by John Darer® CLU ChFC CSSC
If properly designed, structured attorney fees can save and defer taxes for the attorney or law firm. The savings can be significant due to deferring the taxation on the principal and on the accrued but unpaid interest. In other words, if properly designed, neither the principal nor the interest earned on the principal are taxed as ordinary income until the year payments are received.
The advantages and opportunities available to personal injury attorneys through structured legal fees do not end with tax savings. Structured attorneys fees may also provide the following benefits to attorneys and law firms:
- Asset protection – as structured settlement annuities are technically not owned by the attorney, they may be protected from creditors and may survive a divorce.
- Rated Ages/Medical underwriting – attorneys with health related issues such as high blood pressure, diabetes, or high cholesterol may be eligible for higher annuity payouts on lifetime annuities.
- Guaranteed income – structured attorney fees can reduce the stress that often comes with the uncertainty and timing issues of an attorney or law firm's income that is based on contingency fees.
- Flexible design – unlike most annuities, structured attorney fees can be set up and designed to meet your unique needs. The structured attorney fee payment plan design possibilities are only limited by your imagination and that of your settlement planning consultant.
- No restrictions on amount – unlike qualified retirement planning options, there is no limit to the amount deferred via a structured fee in a given calendar year. If you have maxed out your contributions then you can supplement it with a structrued attorney fee
- Distributions can start before age 59 ½ – unlike qualified retirement plans, distributions can start anytime. Such distributions with a qualified retirement plan trigger immediate income tax and a 10% penalty.
- No mandatory employee participation – For small law firms, the cost of qualified plans can be onerous and the retirement planning for the attorney owners may needlessly suffer. Unlike qualified retirement plans, there is no requirement that employees participate.
- You can even decide case by case – each time moves toward settlement, you have another opportunity to defer your legal fee. There is no long-term commitment as is required in other retirement planning options.
- Lifetime payments – most solo practitioners don’t want to hassle with the formalities and commitments of establishing and maintaining a pension plan. Structuring attorney fees allows the attorney to establish a personal pension plan without the headache.
- Source of capital for the law firm-- structured attorney fees can be designed to pay in future years to help smooth out the peaks and valleys associated with contingency fees or to offset known future losses.
- Incentive plan – A law firm can apply “golden handcuffs” by promising deferred compensation to associates funded with structured fees payable to the firm. This can help the law firm retain associates for the long term instead of paying a large cash bonus that just might otherwise have financed the launch of his or her new firm.
There are some disadvantages associated with structuring legal fees. Once the fee is designed and funded, it becomes extremely inflexible and illiquid. Also, the guaranteed nature of a fixed annuity lends itself to lower rates of return than equity-based investment vehicles. Also, be sure that the insurer backing your annuity is financially strong, because you cannot ever switch companies. Attorney fee structures are written and guaranteed by some of the largest and oldest life insurance companies in the world, so there is no need to settle for a fly-by-night insurance company.
In 1996, the 11th Circuit Court of Appeals affirmed without opinion the 1994 Tax Court’s ruling in Childs v. Commissioner. Bear in mind, however, that though the Childs case outlines the requirements to successfully create a periodic payment stream for an attorney, and the Service has not successfully challenged structured fee payouts since Childs, the Service has not officially acquiesced to it.
Attorneys who would like to take advantage of this unique opportunity should contact a settlement planner with experience handling structured attorneys fees to ensure the process is handled correctly. Please contact John Darer toll free, at 888-325-8640 or 203-561-6560 to discuss your particular situation.
 Childs v. Commissioner, 103 T.C. 634, (1994), aff’d, 89 F.3d 856 (11th Cir. 1996).
 The Service issued a Field Service Advisory (200151003) on December 21, 2001 concerning constructive receipt and attorney fee structuring arrangements. The Service on page 9 of the FSA states, “where attorneys entered into a structured settlement which called for deferred payments of their fee, and the settlement was entered into prior to obtaining an unconditional right to compensation for their legal services, the court held that they had not constructively received income upon the purchase of the annuity contracts meant to provide payment for the legal services fee” (citing Childs v. Commissioner).