Sage Settlement Consulting
As the legal system begins to recover from pandemic-related losses, many law firms have suffered layoffs, salary cuts, and overall downsizing. Now, plaintiff attorneys are considering ways to safeguard their finances and protect their businesses against future economic crises. One key solution is laddering attorney fees over time.
What are the tax benefits of attorney fee deferrals?
Attorney fee deferrals, available only to contingency fee-based attorneys, allow you to defer income tax and only pay tax on the portion of the money you receive that year.
Here is an example: You settle a $1M case and receive a net fee of $330,000. Assuming you are in the 35% federal income tax bracket, you will pay an additional $115,000 in federal income tax alone, netting only $215,000 after tax.
Conversely, you could choose to defer your fee. By having it distributed in a series of level payments over ten years, you would earn interest on the entire pre-tax fee and in the process, establish a predictable income stream to assist with the ebbs and flows of your business. You may also benefit from a reduced tax rate in the future should your tax bracket change for the better.
What can you do with your deferred fees?
You can place all of your fee deferral funds in a structured settlement annuity or create a hybrid plan by incorporating a market-based structured settlement. A market-based structure offers more significant growth potential and allows you to use your own financial advisor to manage the funds. Another provider offers the ability to purchase deferred lump sums now that provide additional earning potential if future interest rates rise.
Using deferred fees, you can:
- Stabilize your income during slower periods
- Pay for law firm overhead, including salaries and office rentals
- Pay for college
- Have a source of capital to reinvest in the future
- Supplement retirement savings
With attorney fee deferrals, you are not reliant on present market conditions to meet your financial needs. Additionally, by laddering several fee deferrals, you gain peace of mind that you will not outlive your income. Attorney fee deferral returns can vary based on timing and provider, and certain restrictions may apply.