structured attorney fees
Structuring an attorney's legal fee is very similar to structuring a claimant’s settlement. The same rules and tax principles must be followed in order to protect the tax benefits of any structured attorney fee arrangement.
The U.S. Court of Appeals for the 11th district affirmed in Richard A. Childs, et al. v Commissioner of Internal Revenue, 103 T.C. No. Docket No. 15639-92 that attorneys who defer the payment of their fees pursuant to a structured settlement arrangement are not required to include the legal fees generated from a settlement, judgment or verdict in their taxable income until such time that fees are actually received pursuant to the structured settlement arrangement. The Childs Court found that attorneys’ fees are first the property of and received by the claimant and then, once paid and received, become the property of claimants’ attorney. Therefore, a claimant can elect to pay his or her attorney over a period of time rather than in one lump sum payment upon the resolution of his or her claim. As a result, an attorney is able to earn interest on his or her fee prior to paying income taxes on those fees, because the fees are only subject to income taxation following the actual receipt of a structured attorney fee annuity payment. In essence, the claimant agrees to pay the attorney’s fee over a period of time and then purchases a life insurance annuity to ensure that these payments are made on time.
One of the most important aspects of protecting the potential tax benefits available through a structured attorney fee is not to take receipt of the any of the settlement proceeds that are to be used to purchase an annuity that will provide for the structured attorney fee arrangement. If an attorney takes receipt/possession of the portion of the settlement that is intended for structuring, whether through actual receipt (in your trust account) or constructive receipt (through bad or poorly drafted settlement documents), the ability to structure the fees on a tax-deferred basis is undermined or eliminated entirely.
A key concept to remember is that regardless of the nature (taxable or non-taxable) of the underlying settlement, attorneys’ fees are structured on a tax-deferred basis and are not tax-exempt. Taxes will be due on the attorneys’ fees once received by the attorney as income.
Fee structures are not suitable for every attorney. Determining whether or not a fee structure is appropriate for you will depend on a variety of factors, which include the following: your age, health, risk tolerance, retirement goals, tax bracket and your current and long-term needs.
However, structuring your attorney fees could provide beneficial tax relief as well as secure and stable tax deferred income up to, and including, the remainder of your lifetime.
Consider the following circumstances: It is November and you are about to settle a large case, but the attorney's fee from that case will either push you into the next tax bracket or will be taxed at the highest possible rate. Why not structure that fee to pay out over the next couple of years or even to start paying out at your retirement, or elect to have it pay out in order to smooth out the cash flow of your firm? Fees can be paid out over time for overhead expenses or quarterly tax payments.
Even if the rate of return is nominal, after factoring in the tax-deferred savings of a structured fee, it might be the best decision you can make.
To learn more about structuring your attorney's fees, please contact Forge at 866-68-FORGE (866-683-6743).