Structuring attorney fees along with proper planning may reduce your tax liability. While the savings can be significant, incorporating an attorney fee deferral program into your practice can yield benefits beyond just tax savings. A well-designed fee deferral program offers a variety of benefits, from reducing your tax burden and enhancing your wealth accumulation to improving financial flexibility and helping you retain key associates. By utilizing a fee deferral program, attorneys can enjoy the same level of benefits and protections that corporate executives enjoy — providing a level of safety, service, and transparency that is unmatched across the industry.
A Better Way to Manage Income
Fee structures are a special kind of deferred compensation plan that allows you to receive periodic payments for fees instead of a lump-sum payment. And while payments from a fee structure are not tax free like your client’s annuity, taxes are deferred until you receive your payments. This increases the total amount of money you receive versus a lump-sum payment by spreading out your tax obligation over time.
More important, however, is the opportunity to better manage the income peaks and valleys typical of a contingency-fee practice with a steady stream of future income. For example, attorneys can structure their fees to cover office expenses each year so they can focus all their energy on new cases rather than worrying about the operating budget. And unlike qualified retirement plans, there are no restrictions on the amount of fee income you can structure.
Benefits, Opportunities and Beyond
The advantages and opportunities available to personal injury attorneys through structured legal fees do not end with tax savings. Structured attorneys’ fees may also provide the following benefits:
- Asset protection. Structured settlement annuities are technically not owned by the attorney and may be protected from creditors and even survive a divorce.
- Guaranteed income. Deferred fees can reduce the stress that often comes with an income based on contingency fees.
- Flexible design. Deferred fees can be set up and designed to meet your unique needs (e.g., lump sums, monthly income or deferred income).
- No restrictions on amount. Unlike qualified retirement planning options, there is no limit to the amount deferred via in a given calendar year.
- Distributions can start before age 59½. Unlike qualified retirement plans, distributions can start anytime.
- No mandatory employee participation. Unlike qualified retirement plans, there is no requirement that employees participate.
- Case-by-case. Each time a case settles, you have another opportunity to defer taxes on your fee. There is no long-term commitment as is required in other retirement planning options.
- Lifetime payments. Most solo practitioners don’t want to hassle with the formalities and commitments of establishing and maintaining a pension plan. Structuring your fees allows you to establish a personal pension plan without the headache.
- Source of capital for firm . Attorney fees can be structured to pay in future years to help smooth out the peaks and valleys associated with contingency fees.
- Incentive plan . You can apply “golden handcuffs” by promising deferred compensation to associates funded with structured fees payable to the firm. This can help you retain associates for the long term instead of paying a large cash bonus that might otherwise finance the launch of his or her new firm.
With combined federal, state and local tax rates approaching or exceeding 50%, a well-designed fee deferral program offers a variety of benefits. Fee deferrals can allow you to customize periodic payments based on an investment portfolio and, like a 401(k), the money can grow tax-deferred. However, unlike a 401(k), the account can allow flexibility over the timing of the income and the resulting taxation. By having more liquidity, you can plan for a better financial future.
About the Authors: Scott Hoover, Jeff Klugerman and William Mathews are settlement consultants with Ringler. Their united mission is to provide objective settlement solutions that create future financial stability and peace of mind for all parties involved in a case. For more information about Ringler or to learn more about your Florida Ringler Consultants, visit www.ringlerassociates.com, or contact your local Florida consultant directly:
Scott Hoover SHoover@ringlerassociates.com
Jeffrey Klugerman JKlugerman@ringlerassociates.com
William Mathews WMathews@ringlerassociates.com