What would this old trial lawyer tell you about structured fees? More than likely he wishes he had done more, and earlier in his career.
A “structured legal fee” or structured attorney fee can sound like a financial product, however it’s actually an amazing deferred compensation mechanism just for lawyers on a contingency fee. Patent, Intellectual Property, Whistle Blower, Employment Discrimination and Personal Injury are all types of cases in which the lawyer, at the time the case is settling, can consider whether they want their income, or not. Business executives, Doctors, Athletes, Actors alike are crooning with jealousy.
The recent tax law changes have made it harder for high income earners to take deductions, and to save more of their hard earned money. Only plaintiff lawyers on a contingency fee contract can defer or “structure” their fees. It works like this: back in the day, defendants used to pay an assignment company, and that assignee would purchase an annuity for the lawyer. Since 2003, the same legal tax doctrine since 1996 that allows for attorneys to defer their income, may have it invested in a professionally managed portfolios. Structured fees offer invaluable increase in deferred taxation, pretax investing, asset protection and greater wealth generation in the highest income years of a lawyers practice.
Plaintiff lawyers eat like snakes. Some only every few years. The peaks and valleys of income can wreak havoc on their taxation. Structured legal fees provides our clients with the ability to decide when it is best in their life to receive their income. Over the next ten years? No income for 5 years, and then 10 years of payments. Or a traditional retirement income starting at age 65? All possible.
These arrangements don’t fall under 409A, and therefore can be done on the day a case settles. Meaning their is no election period. The release from the Qualified Settlement Fund created for the case must reflect irrevocable periodic payments.
Will lawyers save on taxes? It depends. Assuming you defer a $1,000,000 fee, most attorneys recognize they can be earning money on the full 1M, instead of just the net after tax amount of $550,000. This may provide the lawyer with the ability to work the money with lower risk, or to grow the asset base pretax, and realize the income when their traditional sources of income drop off, such as the retirement of a spouse, or a natural slowing of their own legal practice.
In my opinion, when done properly, there is zero risk the payments will not be made. The security the lawyer has in the “obligation” is secured through a default judgement against the account holder. These security features do not obviate the mere promise to pay doctrine. Secured Creditor status was codified by the IRS for periodic payments back in the late 1980’s. The Technical and Miscellaneous Revenue Act of 1988 (TAMRA) and Private Letter Ruling 9125017 paved the way for a security blanket around the obligations set forth in periodic payments.
Childs v. Commissioner is the tax law that applies to these obligations, and was further solidified after the passage of 409A, as well as the Revenue Procedure issued by the IRS, that allowed claimants and their attorneys to elect periodic payments as part of their claims against the Victims Compensation fund(Revenue Procedure 2003 – 115). The IRS lost in Childs and has not taken up another case in 22 years in any lower tax court in the US regarding structured fees.
Our suggestions for making this tax deferral available to you and potentially your partners is to establish a QSF prior to settlement, have your contingency fee agreement specify that the lawyer can elect to defer fees. Payment of settlement should be negotiated to be paid to a QSF, and the general release need only include a “payee” change to the Smith Jones Settlement Fund etc. As a practicing attorney, getting your client on board with payment to a QSF instead of your escrow account is advisable. QSF’s are valuable to plaintiff’s too, for liens, creating time to plan, whether that be a special needs trust or structured settlement.
Lawyers new to this concept are well advised to spend time with a settlement planning expert, that can navigate the legal, financial and tax structure that will suit you best over time. After all, the IRS is your silent partner in everything income related, what a gift to be able to decide when you would like to pay them their vig.
A West Point graduate where he served as captain and military aviator, John Bair continues his commitment to our country through his efforts within the settlement planning industry. He has represented families of victims lost in the Flight 3407 crash, offered pro bono services to the families of 9/11 victims and drafted the first consumer protection bill for plaintiffs (H.R. 3699).