Based on long standing tax doctrine, outlined in Section 468(b) of the Internal Revenue Code, the qualified settlement fund (QSF) is a specific type of trust available to all attorneys. QSFs work as a temporary holding and distribution vehicle for settlement funds. While the funds stay in a QSF, there is no constructive or actual receipt of the settlement or the fee – you and your client have not technically received them yet. No receipt means no income, revenue, or tax liability, and all planning options remain available. You gain 100% income recognition, and there is zero tax burden.
Qualified settlement funds allow for a case to settle like normal and funds to be distributed to plaintiffs, lienholders, and co-counsel as appropriate. Meanwhile, all or a portion of your fees may remain within the QSF. Fees that remain within a QSF do not have to be taken as income or revenue. Instead, they can be placed pre-tax into a tax deferred investment account, commonly referred to as an attorney fee structure. This allows you to spread out the tax burden of your fee over a period of years and potentially avoid a higher tax bracket while reaping the benefit of tax deferred growth on your pre-tax fee.
With attorney fee structure, you’ll receive future payments based on a schedule that is 100% customizable. There is no limitation on duration, size, or framework. To the new attorney, it could mean an early retirement. To the longer-practicing attorney, it might be a child’s college fund. To the older attorney who might be nearing retirement, it’s like an unlimited 401(k). For eligible attorneys, fee deferral is the most powerful financial planning tool out there.
Which attorneys can structure their fees?
Anyone who settles contingency fee cases can defer. People who work in mass tort litigation and class actions have used this wealth planning vehicle for decades. Personal Injury attorneys can maximize their fee returns. Their injured clients can do something very similar with their settlement, except their investment account is generally 100% tax exempt.
But what if I don’t settle million-dollar cases or run a large law firm?
It doesn’t matter if your fees and/or firm aren’t huge. You can pool fees within a QSF. Think about it; a dozen small fees pooled together for a solo practitioner becomes a BIG fee deferral. If you’re settling contingency fee cases of any size and you do not yet use a qualified settlement fund, call our team before you settle your next case.
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).