by John Darer® CLU ChFC MSSC RSP CLTC
Personal injury trial lawyers can defer taxes on attorney fees in excess of what qualified plan limits by planning ahead and I can help.
Defer Taxes, Save , Grow
Trial lawyers have a variety of options for deferring their attorney fees:
I. Fixed Income Strategies [Structured Attorney Fees]
- Structured attorney fee funded via structured settlement annuity providing fixed return (qualified assignment)
- Structured attorney fee funded via structured settlement annuity providing fixed return (non qualified assignment)
- Structured attorney fee via periodic payment reinsurance
- Structured attorney funded with index linked structured settlement annuity from Pacific Life insurance Company or, for New York personal injury lawyers, Pacific Life and Annuity Company with payment adjustments based in changes in the S&P 500 index with 5% cap and no downside adjustments
- Structured attorney fee using US treasuries (Treasury Funded Structured Settlements)
II. Market Participation Personal Injury Attorney Fee Deferral Strategies [ Attorney Fee Deferred Compensation]
Historically, personal injury attorney fee deferral programs have been established by closely-held companies that lack the institutional backing and legal mechanisms required to assure the long-term security of the assets. They have also operated offshore and offered loans linked to deferrals, creating tax risks. The personal injury attorney tax deferred compensation solution that we offer through our partner, addresses these concerns.
- Large, independent institutions assure accounts are accurate and managed appropriately. Deferred fees held at BNY Mellon, acting as trustee, and tracked by The Newport Group, the country’s largest administrator of tax-deferred compensation for Fortune 500 executives, with over $75 billion in deferred compensation plans under under management. Attorneys enjoy 24/7/365 monitoring of values in their attorney fee deferred compensation account.
- “Single-purpose entity” status prohibits unrelated activities that could impact assets
- Onshore domicile and bona fide loans eliminate aforementioned tax risks
Benefits of Attorney Fee Deferred Compensation
- Reduce taxes. Enhanced Wealth Accumulation via compounding on a pre-tax, tax-deferred basis
- Improved investment Options: Participation in U.S. and international equity and fixed income markets via investments in low-cost ETFs. Can be used as a diversification strategy if you already have a substantial amount in fixed structured attorney fees.
- Flexibility of Payments: 5-year rolling income stream. Unlike traditional structured attorney fees, attorney fee deferred compensation payments can be postponed, as provided for in IRC 409A(a)(4)(C), as long as an election is made at least 12 months in advance and the postponement is for at least 5 years. For example, on a payment due in at least 12 months. You could elect at least 12 months in advance to defer 50% of that for another 5 years. Just like Fortune 500 executives deferring their compensation, personal injury lawyers can exercise greater control over the timing of income and resulting taxation
- A bona fide lending facility to meet near-term cash needs at competitive rates
- Fund a retention plan for key associates and employees, mitigating the risk of important people leaving the law firm, on a more tax favorable basis than paying the bonus in cash or making the bonus deferred without deferring attorney fees.
To avoid constructive receipt and current taxation the law firm or attorney should make an irrevocable agreement to defer specified fees before there is a legal entitlement to a fee that is currently payable.
If you would like to have a more comprehensive discussion of your attorney fee deferral options please contact John Darer at 888-325-8640
Helpful Reference
Deferred Compensation | Structured Attorney Fee Alternative for Trial Lawyers Talking Settlement™, featuring John Darer and Leif Lundberg August 2016
Structuring Legal Fees Without Annuities: Offspring of Childs, Vol. 148, No. 3, Tax Notes (July 20, 2015), p. 341.