The Settlement Alliance

When Should You Consider an Attorney Fee Deferral?

When Should You Consider an Attorney Fee Deferral?

Dec 30, 2016

As the year winds down, we all begin to look at our finances—what we made this year, what we spent, and what will be waiting for us when we do our taxes in a couple of months. For contingency fee attorneys, tax time can provide an unwanted reality check if you suddenly realize that your attorney fee on a big case bumped you into a higher tax bracket. Luckily, there is a financial tool that can help—but you have to make sure it’s included in the settlement agreement.

What is an attorney fee deferral?

An attorney fee deferral is an arrangement in which a portion or all of your attorney fees on a case are used to purchase a structured annuity. You then receive payments over time based on a payment schedule of your design—monthly, bi-annually, annually, or in a few future lump sums. The rate of return is locked in when the annuity is purchased, so you get a steady, reliable source of income. More importantly, you only pay taxes on the money as it is received. It’s a great way to lessen your tax burden and retain more of your earnings.

Here’s an example:

Bob Smith is an attorney who files a joint tax return with his wife. Together, they bring in around $390,000 a year, putting them in the 33% tax bracket. Bob has already brought in the majority of his income for the year, but he just settled a case that will net him a $165,000 fee, pushing his family’s annual income to well over $500,000. That means that Bob and his wife will also be pushed into the highest federal income tax bracket of 39.6%. Did we mention that Bob and his wife live in New York State, where an additional 6.85% tax will be taken out of their income? That means that if Bob takes his entire fee as a lump sum, he and his wife will lose 46.45% of their income to taxes.

However, if Bob decided to structure his $165,000 fee, he could potentially stay in the 33% tax bracket by taking only a portion of the fee for the 2016 tax year. The remainder of the fee would be paid out over the next several years, during which time Bob would continue to pay taxes on the money in the tax year(s) in which it is received.

Other than the tax benefits, why would I want to defer my fees?

In addition to the potential for a lower tax bracket and less tax liability, fee deferrals can provide:

  • A stable source of future income. Some years business may be up, while others it may be down; your structured fees can provide you with a predictable source of income either way.
  • A limitless supplement for your retirement. Attorney fee deferrals offer benefits similar to traditional qualified retirement programs and IRAs—but without contribution limits.
  • A low-risk foundation for your investment portfolio. We all know that a diversified investment portfolio is the best approach—let your attorney fee deferral serve as the stable foundation that allows you to invest other funds in higher-risk investments.
  • A source of income for predictable future life events. Are your kids going to college in a few years? Do you plan to buy a vacation home down the line? You can set up your fee deferral to pay out in a few lump sums to pay for major life events.

Don’t wait- contact us today.

Attorneys across the country rely on The Settlement Alliance to help them develop attorney fee deferral strategies to meet their financial goals. Contact us today to learn more about your options.

Categories: Attorney Fee Deferral

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  • American general Life Companies
  • Berkshire Hathaway Structured Settlements
  • MetLife
  • Mutual of Omaha
  • New York Life
  • Pacific Life
  • Prudential