ATTORNEY FEE DEFERRALS 2024
Attorney fee deferral is a compelling and helpful pre-tax investment tool for income tax, financial and estate planning that’s available to contingency fee lawyers and law firms .
When you defer your attorney fee, you have a larger fee deferral starting point. All of your attorney fee can be working for you, not just the after-tax amount. As the size of the attorney fee deferral increases, the more the impact on your long term growth over time. The difference could be hundreds of thousands dollars or more.
Structured attorney fees are also known as structured legal fees, attorney fee structures or simply "fee structures". The terms generally refer to an annuity funded deferral mechanism. There are fixed, indexed options and hybrid options for structured attorney fees,
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Contingency fee attorneys can defer legal fees through the use of a fixed structured settlement annuity, funding agreement or an index linked structured settlement annuity. You select the amounts and payout dates at the time of the deferral. With the exception of fixed index structured settlement annuity payment adjustment options , the rate of return is fixed .
Structured settlement annuities are issued by large well-capitalized life insurance companies that are highly regulated, just like the structured settlements established for the attorney's clients. The process for setting up structured attorney fees is very similar to the process for the attorney's or law firm's clients.
Contingency fee attorneys have a market-based option through the use of an investment account that follows the well-established deferred compensation plan rules and guidelines. There is an investment account option that provides additional flexibility for payout dates. Rather than having to decide when payments will be made, under this approach, attorneys can decide at a future date when they would like to receive those future payments.
As attorney fee deferral experts, we listen to your needs and help you navigate the choices.
There are several attorney fee deferral tools on the shelf and the variety of options is expanding:
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non-domestic assignment companies and where they may be appropriate
Payments may be exempt from creditors. For example, the ruling
In re John J. Lynch, Debtor, 321 B.R. 114 (S.D.N.Y., Feb. 10, 2005) found that that payments from the CNA annuity funding the attorney fee structure, which attorney. John Lynch accepted in settling a 2003 case, was not available to creditors in bankruptcy. Lynch filed for bankruptcy in 2004. When the Bankruptcy Trustee tried to use the annuity to pay Mr. Lynch’s creditors, Mr. Lynch resisted, arguing that to do so would pose a hardship on him. Applying New York law, the U.S. Bankruptcy Court sided with Mr. Lynch and ruled that the annuity was exempt from the reach of creditors. A similar conclusion under Louisiana law was reached in
Canfield v. Orso, 283 F.3d 686 (5th Cir. 2002) . In that case, the Court of Appeals for the Fifth Circuit also held that an attorney fee structure was beyond the reach of the attorney ’s creditors. These rulings are helpful, but readers should realize that each state has its own bankruptcy exemptions that might be applied to reach a different result.
The U. S. Court of Appeals for the 11th Circuit affirmed in Richard A. Childs, Et al. v Commissioner of Internal Revenue 103 T.C. No. 36 Docket No. 15639-92 (1)(2) that attorneys may structure their fees, holding that taxes are payable on structured attorney fees when the amounts are received. (3)
The Court held that the fair market values of the taxpayers rights to receive payments under the settlement agreements in the case were not includable in income under Sec. 83, in the year settlement agreements were effected, since the promises to pay under the structured settlements were neither funded or secured and thus did not meet the definition of property for purposes of Sec. 83 The Court further held that the doctrine of constructive receipt is inapplicable because the taxpayer had no right to receive the attorney’s fees prior to the time the agreement fixing a structured settlement was entered into.
Citing Childs v Commissioner the IRS issued a Field Service Advisory (200151003) on December 21, 2001 concerning constructive receipt and attorney fee structuring arrangements. The IRS, on page 9 of the Field Service Advisory 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".
The IRS also cited Childs, among other cases, in issuing PLR 200836019 in an employment case where it ruled that the employee was not deemed to have received any payments when the employer paid funded the structure with the assignment company.
Section 409A of the Internal Revenue Code (included in the American Jobs Creation Act of 2004) initially brought concerns of changes to the tax treatment of structured attorneys’ fees. The Department of Treasury ("Treasury") and Internal Revenue Service issued comprehensive guidance interpreting new Section 409A. The guidance in Treasury Notice 2005-1 excludes most service provider arrangements from the scope of Section 409A. The Treasury Notice states:
A-8…Section 409A…DOES NOT APPLY to arrangements between a service provider and a service recipient if (a) the service provider is actively engaged in the trade or business of providing substantial services, other than (I) as an employee or (II) as a director of a corporation; and (b) the service provider provides such services to two or more service recipients to which the service provider is not related and that are not related to one another.
The guidance cautions that other tax principles may apply. Careful planning must be done in advance should you wish to structure your attorney fees or use a deferred compensation payment plan! We can help. There's no reason to feel intimidated by this, but don't wait until the last minute! Call 4structures.com, LLC toll-free at 888-325-8640!
Generally, an attorney or law firm can structure a portion (or all) of their fees when:
It is not necessary to establish a qualified settlement fund in order to structure or defer attorney fees. There are a few settlement planners who aggressively push qualified settlement funds and misrepresent that it's the only way for you to benefit from structured attorney fees or other attorney fee deferral programs. There are many options that do not need a QSF.
It is also recommended that attorneys contemplating attorney fee deferral strategies, consult with competent tax counsel prior to entering into a structured attorney fee or any other form of attorney fee deferral transaction.
(3) Although the 11th Circuit Court of Appeals upheld the deferral of attorney fees in Childs, attorneys should be careful not to rely too heavily on it. The facts in that case are quite specific and the result reached in Childs should not be relied upon in cases that are materially dissimilar. However, it should be noted that the IRS has cited to Childs in subsequent Private Letter Rulings.
(4) Copy of March 2023 Legal Opinion Obtained by Pacific Life in relation to December 2022 IRS GLAM
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Last updated January 1, 2024
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