Managing unpredictable cash flows and massive tax obligations can make financial planning a challenge for lawyers who work on contingency cases. This is where attorney fee deferrals come into play—a smart financial strategy that ensures long-term stability, flexibility, and growth. By strategically deferring contingency fees, lawyers can take advantage of tax-efficient plans, market-based returns, and structured payment schedules tailored to their needs.
This blog will explore how attorney fee deferrals work, the financial benefits they offer, and the tools available to maximize earnings. Whether you’re a seasoned attorney or just starting your career, understanding attorney fee structures can revolutionize your financial outlook.
What is Attorney Fee Deferral?
Attorney fee deferral allows contingency-based lawyers to postpone receiving all or part of their fees. Instead of collecting a lump sum immediately, these fees are invested in tax-efficient programs or structured into manageable, periodic payments. This strategy defers taxable income to future years, helping attorneys manage both their tax liabilities and cash flow in a way that aligns with their financial goals.
The Benefits of Attorney Fee Deferral
1. Tax Efficiency
One of the biggest advantages of fee deferral is the significant tax savings. When attorneys receive a substantial lump-sum payout, they face hefty income taxes upfront. Deferring fees spreads the tax liability over several years, aligning with the attorney’s payment schedule. Using strategies such as Structured Settlement Attorney Fee eliminates the risk of “constructive receipt,” which ensures tax benefits remain intact.
Case Study Highlight:
The legal case of Childs v. Commissioner established the precedent for attorney fee deferral. The court ruled that attorneys could defer fees without incurring immediate tax obligations, provided the fees were transferred directly to a third-party assignment company. This ruling supports tax-efficient income strategies available to attorneys today.
2. Stable Income
Fee deferral transforms large, irregular payouts into reliable streams of income. Whether attorneys choose monthly, quarterly, or annual payments—or even future lump sums—they gain predictable cash flow, which is invaluable for long-term financial planning.
3. Long-Term Growth Potential
Deferred fees can be invested in market-based structured settlements, fixed income annuities, or non-fixed annuities. These options offer opportunities for growth, allowing attorneys to maximize their earnings over time. Attorneys can work with financial consultants to develop an investment portfolio that suits their financial goals and risk tolerance.
4. Customizable Payment Schedules
Whether you need payments to cover regular personal expenses or want to save for retirement, deferred attorney fees offer significant flexibility. Attorneys can tailor their payment timelines to meet ongoing financial needs or long-term goals like funding a child’s education or purchasing property.
5. Cash Flow Management for Law Firms
Deferring fees also benefits law firms. Law firms often face fluctuating cash flows based on the timing of settlements or verdicts. Structured attorney fees ensure your firm has consistent resources to grow, pay employees, and cover operational costs.
How Does Attorney Fee Deferral Work?
The deferral process begins during the settlement negotiation phase. Lawyers must outline their intent to defer fees within the settlement agreement. After the case is resolved, the fees are assigned to a third-party assignment company. This company manages the funds, creating a structured payment plan or investing in market-linked portfolios.
Step-By-Step Process:
- Indicate fee deferral in the settlement agreement.
- Assign deferred fees to a trusted third-party assignment company.
- Receive payments based on your chosen schedule (e.g., monthly, quarterly, annually).
- Pay taxes only in the year payments are received.
Key Consideration:
Deferrals must be planned early in the settlement process and comply with all IRS regulations.
Types of Attorney Fee Deferrals
1. Structured Legal Fees
Structured settlements involve fixed income annuities that guarantee periodic payments for the attorney. This option offers safety and stability, ensuring predictable income without market volatility.
Advantages:
- Guaranteed payments
- No recurring administrative or maintenance costs
- Ideal for conservative financial strategies
2. Market-Based Structured Settlements
With market-based options, deferred fees are invested in diversified portfolios managed by experienced financial institutions or advisors. This setup provides attorneys the opportunity to achieve higher returns while maintaining flexibility.
Advantages:
- Potential for higher yields
- Customizable investments aligned with individual or firm goals
3. Non-Fixed Annuities
Attorneys who prefer greater growth potential may choose non-fixed annuities. These options often come with annual fees but can offer significant returns over time. They balance the need for stable payments with the growth opportunities of market-linked investments.
Advantages:
- Growth opportunities combined with guaranteed security
- Options to reinvest dividends to maximize returns
Pro Tip:
Consulting with a financial advisor or structured settlement consultant helps attorneys choose the best option for their practice.
Tools to Help Attorneys Maximize Deferrals
1. Fee Structure Plus
This program combines tax deferral, market-related returns, and flexible periodic payments. Attorneys can diversify funds across various asset classes and design a payment schedule tailored precisely to their needs.
2. Settlements Plus
Offers attorneys market-based investment growth while deferring taxable income. This program is ideal for attorneys who seek flexibility and attractive long-term growth options.
3. Treasury Funded Structured Settlements
Best for attorneys who prefer the stability of government-backed annuities. This option guarantees safety and consistent payouts.
By partnering with trusted financial institutions and consulting firms, attorneys can make informed decisions that align with both short-term cash flow needs and long-term wealth accumulation goals.
Key Takeaways for Attorneys
Attorney fee deferral is a powerful financial strategy for contingency-based lawyers. By spreading out income, minimizing tax liabilities, and securing long-term growth, attorneys gain greater control over their financial future. Whether you opt for structured legal fees or explore market-based options, the right attorney fee deferral strategy can turn unpredictable cash flows into a stable foundation for you and your firm.
If you want to tailor a strategy that matches your unique needs, contact a structured settlement consultant today. At Structures, we specialize in helping attorneys maximize their earnings and protect their financial legacy.
