Plaintiff attorneys have the unique ability to place all or a portion of their contingency fees in several types of tax-advantaged investments. By electing to defer fees, an attorney also defers the tax obligation until the year in which payments are received.
Attorneys can choose to defer fees regardless of whether the claimant structures his or her own settlement proceeds; however, the ability to defer fees must be included in the settlement agreement.
Structured Attorney Fees
To facilitate an attorney fee structure using a fixed income annuity, the defendant (or insurance company) directs the attorney’s fees to a third-party assignment company. The assignment company then uses the fees to purchase a fixed annuity that provides the attorney with payments based on a pre-determined schedule.
Payments are eligible to be electronically deposited into the attorney’s bank account and will be reported on a 1099-MISC as income only during the years in which the payments are received.
Structured attorney fees do not have any ongoing administrative or maintenance fees, so more money stays in the attorney’s pocket. Payment schedules can be arranged for monthly, quarterly, semi-annually, annually, or in a series of future lump sums and can begin immediately or on a future date1.
Tax Guidance for Structured Attorney Fees
Much like a structured settlement annuity for injured claimants, the tax treatment hinges on avoiding constructive receipt. In Childs v. Commissioner, 103 T.C. 634 (1994), aff’d, 89 F. 3d 856 (Table)(11th Cir. 1996), the Tax Court ruled that because the attorney’s fees were transferred from the defendant directly to the assignment company, the attorney did not have constructive receipt of the fees; therefore, the fees did not yet count as taxable income.
Non-Fixed Annuity Options for Attorneys
Attorneys may select from several structured settlement annuity options, in addition to the fixed annuity. Minimums for investment may vary depending on the product, and non-fixed annuity options may include setup and/or annual administration costs.
However, non-fixed annuity options may offer the chance for greater growth than the fixed annuity while still providing guaranteed income. Your Sage structured settlement consultant can provide a thorough consultation regarding your annuity options.
Market-Based Structured Settlements for Attorneys
A market-based structured settlement allows an attorney to invest a contingency fee, tax-deferred, in a market-related investment portfolio. The funds can be managed by a respected financial institution or by a financial advisor of the attorney’s choosing. Payments will be received on a periodic payment schedule, with taxes due only on funds received during a given tax year. For more information about market-based investments, visit our Market-Based Structured Settlements page.
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For more information about attorney fee deferral strategies, contact us today.1Payment start date restrictions may vary by issuing insurance company.