In this economy, we are all looking for ways to increase our financial security. As attorneys, perhaps you've encouraged your clients to explore structured settlements, after taking into account the various tax advantages. You probably know that structured settlements provide guaranteed, consistent payments for a plaintiff, with the added benefit of being tax-free.
What you may not know is how to maximize your own tax deferrals. Deferring $17,000 a year for your 401(k) and $50,000 a year in profit sharing under qualified plans is undeniably valuable, but have you also explored the option of structured attorney fees?
Structured fees carry a one-time fee of 4%, compared to the cumulative costs of mutual funds and other investments that charge annual administration and fee costs, which can be seven to eight times the 4% fee.
If you are a conservative investor, it may be attractive to replace some of your fixed income assets that are rate-sensitive, short in duration, and low in yield. Many of our clients just choose to double what they typically defer in their profit sharing contribution, and take $50,000-$75,000 of fee to start an equally rewarding deferred income strategy that works outside of their traditional plans.
As we all know, current interest rates are at historic lows, but if you have to put 10,15, or even 20 percent of your fees into a profit-sharing plan for your employees just to get your deferral, that can become expensive and take years to recoup. While I certainly agree that doing right by your team is important, it's not the only way to create a deferred investment strategy. Any pretax earnings are a valuable piece of your overall financial strategy, especially in banner years.
The underwriting companies offer diverse and flexible plans, so if you are in a partnership, know that it's not all or none. Individuals, partners, or firms can leverage a structured attorney fee in lieu of traditional distributions. Obviously, each plan takes into account how your professional corporation or partnership arrives at those decisions.
What are the considerations of structured attorney fees?
- Defer income to yield a lower tax bracket
- Reduce tax obligation over time with set income distributions
- Contractural guarantees eliminate risk of loss of principal, pursuant to claims-paying ability of the issuing insurer
- Tax-deferred growth
- Plan for future financial goals (e.g. retirement, college) by arranging specific lump sum payments in key years
- Level cash flow for attorney or law firm, making your income level more predictable
How can you elect to do a structured attorney fee?
You must elect to structure fees prior to the end of the settlement. The contingent fee arrangement should specify that a structured fee can be elected at the conclusion of the case. An amendment can be made to the fee agreement to add such a provision, but must be made prior to the settlement.
Before your case settles, contact an experienced settlement planner who can help prepare the necessary paperwork and guide you through the process of structuring your fees.
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).