Most plaintiff attorneys are familiar with the advantages of structured settlements for their injured plaintiffs. What many attorneys don’t consider are the benefits of deferring fees. Contingency fee attorneys have the unique opportunity to use attorney fee deferrals as a building block for a successful estate planning strategy. In order to reap the benefits of a fee deferral, though, there are certain guidelines that must be followed.
How Do Fee Deferrals Work?
Establishing an attorney fee deferral is very similar to the process of arranging a structured settlement. Once a settlement amount is agreed upon by both sides, the defendant/insurer pays the amount of the attorney’s fees to an assignment company. The assignment company uses the money to purchase the annuity selected by the attorney. The structured annuity provider then sends payments directly to the attorney based upon the payment stream designed by the attorney.
One of the most attractive aspects of the attorney fee deferral is the flexibility in design– payments can be made monthly, quarterly, annually, or in deferred lump sums. You can choose to defer your fees even if your client does not want to structure their settlement. However, in order to take advantage of deferred fees, you must elect to do so before the settlement is finalized, and you must include the appropriate language in the settlement agreement. If you have already received your fees or have not included the appropriate language in the settlement agreement, then you have lost the opportunity to structure.
Preserving Your Hard-Earned Fees and Creating a Predictable Source of Income
Spreading out your income over time can help prevent you from being bumped into a higher tax bracket. For an attorney who earns $350,000 a year and files joint taxes with a spouse, one big fee could bump you from the 33% federal income tax bracket to the 39.6% federal income tax bracket. Instead of losing another 7.6% of your hard-earned money by taking the fee in the form of a lump sum, if you were to structure that fee, you would only owe taxes on the payments during the year in which they are received. In California, the tax implications are even more severe, with top earners losing another 12.30% in state taxes. A fee deferral strategy could possibly allow your family to remain in the 33% federal tax bracket, and preserve more of the fees that you worked so hard to earn.
Structured fees can offer returns comparable to those of traditional fixed-income investments. Because the establishment of structured fees often involves less overhead expenses than traditional investments, a fee structured at a lower interest rate (e.g. 4%) could match the return of a traditional investment (e.g. 6.62%). Even more appealing, the rates for structured fees are guaranteed, providing you with a stable and reliable tool for wealth building.
When establishing the fee deferral, you can also choose to have lump-sum payouts for predictable future expenses. Attorney fee deferrals are ideal for expenditures such as overhead expenses for your law firm, college planning for your children, and retirement planning.
What Other Advantages Do Attorney Fee Deferrals Offer?
The advantages of fee deferrals are far-reaching and include: