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Cash flow is not always opportune for attorneys who work on a contingency basis. Income can arrive sporadically, even when a law firm is seeing consistent success. To top it off, a large incoming fee can put a lawyer into a higher tax bracket. This financial situation can be difficult for an attorney trying to manage his or her personal wealth and plan for retirement.

Attorney fee deferral is an investment option for attorneys looking to have more control over their financial future. It can help supplement retirement, manage cash flow, or avoid a higher tax bracket. A fee deferral arrangement provides an attorney with set payments over a period of time according to a customized schedule.

Taking advantage of deferring your attorney fees can offer a lot of customization and flexibility. The money can be invested in equities, just like a 401K, which makes this strategy effective for supplemental retirement funds. There is no limit to how much how little you need to contribute. You can customize all deferred payment options to fit your personal or professional needs. You have the ability to structure your fees no matter what your client opts to do with their settlement proceeds. Additionally, working with other attorneys on the settlement case should not affect your option to defer your fees.

Managing attorney fee cash flow by deferring

Fee deferral, structured attorney fees, or deferred compensation, is a strategy for lawyers earning contingency fees. This financial planning tool allows lawyers to control fee income and build wealth in a sophisticated manner.

Deferring fees comes with many benefits. There are tax advantages, such as staying in a lower tax bracket by spreading income and tax burden over time. Attorneys who defer their fees have flexible financial planning options. They can receive their money when it is most beneficial. Deferred compensation also offers predictable future income. This can be advantageous when planning for all sorts of things: vacations, college tuition for the kids, retirement, and more.

How attorneys defer legal fees

First, an attorney must elect to structure their fees prior to settlement and include it in the settlement agreement. Working with an expert planner, attorneys then develop a customized strategy to “structure” their fees, which rolls into investments much like a 401K. Periodic payments can be made either directly to the lawyer or to his or her firm. There is no minimum or maximum to deferring fees.

Where did attorney fee deferral originate?

In 1996, the 11th Circuit affirmed the 1994 Tax Court’s ruling in Childs v. Commissioner (103 T.C. 634). The Court ruled that attorneys involved in tort cases under contingency fee agreements have the unique opportunity to receive their fees in the form of periodic payments. Attorneys may elect to defer all or a portion of their fees. Structured attorney fees will not be taxed until the year(s) in which they are received.

The practice of deferring contingency attorney fees has not been contested since 1996. In 2008, the IRS released Private Letter Ruling 150850-07, which provided guidance on the proper federal income tax treatment for certain periodic payments. All of this has laid the groundwork for our feeMaster program and allows you to control how much fee income you receive and when, all while alleviating your tax burden.

Structuring attorney fees into a payment plan

As part of the settlement with the defendants and/or their insurers, your contingency fee must be a term of settlement that allows you to create a periodic payment obligation and defer some or all of your fee. The defendants/insurers would issue your fee payable to the selected assignment company. If a qualified settlement fund (QSF) is established, your contingency fee must be a term of settlement that allows your fees to be payable into the QSF, which would then issue your deferred fee to the selected assignment company.

When you elect to structure your attorney fees through the feeMaster program:

  • Your deferred payment options are customizable.
  • Your structured payment plan can be flexible.
  • You are in control of your money.
  • There are no limits to how much or how little you defer.
  • Your attorney fee structure can be invested in equities, just like you would with your 401k.

When deciding to defer fees, you must not have constructive receipt of the money. In most cases, attorneys are able to structure their fees regardless of what their clients choose to do with their own settlement proceeds. This is also true if an attorney works with one or more other attorneys; fee deferral is still an option even if the other attorney(s) choose not to. If all the attorneys working on one case choose to structure their fees, each attorney still creates their own unique payment schedule, as each attorney’s individual fees will be uniquely allocated to them.

Attorneys who structure fees do not have to pay taxes on those monies until they receive the income. This way, they can allocate their funds and avoid incurring a large tax payment in one single year. They are also able to grow their income on the non-taxable principle with a customized investment strategy.

How Milestone strategizes fee deferral

The best way to structure attorney fees depends on an individual’s unique situation. When you’re considering fee deferral, Milestone customizes a strategy to you, your family, and your business. We work in lockstep with you to construct a distribution schedule accounting for factors such as your age, lifestyle, retirement goals, and more. The feeMaster program is not designed for short-term gains; rather, it incorporates your ideal vision of the future.
To start thinking about the potential to defer a contingency fee, ask yourself the following questions:

  • Is deferment possible considering my current financial needs and those of my firm?
  • What do I want to save for?
  • How would I distribute the money?

Periodic payment obligations are 100% customizable. You decide the length of time to defer the fee, so wealth accumulates and becomes available at the perfect time. Payments are made either to you or to your firm. Attorney fee payments can be affected by factors including the type of incorporation the firm has (an LLC or P.C., for example), dissolution plans of the firm, tax advantages, and others.

Important factors to consider

When deciding if deferring your fees could be the right option for you, there are some important factors to consider. These factors include the following:

  • Age and health. Deferred fees are typically most beneficial when spread out over a long time.
  • Current financial needs: Structuring your fees will delay your cash flow. If you need liquid assets now, this is not the best option for you.
  • Future financial needs. If you have well-managed cash flow and anticipate needing something different later, fee deferral may be a great option. It will help structure cash flow and make it more predictable.
  • Personal risk tolerance: Consider your ability to tolerate financial risks before making the decision to defer your fees or not. 
  • Current tax bracket. Deferring your fees can help you stay in a tax bracket while receiving additional income on a scheduled basis.

We partner with financial advisors to find the best way to integrate fee deferral into our client’s financial plan.

Questions? Contact Milestone

Our feeMaster brochure explains how Milestone’s attorney fee deferral program allows lawyers to leverage deferred compensation as part of an overall wealth strategy. We answer common questions and gets into the nitty gritty about how this financial planning strategy works and benefits trial lawyers. However, our team doesn’t expect every attorney to just take our word for it.

Having a diverse financial planning team behind you, collaborating on the best moves for your life, is just smart forward thinking. To learn more about Milestone’s feeMaster program, give us a call.

This content is not legal or tax advice. You should always consult an attorney or tax professional regarding your specific legal or tax situation. Milestone is not engaged in the practice of law or accounting.