401(k) not working? Try this.
The concept of a legal fee structure is a tax-advantaged installment plan wherein the contingent fee lawyer can decide before settlement that instead of taking one-third (or other percentage) contingent fee upon settlement of the case, he wants that fee paid over time. The amount of that fee will be paid usually by the defendant to a third party, typically a life insurance company, for the purchase of annuities benefiting the attorney.
The lawyer must decide to do this before the case settles, as the lawyer technically has not earned his fee until the settlement documents are actually signed. The attorney has complete discretion whether to structure all of his fee in this way, or any percentage of it that he wishes.
The case that is cited as establishing the authority for attorney fee structures is Childs v. Commissioner, 103 T.C. 634 (1994), affirmed without opinion, 89 F.3d 56 (11th Cir. 1996). Over the past few years, the IRS has uniformly cited Childs favorably and permits attorney fee structures.
In the case of structured attorney fees, the attorney will be taxed only when and as he receives each periodic payment, according to the schedule the lawyer has set to suit his personal finances.
Why is this a good idea? Stretching out payments over time yields a better tax result, and it can mean a lower overall tax burden. It is usually not possible to make taxable income tax-fee, but delaying it is another matter.
The longer the attorney wishes to stretch out the payments, the better the financial result. In essence, the lawyer is able to build a kind of unlimited individual retirement account. The payments might start right away and go for the next five or ten years, or alternatively, the payments might be deferred entirely for ten or fifteen years, building up tax-free. Thereafter, the annuity can begin paying out annually for the rest of the attorney's life, or even the joint life of the attorney and his spouse. There is almost unlimited flexibility.
When plaintiffs' lawyers complain about the difficulty of contingent fee practice, it is worth reminding them that this is an extraordinary benefit that applies only to them. Some very successful contingent fee lawyers structure a particular percentage of every case as a kind of retirement fund. This makes sense.
If a contingent fee lawyer structures say 15 percent of every fee and puts it away tax-deferred for a rainy day, he would have achieved retirement income stabilization, estate planning and tax-deferred advantage that most people--and even most lawyers--can't achieve.