Structuring Attorney Fees

Structuring an attorney’s legal fee is very similar to structuring a claimant’s settlement. The same rules and tax principles must be followed in order to protect the tax benefits of any structured attorney fee arrangement. However, you should negotiate the inclusion of the fee structure when settling the case since the creation of a tax-deferred fee structure does require the cooperation of the defendant similar to when the victim’s settlement is structured.

The U.S. Court of Appeals for the 11th district affirmed in Richard A. Childs, et al. v Commissioner of Internal Revenue, 103 T.C. No. Docket No. 15639-92 (Childs Ruling) that attorneys who defer the payment of their fees pursuant to a structured settlement arrangement are not required to include the legal fees generated from a settlement, judgment or verdict in their taxable income until such time that fees are actually received pursuant to the payment stream outlined in their structured settlement annuity policy.

The Childs Court found that attorneys’ fees are first the property of and received by the claimant and then, once paid and received, become the property of claimants’ attorney. Therefore, a claimant can elect to pay his or her attorney over a period of time rather than in one lump sum payment upon the resolution of his or her claim. As a result, an attorney is able to earn interest on his or her fee prior to paying income taxes on those fees, because the fees are only subject to income taxation following the actual receipt of a structured attorney fee annuity payment. In essence, the claimant agrees to pay the attorney’s fee over a period of time and then purchases a life insurance annuity to ensure that these payments are made on time.

One of the most important aspects of protecting the potential tax benefits available through a structured attorney fee is not to take receipt of the any of the settlement proceeds that are to be used to purchase an annuity that will provide for the structured attorney fee arrangement. If an attorney takes receipt/possession of the portion of the settlement that is intended for structuring, whether through actual receipt (in your trust account) or constructive receipt (through bad or poorly drafted settlement documents), the ability to structure the fees on a tax-deferred basis is not an option.

A key concept to remember is that regardless of the nature (taxable or non-taxable) of the underlying settlement, attorneys’ fees are structured on a tax-deferred basis and are not tax-exempt. Taxes will be due on the attorneys’ fees once received by the attorney as income and he will be required to file a 1099 with the IRS for the total amount of income received in the year it is received.

However, structuring your attorney fees could provide beneficial tax relief as well as secure and stable tax deferred income up to, and including, the remainder of your lifetime.

Advantages for the Attorney

• It is a pretax investment in a guaranteed tax deferred annuity.
• Deferring compensation over time results in less being lost to taxes.
• Custom payments can create a supplemental retirement fund.
• Triggering of AMT can potentially be avoided.
• Gives you custom cash flow management and allows you to tailor your own income stream.
• Structured fees have enhanced protection from creditors, judgments and divorce decrees.

COMPARE THE INVESTMENT VALUE OF STRUCTURING $200,000 IN ATTORNEY FEES VERSUS A CASH INVESTMENT OF $200,000 

Fee structures are not suitable for every attorney. Determining whether or not a fee structure is appropriate for you will depend on a variety of factors, which include the following: your age, health, risk tolerance, retirement goals, tax bracket and your current and long-term needs.

Contact our office for a free consultation.

Attorney Fee Structures – FAQ

Does the personal injury victim have to structure a portion of their settlement before the attorney fee can be structured?

• No. The claimant can take one hundred percent cash and the attorney fee can still be structured.

How does fee structuring work?

• Structuring an attorney fee works very similarly to structuring the victim’s settlement. The most important thing to remember is you can’t take receipt of the fees.

Why structure my attorney fee in a fixed interest rate annuity?

• Every portfolio should have some portion of the investments in fixed income. An attorney fee structure is a fixed income investment but unlike all others an attorney can make, the fee structure is a pre-tax investment. Whether a fee structure is appropriate for you will depend on a variety of factors, including your age, health, risk tolerance, retirement goals, tax bracket as well as your current and long-term needs. However, structuring your attorney fees could provide beneficial tax relief as well as secure and stable tax deferred income up to, and including, your lifetime.

Can I receive the same types of income streams the victim can with their settlement proceeds?

• Yes, you can have lifetime benefits. You can have a period certain for a defined amount of time or a future lump sum payment as well as a series of lump sum payments. You can select immediate or deferred payments. You can have multiple income streams such as lifetime payments coupled with lump sum payments.

Can I only structure contingent fees from a personal physical injury or wrongful death settlement?

• No. You can structure contingent fees from nearly any type of settlement. Companies have developed innovative products to expand the availability of attorney fee structures.

What is the legal basis for structuring attorney fees?

• The U. S. Court of Appeals for the 11th Circuit affirmed in Richard A. Childs, et al. v Commissioner of Internal Revenue that attorneys may structure their fees, holding that taxes are payable on structured attorney fees when the amounts are received. See Childs v. Commissioner, 103 T.C. 36, aff’d 89 F.3d 856 (11th Cir. 1996).

What do I need to do to prepare for structuring my attorney fees?

• You should negotiate the inclusion of the fee structure when settling the case since the creation of a tax-deferred fee structure does require the cooperation of the defendant similar to when the victim’s settlement is structured.