As a plaintiff attorney, managing the financial impact of large contingency fees can be challenging. One effective strategy to consider is attorney fee deferral, which allows you to delay receiving your fees and, consequently, delay the associated tax liabilities. By deferring fees, you have the opportunity to allocate your earnings into various tax-advantaged investment vehicles. This approach helps manage your income and offers potential tax benefits and investment growth opportunities.
What is Attorney Fee Deferral?
Attorney fee deferral is a financial planning strategy where attorneys can defer receiving their contingency fees. Instead of taking a lump sum payout, attorneys spread the income over several years, thereby effectively managing their tax burden. The deferred fees can be invested in different financial products such as fixed annuities, market-based investments, or other structured settlements, which grow tax-deferred until the attorney receives the payments.
The option must be explicitly included in the settlement agreement to qualify for fee deferral. This stipulation is essential because if the fees are considered “constructively received,” they become immediately taxable. The IRS recognizes this form of income deferral as long as the fees are not accessible or available to the attorney before the agreed-upon deferral period.
Benefits of Deferring Attorney Fees
- Tax Deferral: One of the primary benefits of deferring attorney fees is the deferral of tax liabilities. Instead of paying taxes on a large sum in one year, attorneys can spread the tax burden over several years, potentially reducing the effective tax rate.
- Investment Growth: Deferring fees allows attorneys to invest in various financial vehicles that can grow over time. According to a Lawyers Weekly report, many attorneys invest their deferred fees in fixed-income annuities or market-based investments, allowing for steady income growth that is not immediately taxed.
- Financial Flexibility: Attorney fee deferral gives attorneys greater control over their financial planning. As Forbes notes, this strategy provides a flexible approach to managing cash flow, ensuring that attorneys can access funds when needed without a significant tax hit all at once.
Different Structures for Attorney Fee Deferral
Attorneys can choose between various structures for deferring fees. One common approach is through fixed annuities, where the deferred fees are placed in an annuity that pays out a fixed amount over a set period. This method offers predictable, stable income.
Alternatively, some attorneys opt for market-based structured settlements. These involve investing the deferred fees in a portfolio of market-linked investments. As highlighted by The National Law Review, this strategy offers the potential for higher returns, though it also carries more risk than fixed annuities.
Key Considerations
While attorney fee deferral can be an effective strategy, it’s essential to consider the potential risks and administrative requirements. The setup must comply with IRS rules to avoid unintended tax consequences. Moreover, choosing the right investment vehicle is crucial to match your risk tolerance and financial goals.
Consulting with a structured settlement consultant or financial advisor who specializes in attorney fee deferral can provide valuable insights and help structure the deferral to maximize benefits and minimize risks. For more detailed guidance, read Forbes’ article on structured settlements to understand the various options and their implications.
Conclusion
Attorney fee deferral is a powerful tool that provides plaintiff attorneys with significant financial flexibility and tax advantages. By deferring fees and investing them strategically, attorneys can manage their income and taxes more effectively while potentially increasing their overall wealth. If you are a plaintiff attorney looking to optimize your financial strategy, consider exploring the options for attorney fee deferral.