Both structured attorney fees and attorney fee deferred compensation programs, are tax efficient methods of addressing the individual financial needs of an attorney or business objectives of a law firm. Structured attorney fees are also known as structured legal fees and attorney fee structures. We have several attorney fee deferral tools on the shelf. We're dedicated to ensuring that we take care of all of our clients, and that their settlement planning needs are met and exceeded. We offer high-quality settlement planning, financial planning and Sudden Money® transitional planning advice and personal client service.
Why Structured Attorney Fees or Structured Legal Fees?
Bankruptcy and Structured Attorney Fees
- Structuring attorney fees or legal fees over several years, or even deferring them out further, may help attorney or law firm, taxpayers avoid a higher marginal tax bracket, allowing the money saved (resulting from deferred current income taxes) to be invested at little to no risk with no initial or ongoing money management fees. The attorney or law firm (In the case of an attorney fee structure where law firm is payee) receives a 1099 in the year in which structured attorney fee payments are received.
- Provide a source of guaranteed income to the attorney or law firm to match up against future expenses.Structured attorney fees can be fully customized. You
define your future without the market risk.
Those attorneys who have more risk tolerance now have options too. Contact us for details.
- Attorneys OR law firms can smooth out future cash flow.
- Attorneys or law firms can effectively achieve the results of a qualified pension plan without the annual administrative and regulatory burden required of employee benefit plans.There is no need to wait age until 59 1/2 before receiving distributions.
- Structure attorney fees enable lawyers to replicate Social Security and defer taking Social Security until age 70 when benefits will start out a higher amount. Deferring from normal retirement age to age 70 will result in 30% higher monthly Social Security payments. Normal retirement age is 66 for lawyers born 1943-1959 and age 67 for lawyers born after 1960.
- Structured Legal Fees or Structured Attorney Fees are not subject to annual qualified pension plan contribution limits. Lawyers getting close to retirement who need to catch up can layer several structured legal fee payment streams from several cases to build an income portfolio, or fill income gaps. You can use structured attorney fees on a case by case basis.
- Provide a source of funds for future buy-sell agreement.
- On cases with certain types of taxable damages you can help mitigate your clients' exposure to the Alternative Minimum tax (AMT) in the tax year of the settlement.
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 the CNA annuity from an 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.
Structured Attorney Fee Example: to Fund Retirement: Structured Attorney Fees with cost of $ 500,000*
Structured legal fee plan designed to fund retirement starting in 20 years, payments of $4,621.89 per month ($55,462.88 annually) for life, with 20 years certain to be paid whether or not the attorney survives the payment schedule. The IRR is in line with with long term bonds.
*example assuming 45 year old male and book rates of an A.M. Best rated "A+" structured settlement annuity issuer available during the week of September 25, 2017 for illustrative purposes. Some structured annuity issuers offer a joint and survivor payment option as well as indexed linked structured attorney fees,
Related Tax Information
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.
Therefore careful planning must be done in advance should you wish to structure your attorney fees or use a deferred compensation payment plan! There's no reason to feel intimidated by this, but don't wait until the last minute! We can help you. 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:
1. The attorney's or law firm's contingency fee agreement permits the structuring of all or a part of attorney's fees. Other critical issues to be addressed, arise out of the form of business under which the law firm operates and such issues (and their impact on the law firm or is partners or shareholder ability to structure legal fees) will vary from law firm to law firm.
2. The attorney or law firm does not have constructive receipt of the funds. Extra care should be taken in drafting settlement documents.
3. The guidelines set forth in the Childs case are followed
4. The requirements and/or guidelines of the structured annuity company, or the deferred payment solution facility, are followed.
5. The insurer or defendant does not object to structured attorney fees. Travelers, for example, has a long standing bar on participating in structured attorney fees. This can be problematic if the fees an attorney or law firm wishes to structure arise from a case against a Travelers insured, it's December and there are no other co-Defendants or Insurers whose contribution to the settlement funding amount can be used. A few other companies will only allow the attorney to structure if the plaintiff structures as well. Plan accordingly by involving a structured attorney fee expert in advance of case settlement to go over your settlement planning options.
It is also recommended that attorneys contemplating structured attorney fees or structuring legal fees consult with competent tax counsel prior to entering into a structured attorney fee transaction.
Helpful articles and media on Structured Attorney Fees and Attorney Fee Deferral Plans
(3) Although the Tax Court 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.