Attorney Fee deferral Strategies for Tax Planning

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Attorney fee deferral strategies involve delaying the receipt of fees to a future date, often for tax planning reasons. There are several reasons a law firm, or solo practitioner may want to take advantage of these strategies. Here are a few common strategies:

  1. Structured Attorney fees: Attorneys can structure their fees using period payments, like structured settlement annuities, using a structured settlement advisor.

  2. Qualified Settlement Funds (QSFs): Attorneys can use QSFs to defer the recognition of income. Instead of receiving the settlement directly from a defendant, the funds are placed in a QSF, and the attorney only recognizes income when funds are distributed.

  3. Non-Qualified Assignment: Attorneys may use non-qualified assignments, such as a non-fixed annuity, to transfer their fee to a third party in exchange for periodic payments.

Tax Guidance for Structured Attorney Fees

Much like a structured settlement for injured plaintiffs, tax treatment hinges on avoiding constructive receipt. In Childs v. Commissioner, 103 T.C. 634 (1994), aff’d, 89 F. 3d 856 (Table)(11th Cir. 1996), the Tax Court ruled that because the attorney’s fees were transferred from the defendant directly to the assignment company, the attorney did not have constructive receipt of the fees; therefore, the fees did not yet count as taxable income. 

The use of these deferral strategies is not for everyone. A firm or attorney that’s in growth mode may need their fees right away to support expansion costs. While in growth mode, a firm is always looking for needed capital to continue its marketing costs, on top of funding existing cases. If this is your hrm, then perhaps these strategies might not be the best right now, unless of course you have a huge settlement come in that you know you can allow to cash flow over time.

A mature firm or attorney closer to retirement may be interested in creating a long-term revenue stream to support them in their future years. In myopinion, aside from large settlements that allow for cash flow over time, this is where these deferral strategies make the most sense. A mature firm (or solo practitioner) may not need as much in cash flow today to run their firm and if retirement savings wasn’t always on the agenda, deferring your current wins to long term annuities could help retirement be achievable at an earlier age

It should be noted that the ability to defer fees must be included in the settlement agreement, and the above noted deferral strategies should be discussed with your tax advisor and a reputable structured settlement agent. The information provided here is for general informational purposes only and should not be construed as tax advice. It is not intended to be a substitute for professional tax advice. Tax laws are always subject to change and individual circumstances may vary. Consult with a licensed tax professional for advice tailored to your specific situation.