Plaintiffs’ personal injury attorneys: when was the last time you looked at your firm’s retainer agreement? Have you ever edited with an eye towards attorney fee deferrals? If so, you may already know the language your retainer agreement should contain. However, if you have not yet taken this into consideration, make sure you do so before you sign up your next client.
The statutory rules are clear: the sooner an attorney decides to defer payment of a fee, the better. If the IRS finds constructive receipt prior to deferment, a plaintiff attorney risks all of the tax benefits of a fee deferment strategy. Therefore, it is paramount to engage a comprehensive settlement firm as early in the process as possible.
A finding of constructive receipt is less likely if the decision to defer the fee was made before legal services were rendered. See generally, Rev. Rul. 60-31, 1960-1 C.B. 174; See also, IRC 409A. The retainer agreement is the first step attorneys can make to demonstrate they intend to defer their funds. Best practice demands a deferred payment strategy that begins before the client even walks in the door, and certainly before any settlement agreement is reached.
Settlement in a tort case is commonly struck on the basis of how much will be paid, and this generally occurs before settlement documentation has been generated and signed. The risk present here is a determination by the Service (i) that there was in fact no decision (and no evidence of a decision) to defer payment of attorney fees prior to the point of reaching a verbal, yet fully enforceable, settlement; and (ii) that the attorney’s decision to defer his or her receipt of compensation did not occur until after the right to payment of an immediate fee, in sum certain amount, was already in hand.
Sample language*: “Client acknowledges that Attorney has the right to receive his or her fee in the form of a periodic payment obligation. Should Attorney elect to receive the fee in this manner, there is no additional cost to Client.”
It is possible and relatively easy to demonstrate in writing that the fee was always planned to be deferred, even before the settlement was “earned” and certainly before the fee was received. The first opportunity for the plaintiff’s attorney to display their plan to defer a fee is in their retainer agreement. While this is only one step in many when building a comprehensive settlement plan, Milestone regularly provides free consultations regarding retainer agreements and ensures that the proper attorney fee deferral language is contained within.
If you have any questions or concerns about your retainer agreements, please contact Milestone today for a free consultation.
Note: The sample text above is an example of possible language to include in an attorney-client fee agreement with regard to the attorney’s option to structure his or her fee. The language below is not meant to serve as legal advice. Consult applicable local, state and federal guidelines and statutes and seek the advice of experienced counsel before making any changes to your attorney fee agreement.