As described below, structuring an attorney fee involves several tax and non-tax factors. The tax attorneys at Higgins Settlement Law can guide you through those factors to determine whether structuring your fee makes sense for you. The decision to do so requires modification of your contingent fee agreement or a deferred compensation agreement or, in class actions, additional attention by the Court. Our firm can document those steps for you. These are not issues that should be left to anyone but the experienced lawyers at Higgins Settlement Law.  In fact, other lawyers and structured settlement brokers call us to advise them on these issues regularly. Avoid the middle man and call us directly if you are considering structuring your fee.

What are structured fees?

“Structured” attorneys fees are fees that are received in periodic future payments, rather than an immediate lump sum. While structured attorneys’ fees have income and economic benefits, they also have estate-tax and adverse employment-tax consequences of which you should take note.

What are the economic benefits of a structured fee?

Structured fees provide you with flexibility to design your own income stream. Structuring your fee will level your income between average and exceptional years, provide a source for paying future case expenses, enhance your defined-benefit plan contributions and provide you with economic security.

What is the tax benefit?

The income tax benefit is that income tax otherwise payable in the year of settlement is deferred and earns interest during the deferral. You are taxed only on amounts received in the years you receive them. Additionally, by deferring income, there is potential for lowering your income tax bracket or marginal tax rate. Of course, rates may also rise in future years.

The payroll tax benefit is that the payroll tax otherwise payable in the year of settlement is deferred and earns interest during the deferral. You pay payroll tax only on amounts received in the years you receive them. Note, however, that payroll tax will also be payable on the interest earned during the deferral, thereby reducing the stated return on the deferral, offset by the benefit of the deferred payroll tax on the deferred fee. As tax lawyers, we can perform that analysis for you so that you are fully informed as to the actual yield on your structure.

What is the estate-tax consequence?

An attorney fee structure can be paid in the amounts and at the times that you designate. Most attorney fee structures include an initial period of 10 or 20 years during which payments will be made even if you die. If you die during that period, payments remaining to be made after your death will be given a value on the date of your death. That value will be included in your estate and be subjected to estate tax. You should therefore have liquidity to pay the estate tax during that initial 10 or 20-year period. During 2009, the maximum estate tax rate is 45% with an exemption of $3,500,000. In 2010, the estate tax rate is zero. In 2011, the estate tax rate is 55% with an exemption of $2,000,000.

What is the tax law governing structured fees?

The only Court decision directly addressing structured fees is Childs v. Commissioner (103 T.C. 634 (1994), aff’d per curiam, 89 F.3d 856 (11th Cir. 1996)). Although Childs involved an unusual fee agreement in which fees were due to a professional corporation and to its shareholders jointly, new law has limited the availability of deferred compensation. That new law is section 409A of the Internal Revenue Code. An exception from section 409A is available for lawyers in Treasury Regulation section 1.409A-1(f)(2). Even under the exception, however, section 409A will apply if the case you are structuring is 70% or more of the year’s fee revenue from all sources. Higgins Settlement Law can help you structure your fee in accordance with those deferred compensation rules.

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