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John Bair
John Bair
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Designing a Future Plan for Personal Wealth: Attorney Fee Deferrals

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When compensation is built around contingency and caseload, it’s easy for trial lawyers to hyper-focus on results and correlate cumulative legal success with personal financial success.

However, having worked with trial lawyers from all walks of life, locales, and backgrounds for close to two decades, too often I’ve seen the reality: some of the most successful trial attorneys focused all of their energies on trial and practice building, and they didn’t begin sidelining money early enough in their careers. As a result, many look back on decades of settling good cases and realize they’ve obtained only partial success in building their own personal wealth.

attorney structured feesWhere does the unfortunate cycle start? For one, trial lawyers tend to throw every fee right back into the practice to grow it, or they dedicate it to the next enterprise or mass tort. This self-confidence is natural, and it’s what makes great trial lawyers great.

However, confidence and good legal work are only half the battle when an attorney is working toward financial success. Without removing some money from the practice and putting it away, years of working on successful cases many not significantly change an attorney’s financial situation at home. In addition to being a great lawyer, it’s crucial to have an overall plan in place – one that allows an attorney to build personal wealth and manage the cash flow at his or her firm at the same time. Structuring attorneys’ fees can be one effective part to that plan.

A common philosophy is that lawyers should get fees in the door in case they need cash the following year. It’s understandable to be cautious, but it’s crucial to start planning wealth accumulation as early as possible.

A paradigm is shifting in our field, as the roster of leadership appointments continues to diversify. Young trial lawyers are conquering major roles in the legal profession. Female attorneys are closing the gender gap. As every trial lawyers’ professional success begins to blossom, they should be thinking about their own personal wealth and how to build it. The answer for many is a plan involving structured fees.

Controlling Income with Structured Fees

Since 1996, trial lawyers have been able to control the timing of their fee income and its taxation – it’s one of the biggest benefits to attorney fee deferrals. Taxes on attorneys’ fees are due when a lawyer receives them as income. So, when a client pays his or her lawyer’s fees from a resolved claim over time (instead of paying in one lump sum), the attorney only has to pay income tax upon actual receipt of those smaller, incremental, structured fee annuity payments. An attorney is then able to earn interest on those fees prior to income taxation.

There are Many Options

Current interest rates have negatively affected the popularity of structured attorneys’ fees, but there are several options. Longstanding tax treaties allow assignment companies outside the U.S. to own the accounts for your periodic payment, so you can participate in the market. The growth vehicle for your deferred fee is no longer limited to fixed annuities. Want your pretax fee to grow in the SP500 or another sector of the market? No problem.

Planning for the Future Makes All the Difference

Accumulation and disciplined savings is what makes businesspeople wealthy. Whether you’re an equity partner, associate, or even brand new to the trial bar, it’s never too early to start planning. The attractive tax treatment of a deferred fee is reason enough to get to know the strategy well. Talk to the experts and understand it. It’s good for your practice and your financial mindset.