Understanding Attorney Fee Structured Settlements: A Smart Tax and Investment Strategy

Structured fee settlements are a powerful tool for attorneys looking to optimize their financial outcomes. This strategy allows lawyers, particularly those working on contingency cases, to defer their fees and the related taxes. Instead of receiving a lump sum, attorneys can choose to spread their income over several years, which can lead to significant tax savings.

Key Advantages of Fee Structures

• Tax Deferral: When an attorney receives a large fee from a case settlement, it can push them into a higher tax bracket for that year. By deferring these fees, taxes aren’t due until the funds are actually received. This allows attorneys to spread out their tax liability over time, which can significantly reduce the total taxes paid. For example, if an attorney defers $500,000 over five years, they pay taxes only on the portion received each year rather than on the entire sum immediately.
• Investment Growth: In addition to deferring taxes, structured settlements provide the opportunity for attorneys to grow their money tax-free. The funds are typically invested in financial products like fixed or market-based annuities. While a fixed annuity guarantees steady payments, market-based structures allow attorneys to potentially earn higher returns by investing in portfolios managed by financial advisors.
• Flexible Payment Options: Structured settlements can be tailored to the attorney’s financial needs. Payments can be set up to occur monthly, quarterly, annually, or even in lump sums at specific future dates. This flexibility is particularly beneficial for retirement planning, offering a stream of income that complements traditional retirement accounts like 401(k)s and IRAs without the contribution limits imposed on those accounts.

Exploring Structured Settlement Options

1. Fixed Annuity Structures: Fixed annuities provide guaranteed payments over a specified period. These payments are determined when the structure is established, making it easier for attorneys to plan their financial future. This option is ideal for attorneys seeking steady income and lower risk.
2. Market-Based Structures: For those looking for greater growth potential, market-based structures allow attorneys to defer their fees into market investments. These funds are managed by financial advisors, offering the chance for higher returns, although with more risk compared to fixed annuities.
3. Fee Structure Plus (FSP): A more advanced option, FSP allows attorneys to diversify their deferred fees by investing in non-traditional products. These investments are typically managed by a financial advisor, which can help attorneys achieve a higher rate of return than a fixed annuity might offer.
4. Qualified Settlement Funds (QSF): If a case involves multiple claimants, a Qualified Settlement Fund can be established. This acts as an intermediary between the defendant and the plaintiffs and enables attorneys to structure their fees without directly involving the insurance carrier or defendant.

Legal Precedents and Tax Treatment

Structured attorney fees are treated similarly to non-qualified deferred compensation, meaning that taxes are not paid until the funds are received. This tax treatment is backed by legal precedents like Childs v. Commissioner, where the court ruled that as long as the attorney does not take constructive receipt of the funds immediately, they are not considered taxable until the payments are received.

Long-Term Financial Planning

Structured attorney fees offer more than just immediate tax relief. They act as a key component of long-term financial planning. Attorneys can use them to create a personalized retirement plan that isn’t subject to the contribution limits of traditional plans. This can be especially beneficial for attorneys who experience large, irregular income from contingency cases.

Moreover, structured settlements provide enhanced creditor protection compared to other types of investments. This is an attractive feature for attorneys concerned about protecting their assets.

Conclusion

For attorneys looking to optimize their income, reduce their tax liability, and build a long-term financial strategy, structured fee settlements offer a flexible, beneficial solution. By leveraging structured settlements, attorneys can manage their tax burden, grow their investments, and enjoy a steady income stream that aligns with their financial goals.

By working with experts in structured settlements, attorneys can tailor their fee structures to suit their unique needs, ensuring they maximize their financial potential while minimizing tax exposure.