. The reason lies in the “substitute for ordinary income” doctrine. Under the doctrine, ordinary income that has been earned but not yet recognized by the taxpayer cannot be converted into capital gain by a sale or exchange. The IRS concludes that the “inside build-up” under the contract represents unrecognized ordinary income to the taxpayer, which must be recognized on sale. Thus, $14,000 of the taxable income from the life settlement is treated as ordinary, and capital gain treatment is allowed only as to the remaining $12,000. (41)

Settlement of a Term Policy
In a final wrinkle, the ruling considers the effect of these principles on the sale of a term life policy. In the facts given, the taxpayer sells a term life contract for $20,000. As with the sale of a cash value policy, basis is equal to aggregate net premiums minus cost-of-insurance. However, since a term policy is pure insurance with no investment element, the entire investment in the policy is allocable to the cost of insurance. Absent proof to the contrary, the IRS will look to the monthly premium, with the added complication that the sale takes place mid-term. Thus, only the unearned portion of the premium is included in basis. The excess proceeds are capital gain in their entirety, since there is no inside build-up under the contract and therefore no ordinary income under the “substitute for ordinary income” doctrine.

Revenue Ruling 2009-14
Rev. Rul. 2009-14 addresses the income tax consequences to the direct buyer of the life policy and to secondary purchasers with mixed results for investors. (42) Primary investors are generally treated less favorably than secondary investors, with the result that a sale on the secondary market during the life of the insured is generally preferred to holding the policy until death.

The Primary Investor
In the facts given, the primary investor purchases a term policy from the insured for $20,000. The policy is a 15-year level premium term policy with a $100,000 face amount and no cash surrender value. The primary investor continues to pay premiums in order to keep the policy in force, with a view toward profiting from the death of the insured or from the subsequent sale of the policy in the secondary market.

Proceeds at Death of the Insured
If the primary investor holds the policy until the death of the insured, he receives $100,000 under the contract. As in the case of cash surrender, taxable income is determined under Section 72(e)(5)(A) and is equal to the amount received under the contract minus the investment in the contract. Because Section 72(e) governs, there is no basis reduction for cost-of-insurance, and the entire amount invested, plus premiums paid to keep the policy in force, is included in basis.

Section 101(a), which controls the treatment of death benefits paid under a life insurance policy, produces the same result. Death benefits are generally excluded from income, except where the policy has been transferred for consideration, in which case Section 101(a)(2) limits the exclusion to the amount of consideration and subsequent premiums paid by the transferee.

The character of the income is once again ordinary. Although neither Section 62 nor Section 72(e) specifies the character, the sale or exchange element required for capital gain treatment is missing.

Proceeds from Sale of the Policy
If the primary investor sells the policy for $30,000 during the life of the insured, his tax treatment changes dramatically. Because the sale or exchange element is now satisfied, there is the potential for capital gain treatment of amounts received in excess of basis. Neither Section 72(e) nor Section 101(a) applies, because the amounts are not received under the life insurance policy. In that case, the specific statutory rules give way to more general tax basis concepts.

The investor’s gain is measured by the $30,000 amount realized, minus basis. Basis is equal to the cost of the policy plus subsequent premiums. Note that, unlike the insured, the investor pays premiums not for the personal purpose of protecting against economic loss in the event of the insured’s death, but to prevent the policy from lapsing and thus preserve the value of the investment. Thus, the investor is not required to reduce its basis by any cost-of-insurance amount and is entitled to recover the full investment on a tax-free basis.

Under these facts, the ruling also confirms the capital gain treatment of the investor’s income. In the facts given, the policy is a term policy without any cash surrender value or “inside build-up”. Therefore there is no ordinary income to be recognized upon the sale under the “substitute for ordinary income” doctrine. (43)

Summary of Tax Rulings
The rulings will bring certainty and comfort to the market in some respects.(44) In particular, an authoritative rule for policy holders, the least sophisticated market participants as a class, will pave the way for broader participation and more transparent pricing. The proper analysis of capital gains treatment is confirmed, however limited its availability. And investors will be reassured that basis includes premium payments made to keep policies in force, notwithstanding the cost-of-insurance doctrine. Perhaps most welcome, in light of the widespread uncertainty preceding their issuance, the rulings confirm the IRS will not challenge tax positions taken by policy holders with respect to settlements made before August 26, 2009.

In their result, if not in any express policy rationale, Revenue Rulings 2009-13 and 2009-14 create significant disparities within the life settlement marketplace. A policy holder will be taxed more heavily on a life settlement than on a cash surrender of the same policy. The disparity will offset a portion of the higher price received, and in some circumstances absorb it entirely. In theory and in practice this disparity should drive up prices for life settlements, reducing their attractiveness for investors. Likewise for investors, death benefits are taxed more heavily than proceeds from a secondary market sale. All other things being equal, a “buy and hold” strategy is disfavored, and “flipping” or secondary trading is encouraged. This result gives no comfort to anyone troubled by the prospect of an active “death futures” market.

1 Troy E. Thompson is a member of the Oregon and California Bars and a Certified Financial Planner® practitioner. His company, Thompson Advisory Services, LLC, provides comprehensive, fee-only financial planning services to individuals and families throughout Northern California and the Pacific Northwest.

2 Conning Research & Consulting, Inc., Life Settlements: New Challenges to Growth (2008).

3 Insurance Information Institute, Insurance Factbook 2009-2010 (2009).

4 S.B. 973, 75th Leg., 2009 Sess., (Or. 2009), 2009 OR. LAWS c.711.

5 Rev. Rul. 2009-13 & Rev. Rul. 2009-14, IRB 2009-21 (May 26, 2009).

6 The insurable interest rule for life insurance is codified in Oregon at OR. REV. STAT. § 743.024, and rooted in the common law, Brett v. Warnick, 75 P. 1061, 1063-64 (Or. 1904).

7 222 U. S. 149 (1911).

8 In the Western Christian tradition, the Viaticum is the Eucharist or Holy Communion administered to a dying person as part of last rites.

9 Viatical Settlements Model Act (National Association of Insurance Commissioners).

10 995 OR. LAWS c.342.

11 1995 OR. LAWS C.342 § 2, former OR. REV. STAT. § 744.319(3).

12 1995 OR. LAWS C.342 §§ 4-10, former OR. REV. STAT. §§ 744.321-744.338.

13 1995 OR. LAWS C.342 §§ 13, 18, former OR. REV. STAT. §§ 744.346, 744.358.

14 1995 OR. LAWS C.342 § 11, former OR. REV. STAT. § 744.341.

15 1995 OR. LAWS C.342 § 15, former OR. REV. STAT. § 744.351.

16 1995 OR. LAWS C.342 § 14, former OR. REV. STAT. § 744.348.

17 Pub. L. 104-191, § 331, 26 U.S.C. § 101(g).

18 It was not clear until last summer exactly what the proper tax treatment had would have been. See the discussion of Rev. Rul. 2009-13 and Rev. Rul. 2009-14, below.

19 The face value of policies eligible for settlement in the current market is estimated to be $170 billion. Steven A. Morelli, “Are Life Settlements the $170 Billion Elephant in the Room?”, InsuranceNewsNet Magazine, http://insurancenewsnet.com.

20 2009 OR. LAWS c.711 § 14(1).

21 2009 OR. LAWS c.711 § 14(1)(c).

22 2009 OR. LAWS c.711 § 14(1)(b).

23 2009 OR. LAWS c.711 § 8, amending OR. REV. STAT. § 744.341.

24 2009 OR. LAWS c.711 § 9, amending OR. REV. STAT. § 744.343.

25 2009 OR. LAWS C.711 § 13(7)(a).

26 2009 OR. LAWS c.711 § 11(4).

27 2009 OR. LAWS c.711 § 13(1)(a).

28 2009 OR. LAWS c.711 § 13(1)(e).

29 However, the provider is also permitted to note that settlement proceeds may reduce the owner’s risk of becoming impoverished and having to rely on public assistance.

30 2009 OR. LAWS c.711 § 11(1).

31 2009 OR. LAWS c.711 § 11(5).

32 2009 OR. LAWS c.711 § 11(5)(k).

33 2009 OR. LAWS c.711 § 11(5)(m); 2009 OR. LAWS c.711 § 11(7)(a).

34 2009 OR. LAWS c.711 § 13(1)(b)-(d).

35 2009 OR. LAWS c.711 § 14(2).

36 2009 OR. LAWS c.711 §§ 13(1)(d), 14(3).

37 2009 OR. LAWS c.711 § 14(4)-(5).

38 2009 OR. LAWS c.711 § 22(2)(a)-(b). “Life insurance is a critical part of a broader financial plan. There are many options available, and you have the right to shop around and seek advice from different financial advisers in order to find the option best suited to your needs.”

39 Section 1222(3) defines long-term capital gain as gain from the sale or exchange of a capital asset held for more than one year. The conclusion is consistent with the longstanding position of the IRS expressed in Revenue Ruling 64-51, 1964-1 C.B. 322 (1964).

40 In the real world, the taxpayer may have difficulty making this allocation, as life insurers do not routinely disclose the information.

41 This part of the ruling suggests that taxpayers contemplating settlement may benefit in at least some cases from reducing or eliminating inside build-up by means of policy loans or use of value for premium payments. The optimal strategy would depend on the amount of the anticipated settlement offer, the existing basis in the policy, the taxpayer’s marginal rate, and the options available under the policy.

42 A third area of the ruling holds that income from the disposition of a policy issues by a U.S. insurer on the life of a U.S. person is U.S. source income. This ruling principally affects withholding for foreign investors, and may tend to dampen enthusiasm for cross-border investment in U.S. life settlements.

43 The ruling does not address the secondary market sale of a cash value policy. Presumably, the “substitute for ordinary income” doctrine should apply to convert some or all of the capital gain to ordinary income. However, this may not present a practical issue. Even in the case of a cash value policy it is typical for investors to strip out the cash value using policy loans or by using inside build-up to pay premiums. The effects of this strategy, implicit in the ruling, are to reduce basis and increase capital gain.

44 Other important issues remain open. Neither ruling addresses the proper treatment of any losses arising from these transactions. Nor does Rev. Rul. 2009-14 address whether nondeductible interest used to finance a life settlement contract may be added to basis in either of the scenarios it describes.

The first step in getting the best results from using a contract attorney is to choose the right one (or ones) to hire. Whom do you trust to be competent, fit well within your firm culture, be honest, serve your clients better, and increase your profit? Once you’ve chosen a contract attorney, the most effective tool for getting the most out of the relationship is to identify and communicate clear expectations. This article provides tips on how to find the right contract lawyer and what issues to consider as you articulate your expectations.

How Do I Find a Contract Lawyer I Can Trust?

If you don’t already have a working relationship with a contract lawyer, talk to your lawyer friends, colleagues, and law school classmates—anyone who can give you a referral to a contract attorney they’ve used in the past. The personal reference of a trusted colleague is invaluable. If this doesn’t yield results, broaden your field of inquiry, such as through the Lewis & Clark Law School contract lawyer list (linked here) or the Oregon Women Lawyers contract lawyer list (linked here). (Disclosure: I am on the Oregon Women Lawyers contract lawyer list and have sporadically used the Lewis & Clark Law School list.) Once you’ve identified potential contract attorneys, get references from them and follow up on the references. Any contract attorney should be able to give you the names and contact information for people for whom they’ve worked.

Most importantly, establish relationships with contract attorneys you trust before you need them. In the middle of a crisis with deadlines looming is not a good time to make a hiring decision: the pressure to get someone on the case will limit your ability to be selective and may affect your ability to accept a large case when the opportunity arises. A low-risk way to create these relationships is to test the waters with smaller projects, to get a sense of the contract attorney’s abilities and working style.

Does the Client Have to Know?

Before you engage a contract attorney you must obtain the client’s consent. Oregon Rules of Professional Conduct (RPC) 1.5(d). Client consent may generally be handled through the initial engagement letter; consider inserting language into your standard engagement letter that discusses the use of contract attorneys. Once you’ve addressed the idea of contract lawyers in the engagement letter, notify the client if you plan to use a contract lawyer on a particular case. The notice will not only comply with the rules of ethics but also maintain your working relationship with your client (the most obvious way the contract attorney will come to the client’s attention is when his or her initials appear on the client’s monthly bills).

What Details Do I Need to Consider For Each Project?

What goals do you have for the contracted project and what are your expectations of the contract attorney? Take the time to write yourself a project memorandum (it will be time saved in your initial meeting with the contract attorney and throughout the project, as it brings focus to the contract relationship). In my experience, the hiring attorney who has taken the time to think through the parameters of the assignment receives much more value in return. Consequently, when I discuss a project with hiring attorneys, if they haven’t thought the project through I take the initiative to help them articulate their expectations.

Here are some considerations:

Location of work: Do you want the contract attorney to work from your office or from his or her own office (or does it matter)? Having the lawyer work at your office allows easier access for a collaborative project, but requires you to provide office space and supporting resources (computer, printer, fax machine, desk, etc.). When the lawyer works from his or her office you minimize your support requirements. This decision will be a function of your available resources, goals, and your relationship with the contract attorney.

Scope of Work: Be clear with the contract attorney about the parameters of the project, the timing of turn-round, the format of the end product (A memorandum? Copies of pertinent legal citations? A motion suitable for filing?), and how much time you have budgeted for the project. Do you expect the contract attorney to keep track of court-filing deadlines, or is this something that you or your staff will do?

Access to Client File and to Client: The contract attorney will need at least some access to the client file, depending on the scope of the project. The more responsibility you are delegating the more important full access to the file becomes. Client access will differ depending on the case, your working relationship with your client, and your assessment of how the contract attorney and client will relate to each other. There is no right answer to whether or not the contract attorney should deal directly with the client, but consider from the outset what your arrangement will be.

Payment and Billing: Do you expect the contract attorney to keep detailed time sheets that your staff can then enter into your time and billing system? Or do you prefer a general bill for “services rendered?” When do you want the time sheet? At the end of the project? Monthly if it is an ongoing project? What day of the month do you need the contract attorney’s time sheets in order to include them in your bills for that month?

In most contract attorney arrangements, the contract attorney will expect to be paid by you, whether or not the client pays you. At the risk of stating the obvious, make sure that you have client funds in trust to cover the cost of the contract attorney.

Rate: The most frequently asked question I hear from new contract attorneys is, “How do I set my rates?” Not surprisingly, this is one of the first questions I asked of more experienced contract attorneys when I began contract work. Practicing contract attorneys offered a wide range of numbers, based on experience, practice area, and whether or not they carried their own PLF insurance. However, the best answer I received was from a contract attorney who told me that she meets with the potential hiring attorney, asks what they expect to bill her out at, finds out what kind of a margin they expect, and determines whether or not the resulting figure is within her acceptable range.

Of course hourly billing isn’t the only option. You may arrange a flat fee, a contingent fee, a combination reduced hourly rate with a contingent element, or any other structure that fits your needs and fulfills the ethical requirements of RPC 1.5(d) (discussed more below).

What about ethical considerations? The American Bar Association addresses surcharges to the client for contract attorneys in Formal Ethics Opinion 00-420. Opinion 00-420 concludes that if the cost of the contract attorney is billed to the client as fees for legal services, the hiring firm may add a surcharge, but if the attorney is billed as an expense, a surcharge is not permitted. Although the difference between a “fee” and an “expense” seems to be one of form rather than function, it seems to be grounded in the client’s expectations based on the label you use. So when you add a surcharge, for goodness sake call it a fee. The amount of the surcharge is controlled by the rule requiring that a lawyer’s fee not be clearly excessive. RPC 1.5(d).

Whether or not the contract attorney has PLF coverage, the practice area, the amount and quality of experience, and the quality of work will all affect the contract attorney’s rate. Contract attorneys who appear in court or take depositions, for example, must have their own PLF coverage. Those who perform research and writing only are not required to have PLF coverage, but you must supervise them more closely. Ultimately, perception of value is going to drive the rate you pay: finding the sweet spot that makes both parties happy.

Confidentiality and conflicts: Any contract attorney that you hire is subject to Oregon’s Rules of Professional Conduct. Thus the contract attorney is subject to the same confidentiality rules with regard to the assigned project that you are. But what about your other client files? If the contract attorney has unfettered access to your other client files, either hard copies or on your computer network, you run the risk of an imputed conflict of interest. ORPC 1.10 states that a lawyer associated with a firm shall not knowingly represent a client when any member of the firm would be prohibited from doing so. A lawyer who works with a firm on a limited basis is not considered a member of the firm unless the facts of the particular situation dictate otherwise. ORPC 1.0(d). However, it is prudent to take precautions to segregate a contract attorney from access to files they are not assigned to, to minimize the risk of disqualification. Also, make sure that the contract lawyer maintains his or her own conflict database.

Software compatibility: WordPerfect versus Microsoft Word, Mac versus PC, and access to different versions of the same software can all get in the way of getting work product turned around from a contract lawyer. Work out these details before the project starts.

Engagement letter: Once you’ve established your initial expectations the details should be confirmed in an engagement letter. In my experience it is typically the contract attorney who provides the engagement letter. There is an example of a contract attorney engagement letter at the PLF web-site (click here). There is also a good form letter in The Complete Guide to Contract Lawyering: What Every Lawyer and Law Firm Needs to Know about Temporary Legal Services, by Deborah Arron and Deborah Guyol.

Establish relationships with contract attorneys when you aren’t in dire need and pay attention to the details of the working relationship. This will put you in a position to get the most out of a contract attorney when the big project comes in.

Additional resources relating to hiring contract attorneys:

• Oregon Rule of Professional Conduct (RPC) 1.0(d), “Firm” and “Law Firm” defined.
• RPC 1.5(d), Division of Fees Between Lawyers who are not in the same firm.
• RPC 1.10, Imputation of Conflicts of Interest; Screening
• American Bar Association Ethics Opinon 00-420: Surcharge to Client for Use of a Contract Lawyer (This can be ordered from the ABA online, at www.abanet.org, for $20; it is also reprinted in the May 1, 2008 CLE materials mentioned below)
• Oregon State Bar CLE The Ethical Oregon Lawyer, Section 12.24, Relations Among Lawyers within a firm: Contract Lawyers.
• Professional Liability Fund online resources here (from this page you will need to sign in with your bar number and name and follow the link to: Loss Prevention < Practice Aids and Forms < Contract Lawyering)
• Professional Liability Fund and Oregon Women Lawyers CLE: Practical Contract Lawyering, May 1, 2008. You can download the written materials for free or order a CD or DVD of the program here. (From this page you will need to sign in with your bar number and name and follow the link to: Loss Prevention < CLE < Programs on CD/DVD < Contract Lawyering)
• Arron, Deborah and Deborah Guyol, The Complete Guide to Contract Lawyering: What Every Lawyer and Law Firm Needs to Know about Temporary Legal Services, Decision Books, Seattle, Washington (2004).

About the Author: Heidi Strauch is a professional contract attorney based in Portland, specializing in litigation support. Contact information: heidi@heidistrauchlaw.com, 503-201-7642, www.heidistrauchlaw.com.

© 2010 Heidi O. Strauch

What do you know about foreign legal systems and attorneys practicing abroad?

Like most, probably not much. Yet when a client needs legal help in a different country they often look first to their US attorney for a recommendation. And what do we do? If we do not have someone already in mind our inclination is to seek a referral, maybe from one of the list serves, and send it along to the client. We can do better than that. The first question to ask is what qualifies the referral to practice law? The answer may come as a surprise.

We all know who can practice law in the US. Attorneys are accepted as professionals who have met a series of established requirements. In fact, the definition of a “professional” in the US could be a person who has been certified by a governing body of peers to practice a given profession, based on an educational component, passing a professional examination, adherence to certain ethical standards and completion of continuing education courses. Doctors and attorneys are professionals who meet this definition.

We often assume that foreign attorneys have met those same kinds of standards. NOT NECESSARILY SO! Let us take Mexico, for example. Attorneys in Mexico are simply required to graduate from college with a degree in law, and then they can hang the proverbial shingle. There is no exam. There is no specific code of ethics. There is no requirement that they take continuing legal education courses, nor is there any organized oversight. While bar associations exist, membership is voluntary and they have no authority to revoke the ability to practice.

Further, the concepts of “fiduciary duty” or “conflicts of interest” as applied to professionals here in the US, are poorly understood, if at all, in many civil law jurisdictions, including Mexico. I am not disparaging Mexican attorneys. Quite the contrary, there are many excellent advocates and I have worked with many that I hold in great esteem. However, given the different standards between the US and many other countries, not just Mexico, increased due diligence is in order if you are planning to engage a foreign attorney, or are responsible for recommending a foreign attorney.

Taking the time to identify an attorney with whom you feel comfortable, and for whom you can obtain objective positive references, can make the difference between success and failure to you and your clients. I suggest that when interviewing a foreign attorney you create a questionnaire from which you can obtain some basic information. My first choice would be to ask the attorney to answer the questions in writing so that you can judge the written English capabilities and written work product.

At a minimum, I would ask the following questions of a prospective Mexican attorney, but the questions are appropriate for the engagement of any foreign attorney. To make this process useful, of course, you must then complete your own due diligence on the answers you receive. What law school did you attend? Mexico has over 100 accredited law schools! The disparity in legal education from the top law schools to those in the lower tiers is very significant. It is possible, for example, to get a law degree over the internet from a couple of these law colleges. The best law schools are located in the largest cities of the country such as Mexico City, Monterrey and Guadalajara.

Interview questions: Where did you study law? What year did you graduate? May we see a copy of your diploma? May I see your license please? College graduates in Mexico are required to obtain a professional license called a Cédula Profesional before they can practice a profession. In actual fact many people, including law students, practice a profession without being licensed to do so. Interview questions: How is a person licensed to practice law in your country? Have you met all the requirements? Can you provide me with a third party certification that shows that you are licensed to practice?

Membership in a Bar Association. As I mentioned, in Mexico membership in a bar association is voluntary. The largest bar association is the Barra Mexicana Colegio de Abogados (www.bma.org.mx). The Mexican Bar Association requires members to adhere to a strict code of ethics. There are other membership possibilities open to Mexican attorneys such as the US-Mexico Bar Association ( www.usmexicobar.org) and even the American Bar Association (www.abanet.org). From my experience voluntary membership in a bar association is a very good indicator as to how serious the attorney takes his or her responsibilities as a professional. Interview questions: Are you a member of any bar associations? If so, please list them here with your membership information. If you are not a member of a bar association, please explain why not?

Finally, if you are uncomfortable working with an attorney that is only licensed to practice in a foreign jurisdiction, you might want to consider working with an attorney that is licensed in the US as well as in that other jurisdiction. American law firms with significant US-Mexico business, for example, principally in Texas and California, have hired Mexican attorneys and assisted them in obtaining US law degrees. The advantages are obvious. These professionals will speak English and will be beholding to US standards of professional practice. More importantly, in my opinion, they should be familiar with the differences between the two legal systems, and how the law is practiced.

As advocates for our clients we need to take a bit more care when dealing with engagements that involve foreign attorneys. It is in your best interests, as well as that of your client’s, to ensure that your foreign counterpart’s professional endeavors meet, as closely as possible, our own standards of professional practice. By so doing you could avoid an unfavorable “sorpresa”.

About the Author: Raoul Rodríguez-Walters, CFP® was managing partner of a law firm in Mexico, although he is not an attorney.

So when are you going to get help with your bookkeeping?

It is natural to resist investing in a bookkeeper and bookkeeping software if you are not required to do so. But the cost of errors and oversights can be far greater. And that’s not just the money, but reputation, image, credit rating, and ultimately your business itself.

You tell your clients that investing in a lawyer can save them in the long run. The same applies for you and bookkeeping. You are an attorney. That’s where your talent lies. You did not put in all of that time and effort obtaining your degree and building your practice to now spend it wrestling with your bookkeeping.

When is a good time to get bookkeeping help?

When you are:
• Starting your own practice.
• Growing an established practice including hiring employees or bringing on partners.
• Preparing for tax time.
• Getting caught up on past financial tasks.
• Preparing to apply for a loan or line of credit.

To put it another way, there is not a bad time to upgrade your bookkeeping system. But there are times when you wish you had.

Here are a few examples where prudent bookkeeping pays off.

First, finding good bookkeeping software.
If you are a new or otherwise small practice, it is tempting to select a small, inexpensive and simple bookkeeping software. You should invest now in a proven full service software that will grow with you. I recommend going to www.intuit.com and looking for Intuit’s QuickBooks Pro – the gold standard general bookkeeping software. You may need assistance configuring it for a law practice. You can also get QuickBooks Premier Industry Edition Professional Services. It costs more, but provides a template for law offices.

Tracking start-up costs.
Remember when you paid for office supplies, business license, business cards and stationery out of your personal account or cash in your pocket thinking you’d deal with recording and expensing it later? Did you record those expenses correctly? It is important to track out of pocket expenses. All of those are write offs. Otherwise, that’s free money you’re leaving behind!

Making routine entries into register. Reconciling.
Doing this dutifully in a bookkeeping software helps you find errors – yours or the bank’s. You’ll be able to spot deleted, missing, or duplicate entries. Do you have the time to search those out by hand? Do you know where to even start looking?

Managing your IOLTA checking account.
Your IOLTA checking account must be kept separate from your general business checking account both at the bank and in your QuickBooks to be in compliance with OSB regulations.

Contractors vs. employees.
Be sure you know the difference and are issuing 1099’s and W-2’s accordingly. No one wants an employer who can’t get accurate tax documents to them on time.

Invoicing clients in a timely and professional manner.
If you’re not invoicing, you’re not getting paid. And as time goes on and new business comes in, you’ll find it more difficult to follow up on unpaid invoices with regular statements or collections procedures.

Paying bills on time to avoid costly late fees or worse.
Keep in mind that in this present time of credit crisis, having merely one or two late payments could spell disaster. Your credit rating could plummet. Your interest rates could skyrocket. Credit cards could be cancelled. New applications for credit could be denied. And why? Because you didn’t have the money, or because you just didn’t have your stuff together to write the check, lick the stamp and pay the bill on time?

Organizing your paper flow and time. Good bookkeeping is about organization. Important financial documents are safe and easy to find. Invoices are going out. Money is coming in and getting deposited correctly. Bills are being paid on time. Checks and credit card usage are tracked and itemized. Employees and contractors are getting paid on time. All documents for tax time are calculated and ready to go. Potential creditors or partners are happy to see you’re on top of your financials. And you can spend more time doing what you do best.

About the Author: Belinda Bixby is a Certified QuickBooks Pro Advisor and owner of BJB Bookkeeping Solutions LLC, 503-332-2706
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“Taking care of your QuickBooks so you can do what you do best”

This traveling CLE will be taken throughout the state, beginning next month. Cities and dates include:

City Date

Gold Beach April 8
Coos Bay April 9
Astoria April 29
Tillamook April 30
Ontario May 18
Baker City May 19
LaGrande May 20
Pendleton May 21
Klamath Falls June 9
Medford June 10
Roseburg June 11
Linicoln City June 23
Prineville September 16
Bend September 17
Eugene October 20
Corvallis October 21
Albany October 22
More cities to come 2011

Lawyers and their staff are welcome. To register, go to osbplf.org and select Upcoming Seminars under the Loss Prevention heading. Registration is now open for Gold Beach and Coos Bay. Watch your e-mail inbox or check the Upcoming Seminars page frequently for future cities.

According to the American Psychological Association almost three-quarters of adults report that money is a “very significant” source of stress. Add the pressure of running your own law practice, and financial worries can quickly spiral out of control.

How can you get on track? Meet your goals? Create a vision for the future? It starts with planning and a little number-crunching.

Creating a Business Plan

Every solo or small firm practitioner should have a written business plan. If you are applying for a loan or line of credit, the bank will require it. But it isn’t just an exercise for new lawyers or those seeking financing. Your business plan serves as a roadmap for the future. It describes your reason for going into business, why you are entering into a particular type of practice, your projected income and expenses, how you will market yourself, and how your business will be structured. It requires research, organization, and soul-searching to prepare. But don’t be intimidated. The Small Business Administration is a great place to start.

If you’re looking for tools specific to the legal profession, try these free resources from the Law Society of British Columbia, FindLaw, and Whittier Legal. The American Bar Association (ABA) offers The Lawyer’s Guide to Creating a Business Plan, a step-by-step software package with self-calculating worksheets, detailed financial plans, and preformatted documents. Creating a Business Plan, excerpted from Flying Solo: A Survival Guide for the Solo and Small Firm Lawyer is a bargain at $19.95. With over 300 products geared to law practice management, you’re bound to find many useful materials on the ABA’s Web site. All ABA Web store products may be ordered through the Professional Liability Fund (PLF) at a discount. From the PLF Web site, select ABA Products, and note the PLF promotional code.

Your Mission Statement

A professional mission statement is an important, but daunting, component of your written business plan. How can you express your talents, passion, and values in a concise paragraph or two? The answer lies in four simple exercises that take 30 minutes to complete. (See How to Create a Professional Mission Statement mid-way through the blog post.) I give all the credit to Seattle attorneys Terry Leahy and Joseph Shaub, who developed and shared this approach.

Using a Budget

Every law office should have a budget. Without one, it’s easy to overspend and hard to plan for future purchases. Knowing your overhead costs will help you decide how much money you need to make and how much you need to charge to make that amount. Failure to budget can cause financial problems. Lawyers with financial problems may take on new clients who have money in hand, leaving the work for existing clients unfinished. This soon turns into a a vicious cycle and leads to disciplinary complaints from clients whose work is not completed.

If you have accounting software, you should be able to create a budget and run budget reports and graphs which compare actual to budgeted income and expenses by category. Both Quicken and QuickBooks have this feature. These programs can also create a budget automatically from actual income and expenses you’ve previously entered.

If you don’t have accounting software, you can use online resources like Mint or Wesabe. Both are free and allow you to budget, manage investments, set spending alerts, and generate reports. Additionally, Mint offers a free iPhone app to track expenses on-the-go.

If you want to focus specifically on what your hourly rate should be, try Freelance Switch, an easy to use hourly rate calculator.

Mint, Wesabe, and Freelance Switch are secure sites. No personal identifying information is entered in order to generate budgets, calculate rates, or set alerts. But if the idea of going online still makes you uneasy, the PLF offers budget forms and cash flow worksheets. From the PLF Web site, select Practice Aids and Forms, then Financial Management.

Industry Specific Data for the Legal Profession

Every five years, the Oregon State Bar sends out an Economic Survey to a random sample of the bar membership. The most recent survey was conducted in 2007, and is available for download on the bar’s Web site. Information on billing practices begins on page 26. Hourly rate data can be evaluated by geographic location, total years admitted to practice, and areas of private practice. The following bar sections participated in a supplemental hourly rates survey in 2008: Antitrust, Business Law, Business Litigation, Civil Rights, Construction Law, Consumer Law, Energy Law, Environmental, Intellectual Property, International, and Litigation.

Use this data, in conjunction with your budget or calculations from Mint, Wesabe, and Freelance Switch, to decide how much you should charge.

Avoid Common Pitfalls that Lead to Non Paying Clients

The most stressful part of a law practice is usually getting paid. Unfortunately, it’s easy to sabotage yourself before you’ve even started, if you don’t consider some common pitfalls and how to avoid them:

• Discuss fees at the outset. Carefully screen new clients to minimize the number who don’t pay for your services because they can’t afford your fees.
• Avoid clients with unrealistic expectations. The client who frequently complains or needs constant hand-holding is often the client who is unhappy with your bill.
• Review billing practices. Make sure clients understand time will be billed in tenths of an hour, statements will be issued monthly, and payment is expected within 30 days. Always include a due date on your bill.
• Use written fee agreements to prevent misunderstandings and communicate what will happen if the client does not pay.
• Monitor account receivables closely and establish a collection procedure now. Assuming you generate bills on the first of the month and clients are expected to pay by the 30th of the month, your procedure might be:

o On Day 31, past due clients automatically receive a second billing notice
o On Day 40, past due clients receive a phone call
o On Day 50, past due clients receive a (form) letter, and so on.

The idea is to establish specific steps that follow a timeline. Remember, these situations rarely get better. If you need to withdraw, comply with the Rules of Professional Conduct. See How to Fire a Client – Dos and Don’ts When Ending Representation.
• Offer incentives, such as a discounted hourly rate or flat fee, if the client establishes a retainer or pays your fee up front. Comply with OSB Formal Opinion 2005-151 if you intend to charge a fixed fee earned upon receipt.
• Consider an early-payment discount. If the client pays your outstanding bill within 10 days, rather than 30, give the client a percentage discount off the total amount due.
• Accept credit cards. Avoid bookkeeping hassles by using a private credit card processor who will take merchant fees only from your business account. Be sure to read and comply with OSB Formal Opinion 2005-172.
• Collect last month’s rent. Require that the client pay a security deposit to be held in the lawyer trust account. Invoice the client as usual. At the end of the case, the security deposit is used to pay the client’s final bill. Alternatively, the funds may also be used if the client fails to pay a monthly invoice. Put this arrangement in writing. Keep in mind that if the client’s funds can earn net interest, you are required to establish a separate interest-bearing account for the client or obtain a waiver of the client’s right to interest. See OSB Formal Opinion 2005-117 for additional details.
• Use evergreen retainers. In this type of arrangement, the client agrees to maintain a specified retainer balance at all times. Your bill should reflect the beginning retainer balance, fees and costs incurred during the month, total funds disbursed from the client’s retainer, any balance remaining, and the amount needed to replenish the retainer to the required amount.
• Consider interest charges carefully. Unless you and the client have entered into an enforceable written agreement to charge interest at a higher rate, you may only charge the statutory rate of 9% on a past-due account. See OSB Formal Opinion No. 2005-97.
• Resist the temptation to modify your fee agreement. OSB Formal Opinion 2005-97 also stands for the proposition that modification of a fee agreement in the lawyer’s favor requires client consent preceded by an explanation of the reason for the change and it’s effect on the client. In addition, any modification must be objectively fair. Meeting this standard isn’t impossible, but it isn’t easy either. If you discover you have made a bad bargain, the best course is to learn from experience and change your fee agreement prospectively with future clients. Otherwise, you may find yourself in the middle of a fee dispute, even if your client initially agrees to the modification.
• Think twice before suing a client for fees. The decision is yours, and I certainly understand why lawyers who have never resorted to suing clients before are considering it now. Economic pressures are hard to ignore. Before you take this ultimate step, be sure you’ve considered all the issues, including the possible effect on your PLF coverage.

Follow the author on Twitter at http://twitter.com/OreLawPracMgmt. Her blog may be found at http://oregonlawpracticemanagement.wordpress.com/

I wanted to get back in touch with you on the issue of BarBooks following the BOG meeting last week. As you know, at our planning retreat last October, the BOG dedicated itself to the concept of finding a way to make access to BarBooks universal. We continue to strive toward that goal. Specifically:

* The Budget & Finance Committee shared the SSFP Section proposal—that it be deemed an office share group for purposes of BarBooks pricing in 2010—with the BOG as a whole. For a number of reasons, the BOG made the decision that it does not believe that a Section qualifies as an office share, for these purposes.
* The energy, attention, and focus of the BOG this year is on BarBooks on a macro basis. Following the regular BOG meeting, we convened a Joint Committee on Universal Access, which includes the P & G Committee, the B & F Committee and the Member Services Committee—all BOG members save two were present! We are so committed to this concept that one of the decisions made was to continue to meet, as a Joint Committee, at the beginning of each of our meetings, starting in March, until we come to conclusion. How to deliver information and how to price that delivery is at the top of our agenda.
* Our goal is to have a model designed and any issues for HOD action identified by September 2010, with implementation thereafter. Specifically, we’ve asked staff to prepare alternative business plans for the Joint Committee to consider at the March 19th meeting.
* We know we cannot consider the issue of BarBooks in isolation. We’ve asked staff to provide information about ALL bar programs, as well as how our dues compare to other unified bars and the services they provide to their members.

Kathy

There are enough members in our section to fill each HOD vacancy and we would strongly encourage you to take advantage of this opportunity to play a direct role in the future direction of the OSB. The time commitment is minimal and the HOD Annual Meeting (where voting on resolutions takes place) is not just interesting, but a lot of fun too.

Among other powers, members of the House of Delegates have the power to direct the Board of Governors as to future action and to modify or rescind an action or decision of the Board of Governors.  The Board of Governors is bound by the decisions of the House of Delegates. See ORS 9.139 here:  http://www.leg.state.or.us/ors/009.html

The deadline for filing nominating petitions and candidate statements is March 19, 2010. Find  candidate forms here:    http://www.osbar.org/leadership/hod/

Region 1 – 3 vacancies
Region 2 – 3 vacancies
Region 3 – 1 vacancy
Region 4 – 4 vacancies
Region 5 – 19 vacancies
Region 6 – 9 vacancies
Out-of-State – 6 vacancies

1.  What was the selection criteria for the 59 “new members” who received complimentary BarBooks subscriptions in 2009?

All new admittees receive a coupon that they can redeem for a complimentary 6-month subscription. The 59 new members who had complimentary subscriptions at the end of 2009 were those who returned the coupon. This offer was created as a marketing tool to help new members become acquainted with BarBooks. As of Dec. 31, 2009, there were 12 BarBooks paid subscribers who were renewals of previous complimentary subscriptions.

2. How many new members will receive complimentary subscriptions in 2010?

We have no way of knowing this. As stated above, all new admittees receive the coupon and we do not know how many will take advantage of it. We have set up 6 new member complimentary accounts already in January.

3.  What is the selection criteria for granting complimentary BarBook licenses to Oregon non profit organizations?

The Legal Aid offices were all set up at the same time, and were granted the complimentary subscription because they were affiliated with Legal Aid Services of Oregon. The rationale behind the decision to grant these offices complimentary subscriptions was that it did not make sense for one department of the bar (Legal Services) to provide financial support to Legal Aid Services of Oregon in furtherance of providing legal services to the poor only to have another department (Legal Publications) take that money back to pay for BarBooks.

4. How many non profit organizations will receive complimentary BarBooks subscriptions in 2010?

The same as in 2009. There are no plans to add any new complimentary subscriptions for non profits.

5.  Does a corporation receive a credit at the time its license fee is paid if a member of it’s corporate legal department has already paid for a BarBooks subscription?

No. The only time we give credit for an existing subscription is when a sole practitioner joins an Office Share Group. In this case, credit is given for the remaining months of the sole practitioner’s existing subscription.