ATTORNEY FEE DEFERRAL OVERVIEW

Turn to Synergy as trusted partner for your firm in mitigating the impact of taxation of contingent legal fees. Through a consultative process, we can build a strategic plan for reducing the tax burden on a year-to-year basis for fees as well as provide greater control over the timing of income. Consider us your guide to cutting edge tax deferral strategies for your firm.  

Trial attorneys can invest all or part of their contingent legal fees on a pre-tax and tax deferred basis using annuity based attorney fee structures or deferred compensation plans. These pre-tax investment options allow attorneys the unique ability to control the timing of their income in any given taxable year. 

The key reasons to use these fee deferral options are:

  1. Fees are invested on a pre-tax and tax-deferred basis
  2. Almost limitless investment options from fixed to variable, mutual funds, ETFs, stocks & bonds
  3. Unlimited contributions and no penalties on withdrawal prior to retirement age
  4. Better control over timing of income and taxation

There are three primary products to defer taxation of contingent legal fees. Each of these options have benefits and certain drawbacks. A summary of each option and its characteristics are below:

1. Fixed Attorney Fee Structure Annuities

You may be familiar with structured settlements since they are a commonly used planning tool for personal injury victims. Attorneys can use these same fixed structured settlement annuities as a pre-tax and tax deferred mechanism for investing their own attorney fees. These annuities are fixed so they aren’t subject to market risk. The rates of return are going to be similar to bonds and other long term debt instruments. It is a conservative investment but doesn’t have any downside risk. You must elect the timing of the income in advance by selecting a payment plan which can’t be changed once it is finalized. This is the primary drawback of doing an attorney fee structure along with more conservative returns.

Learn More About Fixed Attorney Fee Structures

2. Indexed Attorney Fee Structure Annuities

This option is identical to the fixed option immediately above as it is also an annuity but these have an equity indexed rider which allows the payments to go up based upon market performance. This option gives lawyers exposure to the upside of the market without the downside risk. Interest rate performance is tied to the S&P 500® index. Payments can increase by up to an annual maximum of 5%. If the index is flat or decreases, the payments remain the same and can never go down. This is called annual ratchet up. This is a unique solution that gives more potential positive upside to lawyers looking to structure attorney fees with a traditional annuity. Like with a fixed annuity, the plan can’t be changed once it is finalized.

Learn More About Equity Indexed Attorney Fee Structures

3. Deferred Compensation Plans for Attorneys

This option is unlike an annuity as it has a variety of investment options and has more flexibility in terms of timing of income. An example is the best way to illustrate how it works: Let’s assume that in 2018 you want to defer $1 million in contingent legal fees. To maximize liquidity, you can split the $1 million (plus earnings) into 20 quarterly payment buckets (over 5-years). Thirteen (13) months prior to any scheduled payment bucket, you may elect to withdraw it. However, if you don’t need the payment as scheduled, the payment bucket will automatically roll forward to the end of the line. By laddering the payments this way, you can effectively manage your cash-flow and better control the timing of taxation. Using this type of plan, you can effectively have your cake and eat it too! Control the investment options and when you take income.

Lawyers have a unique opportunity to avoid current year taxation of their legal fees by availing themselves of these different fee deferral options. Talk to Synergy today about how we can better help you plan for your future by deferring your fees.

Learn More About Deferred Compensation Plans

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