Although most attorneys are familiar with structuring settlements for their clients, many do not know that their own fees can be structured to provide them with similar benefits. Although an attorney cannot receive tax-free benefits like a client, he or she can defer income tax liability until the year the attorney receives their actual benefit payment. With a structure, money that would have been paid to the IRS will instead earn a return for the attorney until it is paid.
In addition, taxation on interest earned is also deferred until payment – principal and interest are not taxed as ordinary income until the yearly payments are received.
Attorney fee structures provide many other benefits, including:
- Asset protection: Assets in structured settlement annuities are often not recoverable assets in litigation.
- Lower average tax bracket: For many attorneys, the thrill of hitting a big case is lost when the reality of the accompanying tax situation sets in. Structuring the big case payoff for future years can be used to pay for office overhead, steady law firm cash flows, and substantially reduce taxes in the year the fee is earned.
- Medical underwriting: Through substandard age rating, attorneys with health issues such as high blood pressure, diabetes, high cholesterol, overweight, smoker, or other medical impairments can receive higher benefits on lifetime annuities.
- Guaranteed income: Structured fees can reduce the stress that often accompanies contingency fee based income.
- Flexible design: Unlike traditional annuities (bought on the market after the attorney receives their fees), structured fees can be designed to meet the unique needs of attorneys, i.e. lump sums, monthly income, stacked income, income with cost of living adjustments (COLA), deferred income, planning for their children or grandchildren’s college, retirement, and future nest egg. The options are flexible and nearly unlimited.
- No restrictions on amount: Unlike traditional retirement planning options, there is no limit to the amount deferred through a structured fee in a given calendar year.
- Distributions can start before age 59.5: Unlike traditional retirement planning options, such as the Single Premium Deferred Annuity (SPDA), distributions can start at any age. There is no need to wait until age 59.5 to start receiving benefits and no penalty for this early benefit.
- No mandatory employee participation: There is no requirement that employees participate, adding tremendous flexibility to retirement planning
- Case-by-case: Each case that settles is another opportunity to defer fees. There is no long-term commitment as is required in other retirement planning options.
- Lifetime payments: Most solo practitioners do not have the time or manpower necessary to establish and manage a pension plan. Structuring attorney fees allows the attorney to establish a personal pension plan that will pay a fixed amount for the rest of his or her life without the concern of administration fees and stress of typical pension plans.
- Incentive plan: Structuring fees for a future time can be a way of applying “golden handcuffs” to junior associates and can increase employee retention. Structured fees are often used to provide bonuses and ongoing incentive plans to staff.
Structured Attorneys’ Fees: A Legal Framework
In 1996, the 11th Circuit affirmed without opinion the 1994 Tax Court’s ruling in Childs v. Commissioner, which found for the taxpayer attorney who structured her fees. Although the Childs case gives evidence of the requirements and acceptable procedures to structure fees, the IRS has never acquiesced to it. ROBINYOUNG & COMPANY has the expertise and experience necessary to ensure that settlement forms and procedures are carefully prepared and reviewed following the Childs facts and holding to avoid potential tax pitfalls.
Childs v. Commissioner, 103 T.C. 634, (1994), aff’d, 89 F.3d 856 (11th Cir. 1996).
Kevin Moriarty, Feature: Structured Payouts of Attorney Fees: A Golden Opportunity for Tax Planning, 27 Ver. B. J. & L. Dig. 47, Sept. 2001.
Learn more by contacting ROBINYOUNG & COMPANY.