Attorney Fee Deferral
Trial lawyers: If you have not yet considered deferring your contingency fees, now is the time. Attorney fee deferral, also called attorney fee structure, is a unique and viable investment option, especially if you are looking to create a supplemental retirement fund, manage the cash flow of your law firm, and/or protect yourself from being bumped into a higher tax bracket. As a trial lawyer, you are part of the only profession with access to unlimited income deferrals.
When you elect to structure your attorney fees:
- 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, and
- Your attorney fee structure can be invested in equities, just like you would with your 401k.
Milestone’s feeMaster program allows you to take more control of your income and strategize for wealth management and tax planning. Contact our team to discuss your options with attorney fee structured deferrals.
What Is Attorney Fee Deferral?
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. Fees included in the structure 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. Then, 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 unrivaled feeMaster program and allows you to control how much you get paid and when, all while alleviating your tax burden.
Here’s how it works. 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.
Attorney Fee Deferral Strategies
What are attorney fee deferral strategies?
The best way to structure attorney fees depends on an individual’s unique situation. When you’re considering fee deferral, Milestone develops a strategy that is customized 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 is built with your ideal vision of the future in mind.
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 can be 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.
Milestone has pioneered three options for our attorney clients who wish to defer their fees:
Option 1: Private wealth portfolio
If you are currently working with a financial planner, Milestone provides the opportunity to build a tax-efficient deferred income in collaboration with your current advisor and our wealth management team.
Option 2: Permanent whole-life insurance
Keep more of your total contingency fee and work within an existing financial framework that can return historical dividends as high as six percent or greater. By becoming a policy holder in one of these large mutuals, you reap the benefits of their financial strength and dividend-paying histories.
Option 3: Fixed-index, traditional, and secondary market annuities
A more tried-and-true strategy, this approach has been allowable since 2008 but has been cost prohibitive until now. No longer limited to the eight basic structured annuity options, this platform relies on the inherent advantages in the marketplace of annuities. The core benefit of this option is getting a principal guarantee from a highly rated insurer. In addition to accumulating wealth on a pretax basis, deferring fees include advantages like yielding a lower tax bracket, creating a steady flow of income in a field where the payment stream isn’t always predictable, and setting up a strategy for philanthropy, family vacations — anything you would like to use your money for.
When to establish attorney fee deferrals
As with a plaintiff’s structured settlement, trial lawyers must elect to structure their attorney fees prior to settlement, and it must be included in the settlement agreement. In other words, you cannot have constructive receipt of the money to be structured. At Milestone, we’re dedicated to developing a customized strategy that works best for the attorney and his or her family. The best wealth management approach for most of our trial lawyer clients is a well-diversified individual stock portfolio that is mid- and large-cap dividend growth heavy. However, there are many options. Our team would be happy to answer your questions about attorney fee deferrals and our feeMaster program. You can also download our brochure to learn more.
Frequently Asked Questions
How do fee deferrals affect my taxes?
In Richard A. Childs, Et al. v Commissioner of Internal Revenue, the 11th Circuit U.S. Court of Appeals affirmed that attorneys who elect to structure their fees will not have to pay taxes on those payments until the year the income is received. This allows attorneys to spread out their income with a fee deferral program, rather than getting hit with one large tax bill in one year. The distributions that come out of the attorney fee deferral program are reportable as ordinary income.
What is my time frame to set my deferral payment schedule?
If your fees are coming directly from the defendants and/or their insurers, a deferral plan must be chosen prior to the settlement being issued. Or, if your fees are placed into a QSF, you have more time and less pressure to decide on your payment options, because typically there is no immediate time frame to distribute the funds.
What type of attorney fees can I defer?
Any contingency attorney fee for physical or non-physical injury tort settlements can be deferred.
Can you structure an attorney fee to pay another beneficiary?
Depending on your contingency fee agreement, deferred fees can be payable to you individually or to your law firm. The beneficiary would be your estate.
Can I elect to defer a fee if my client elects to receive their settlement proceeds in a lump sum?
In most cases, you may create your fees regardless of what your client decides to do.
Can attorneys negotiate a fee structure in class action lawsuits? What about mass tort attorneys?
Lawyers who practice in mass tort litigation and class actions can defer their contingency fees if the court orders a qualified settlement fund into existence. It just comes down to determining whether it’s the right move for the attorney and firm. If that decision is right for you, deferring your fees can be an exceptionally useful tool to accumulate wealth and plan for long-term financial success.
What if I worked on the case with another attorney? Am I still eligible to defer my contingency fee?
You can structure your fees even if you worked on a case with another attorney. The stream of payments can be split among more than one attorney. And, if more than one attorney decides to structure, each attorney can get their own unique payment schedule.
What does it cost to set up a deferral?
As administrator, our firm charges a low percentage annually on the assets in the program. Monolith Advisers is our Registered Investment Adviser that provides the investment advice.