Structured Attorney Fees
Various Solutions To Meet The Attorney’s Needs
A Powerful Financial Tool that Provides Deferred Taxation…
Since 1996, federal courts have recognized an attorney’s ability to defer taxation of his or her fees by using an attorney fee structure. An attorney fee structure is a method of deferring income and taxation on the current year’s earned fees, while at the same time guaranteeing future income for retirement, children’s education, or other anticipated needs. Millennium Settlements offers several types of options for attorneys who want to defer income and taxes—from a traditional structured settlement annuity to the newest product, EAFS, which allows for the investment of fees in Vanguard Funds. Millennium Settlements is unparalleled in its experience of serving its attorney clients and ensuring customized plans that best meet their unique financial needs.
TYPES OF ATTORNEY FEE STRUCTURES
Structured Settlement Annuity
Attorneys can defer their fees and defer taxes into the year(s) in which they receive each payment(s). Each payment is fixed and determined at the time the structure is established during the settlement. The funding vehicle is an annuity that is from highly rated life insurance companies.
Enhanced Attorney Fee Structure (EAFS)
EAFS is also a structured settlement, but it allows the attorney to invest the fee in one or several pre-selected Vanguard Life- Strategy Funds that are administered by Midwest Trust. This unique product allows attorneys to structure fees, defer income, defer taxes, and have the ability to potentially earn a higher rate of return in the market. This product is for the attorney who is looking for a potential higher internal rate of return and desires more control over how his/her money is invested. As with the other attorney fee products, EAFS allows attorneys to have 100% of their fee go into the investment on a pre-tax basis, allowing for greater tax-deferred growth.
Fee Structure Plus (FSP)
FSP is a similar product to EAFS in that it allows the attorney to invest their fee in something other than a traditional annuity or US Treasuries in order to attempt to realize a greater rate of return on their investment. With FSP, the attorney has the flexibility to allow the funds to be managed by their own personal financial advisor or by an established and reputable trust company that has been designated for the program. If you want your fees to be invested pursuant to a comprehensive investment plan as decided by you and/or your advisors, but on a fully tax deferred basis, the compounding opportunity provided by FSP cannot be beat!
FREQUENTLY ASKED QUESTIONS
Must I structure my entire fee? Do my partners also have to structure their fees?
An attorney may structure all or a portion of the fee earned on a given case. It is not necessary for your partners to structure their fees as well. The portion of the fee that will be put into the structure will be paid directly to the life company. The remainder will be paid to the law firm, like any other settlement which does not involve a fee structure.
Are there any limitations on the amount of fees an attorney can defer?
There is no limit to the amount of income that can be deferred. By comparison, there are statutory limits to the amount one can defer in a traditional qualified retirement plan. Even if the attorney participates in a qualified retirement plan or an individual retirement account (IRA), he or she may still defer additional income through an attorney fee structure.
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 Service the Tax Court’s ruling that attorneys may structure their fees, and 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?
Your contingency fee agreements should include a provision that gives you the option to elect to receive your fees in the form of future periodic payments. You should negotiate the inclusion of the fee structure when settling the case. The creation of a tax-deferred fee structure does require the cooperation of the defendant, similar to when the personal injury victim’s settlement is structured.
The specific tax rules of a structured settlement are governed by Section 104(a) and Section 130 of the Internal Revenue Code. Once a settlement agreement is reached, it is irrevocable. As every individual and case is unique, a structured settlement is not right for everyone. Therefore, it is essential to seek appropriate legal and financial advisement.