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The power of attorney fee deferral as a wealth management strategy cannot be overstated. Available only to attorneys who earn contingency fees, it allows for better planning of income, a stronger long-term financial strategy, and major tax benefits. Not only do attorneys earn more from the tax-deferred growth on their fees, but by controlling the receipt of income, they can better strategize around tax time year over year.

Attorney fee deferral has been an available option for trial lawyers since 1994. In Richard A. Childs, et al. v Commissioner of Internal Revenue, the 11th Circuit U.S. Court of Appeals ruled that any attorneys involved in tort cases under contingency fee agreements may receive their fees in the form of periodic payments instead of in one lump sum. The IRS followed up with comprehensive tax guidance for attorneys who defer their fees, namely in Notice 2005-1 and Private Letter Ruling 150850-07.

What happens if an attorney is about to receive a referral fee? Can a referral fee be structured under the same IRS rules?

The short answer is yes, the same rules apply to contingency fees collected from a referral – even if the referring attorney’s name is not on the settlement documents. In the eyes of the IRS, that fee is still income earned from a settlement, so the receiving attorney can still structure the fee as long as he or she does not take receipt of funds as, say, a check from the other firm. The fee deferral arrangement must happen before settlement.

To defer an attorney referral fee, the settlement will need to be placed in a qualified settlement fund. A qualified settlement fund is a Section 468B trust that holds settlement proceeds – including attorney fees – past the conclusion of litigation. There is no constructive receipt of the fee while the money remains in the fund. During this time, the referring attorney may work with a professional settlement planner to design a customized deferral arrangement. Milestone establishes and manages qualified settlement funds for single cases and for firm-wide use. When a QSF is not the preferred option, Milestone also offers a proprietary alternative for referring attorneys to still be able to structure their fees.

If you’re interested in discussing fee deferral – whether with a contingency fee or a referral fee – the team at Milestone would be happy to answer your questions. There is no obligation when you call.

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