How to Protect Your Law Firm's Cash Flow
With quarantine wiping out profits, many law firms are struggling to plan for 2021. Fortunately, there is a proven strategy for successful firm-wide and individual cash flow management—structured attorney fees.
A Tax-Advantaged Safety Net
If you accept contingency fees as a lump sum cash payment, then the entire lump sum is taxable. Conversely, if you structure your fees, then you are only liable for taxes on the payments received within a given year.
Aside from the tax benefits, one of the significant advantages of deferring fees is the steady stream of guaranteed1 payments. Structured attorney fee arrangements can be arranged to pay a single attorney, multiple attorneys, or even the law firm. Regardless of the payment stream option, the final settlement agreement must include language allowing for structured attorney fees.
Structured Attorney Fee Example: $1M Contingency Fee
In this example from MetLife, the plaintiff attorney earned a $1M contingency fee. His tax advisor suggested two options: 1) accepting the fees as a lump sum cash payment, or 2) placing the fees in a tax-deferred structured settlement. Here is how the options compare:
Option 1: Lump Sum
- Take the $1,000,000 contingency fee as a cash lump sum.
- Pay $363,653 federal income taxes in one year.
Total Payout: $636,347
Option 2: Structured Attorney Fees
- Structure the $1,000,000 contingency fee.
- Receive $104,130 guaranteed annual income.
- Pay $264,220 federal income taxes over ten years.
Total Payout: $777,080
Lump Sum Attorney Fees vs. Structured Fees: Which Makes More Sense During COVID?
Our consultants are often asked –why not just accept the lump sum cash payment and invest it? With more than $100,000 in guaranteed annual income, you can reinvest your structured attorney fee payments when you receive them—and with less tax liability, you have more money with which to invest!
Another alternative is to incorporate market-based structured settlements into your fee deferral strategy. A market-based structured settlement allows you to place a portion of your pre-tax fees in a market-based investment portfolio, then have it managed by a professional fund manager or your financial advisor.
How Stable are Structured Settlement Companies?
Another concern our attorney clients cite is security. Many were left shell-shocked after the 2008 financial crisis and want to ensure that their hard-won contingency fees will be safe.
Most of the companies that issue structured settlement annuities have withstood the most dramatic financial events in U.S. history, including the 2008 financial crisis and The Great Depression. In fact, since 2008, no structured settlement-issuing life insurance companies have become insolvent.
Sage only offers structured settlement annuities through life insurance companies that are highly-regulated, well-capitalized, and have consistently achieved high ratings, even amid the COVID-19 pandemic.
Make a Plan for Your Contingency Fees Today
Do not let the next financial downturn catch you off-guard. Contact your Sage consultant to get started on your structured attorney fee plan today.
1 Guarantees are subject to the claims-paying abilities of the issuing insurance company.