As a trial attorney, you may have heard about structuring your contingency fees into deferred periodic payments but aren’t quite sure of how to get started. The process begins during litigation, and the first step is to establish a 468b trust, also known as a qualified settlement fund or QSF.
Either you or a third-party administrator can petition any court of competent jurisdiction for an order to approve the establishment of a QSF. This type of trust allows extra time once litigation has concluded to decide the best financial plan to fit your needs – whether that’s receiving your fee as a lump sum or structuring it into periodic payments.
Other than providing you and your client time to make financial decisions with the incoming settlement and fee, the main benefit of a QSF is delaying constructive receipt. You are able to decide how you want to receive your fees without being seen as legally receiving them until they are dispersed to you from the QSF. To prevent running into constructive receipt complications, you must choose to defer your attorney fees before they are earned in order to later structure them. Then prior to your client’s settlement being finalized, you’ll choose the amount of your fee that you want to receive as future payment(s). These terms are then included in the settlement agreement.
Contrary to popular belief, you are able to structure your fees whether or not your client chooses to structure their settlement. The two decisions are not related at all. A significant benefit of choosing to structure your attorney fees is controlling your yearly federal and state income taxes. Fees included in the structure will not be taxed until the year(s) in which they are received. This helps prevent trial attorneys from receiving a large fee that would push them into a higher tax bracket and ensures income for years to come. For more information on federal income tax treatment of various periodic payments, refer to Private Letter Ruling 150850-07.
The option of structuring your fees is based upon the Tax Court ruling in Childs v. Commissioner (103 T.C. 634) in 1994 that trial attorneys are able to receive their fees via periodic payments when working on cases under contingency fee agreements. This was later affirmed in 1996 by the 11th Circuit Court. These rulings are the foundation upon which Milestone created feeMaster, a program that allows you to control how much you get paid and when. Through feeMaster, you are able to:
- Customize your deferred payment options
- Create a flexible structured payment plan
- Remain in control of your money
- Defer as much or as little as you want
- Invest your structure in equities, just like with your 401k
If you’re interested in learning more about establishing a QSF or structuring your fees, call us today at 716.888.1833 to chat with one of our team members. You can also read more about the benefits of a QSF and structuring your fees here.
This content should not be viewed as legal or tax advice. You should always consult an attorney or tax professional regarding your specific legal or tax situation. Milestone Consulting, LLC, is not engaged in the practice of law or accounting.