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Legal Fee Structures

A Unique Opportunity for Growing Personal Wealth and Managing Insecurity

As a plaintiff attorney who does contingency work, you face unique pressures and bear many responsibilities. You have, however, access to a significant tax benefit that nobody else has: the ability to defer an unlimited amount of compensation on your contingency fees and elect to have those funds directed on a pre-tax basis toward an array of fixed income and/or market-based products. You can choose exactly how and when you wish to receive the resulting income, or “periodic payments” from such a transaction. Many plaintiff attorneys say that it’s incredibly stressful having to make one good settlement sustain them for several years; with attorney fee structures, those stressful days of uneven income could be over.
Grossly underutilized by attorneys, fee structures offer two tax distinct advantages: 1) deferment of current earned income and the taxes on that income and 2) deferment of taxation on the interest earnings prior to distribution. Through a legal fee structured settlement you can defer tax liability until the year(s) in which you receive payment, while electing to have those funds directed on a pre-tax basis towards a number of structured settlement vehicles. As eminent tax attorney Robert W. Wood writes, “Stretching out payments over time yields a better tax result….it can mean a lower overall tax burden.” Legal fee structured settlements offer the best of all worlds to contingency-based attorneys. An attorney can spread out tax liability while having the funds managed by an insurance company, trust company or a qualified and appropriately licensed financial services professional, without the limitations imposed by traditional qualified plans, such as an IRA or a 401k plan.

You may choose to structure all or a portion of your fees. You are the architect of how you receive these periodic payments and you decide the deferral period. With most qualified plans, you’re subject to penalties for accessing monies before 59 ½ and you have IRS mandated distributions at 70 ½. With a fee structure, you can plan to receive money immediately or much further in the future. You can receive one future lump sum, a series of lump sums, or you can take monthly, semiannually or quarterly payments or any combination. You can receive payments for a defined period of time or, when structuring with an annuity from an insurance carrier, it’s possible to receive a guaranteed stream of payments for life. You can structure as much money as you’d like in any given year—there are very few limitations on how you defer your compensation, so you have a great deal of flexibility as to the timing of your tax liability.

Need More Reasons to Structure Your Fees Instead of Taking Cash?
In addition to offering tax-deferred growth, a fee structure allows you to create a personalized financial plan that accounts for your specific needs.
You can:

  • Save for retirement, your children’s education, or for the years in which you anticipate working less.
  • Ensure solvency and income regularity from year to year.
  • Know that fee structures enjoy enhanced creditor and judgment protection that other investments cannot provide.

When Can You Structure Fees?
You can structure your fees…
…on any contingency fee case, not only on physical injury/wrongful death cases.
…on single-event claimant cases, mass torts and class action cases.
…on verdicts in special situations as well as settlements.
...independently of what your clients, co-counsel, and business partners do with their fees.

What are My Options for Structuring Fees?
When you’re weighing your fee structure options, remember that you can use different products for different cases and you can even use different products for the same case if the fee is large enough to warrant doing so. Your options:

The Structured Settlement Annuity. The fixed interest rate annuity offers security and peace of mind because you know that you will receive guaranteed fixed income in the customized design of your choosing. This option is unique in that it can provide for guaranteed lifetime payments, and/or increased payments over time to account for inflation. Market-Based Structured Settlement. If you want the potential for a higher rate of return, you should consider directing your pre-tax dollars to a market-based structure settlement product, such as Millennium’s Fee Structure Plus™. With that product, you can direct your fees towards most any equity or bond vehicle (remember that most qualified plans have a limited line-up of mutual funds), and you have the option of having your own financial planner or a trust company manage your money within a fiduciary capacity. With the assistance of a qualified and licensed financial services professional, you can create a diversified portfolio to meet your individual needs and risk profile. For the attorney who commonly receives his or her fees in cash and then invests in the market, it only makes sense to consider directing those fees, on a pre-tax basis, towards a tax-deferred vehicle such as Fee Structure PlusTM. As with any market-based product, the income stream is not guaranteed or steady, and you incur the same type of risks as you would have with typical investment accounts.

Treasury Funded Structured Settlement. U.S. Treasuries have long been the pinnacle of safety and security around the globe. Through a product such as the Treasury Funded Structured Settlement, you can now enjoy the benefit of U.S. Treasuries for your deferred contingency fees. The rate of return is fixed for the life of the periodic payments.

How Do I Make it Happen?
While you do have a legal right to structure your contingency fees (see Richard A. Childs, Et al. v. Commissioner of Internal Revenue Service), there are some necessary preemptive steps that you must take to preserve your ability to structure your legal fees. As with all structured settlements, you must secure defense cooperation to structure your fees. The most important point to remember is that if you want to preserve your client’s ability to structure recoveries or your ability to structure fees, you must not let defense write a check to you or to your firm’s trust account. If that happens, you’re considered in constructive receipt of the funds and can no longer enter into a structured settlement. When you have selected a structure plan, it’s at that time that your structured settlement company will request payment and give payment instructions to defense. If the appropriate steps are taken, the IRS should not consider you in possession of the funds until the year(s) in which you receive payment. To ensure that you understand your structured settlement options and how to exercise them, you should consult a structured settlement professional.

Don’t wait until “later” to take advantage of this unique opportunity. Remember that the longer you defer payments, the more of an opportunity you have to potentially receive a better rate of return on your fees. It behooves you to plan ahead and to consider how the fee structure options could fit into your overall financial plan.

1 “Legal Fee Structures Can Hedge the Insecurities Many Lawyers Face.” Los Angeles Daily Journal. 28 August, 2006. P.6

Margie Smith

Margie Smith is a structured settlement consultant (CA #: 0I11806) with Millennium Settlements. Please contact her with any questions (margie@msettlements.com). Millennium Settlements, Inc., or its agents or affiliates (MSI), do not provide advice or services related to the purchasing of, selling of or investing in securities or other financial instruments. Any discussion of securities contained herein is not intended or written to be used, and cannot be used, as advice related to the purchasing of, selling of or investing in any particular securities or other financial instruments. MSI does not provide legal advice or legal services, nor does MSI provide tax advice or tax services. Any discussion of legal or tax matters contained herein is not intended or written to be used, and cannot be used, as legal advice or for avoiding any penalties that may be imposed under Federal tax laws. To ensure compliance with requirements imposed by the IRS under Circular 230, we inform you that any U.S. federal tax advice contained in this communication (including any attachments), unless otherwise specifically stated, was not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any matters addressed herein.

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About the Author: Margie Smith is a structured settlement consultant (CA #: 0I11806) with Millennium Settlements. Please contact her with any questions (margie@msettlements.com). Millennium Settlements, Inc., or its agents or affiliates (MSI), do not provide advice or services related to the purchasing of, selling of or investing in securities or other financial instruments. Any discussion of securities contained herein is not intended or written to be used, and cannot be used, as advice related to the purchasing of, selling of or investing in any particular securities or other financial instruments. MSI does not provide legal advice or legal services, nor does MSI provide tax advice or tax services. Any discussion of legal or tax matters contained herein is not intended or written to be used, and cannot be used, as legal advice or for avoiding any penalties that may be imposed under Federal tax laws. To ensure compliance with requirements imposed by the IRS under Circular 230, we inform you that any U.S. federal tax advice contained in this communication (including any attachments), unless otherwise specifically stated, was not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any matters addressed herein.

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