Attorney Fee Deferrals

Flexibility

Process Highlights

Plaintiff attorneys are able to defer some or all of their contingency fee through the use of multiple tax-advantaged strategies.

Process Highlights

The parameters for deferral must be included in the release agreement and the funds must flow directly from the defendant, their insurer, or a qualified settlement fund, into the selected strategy.

Tax Reporting

Process Highlights

Tax Reporting

Tax reporting will be issued only for the years in which payments are received.

Payee Choice

No Limits & Penalties

Tax Reporting

Future payments can be made either to the law firm or the attorney individually.

No Limits & Penalties

There are no limits on how much can be deferred and no penalties for receiving payments prior to age 59 1/2.

Beneficiary

No Limits & Penalties

A beneficiary can be designated to receive any remaining certain payments upon the death of the attorney.

Tax Precedent and Suggested Language

Tax Precedent:

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.

Suggested Contingency Fee Agreement Language:

“In payment of the contingent fees specified, the parties agree that any amounts owed may be paid by a lump sum cash payment or by using all or a portion of the lump sum owed to purchase a structured settlement that will make periodic payments or some combination thereof. It is understood that the attorney may use a structured settlement for the contingent portion of the fees due and owing even if the client does not wish to do so with their proceeds.”

IRS GLAM Analysis

In December 2022, the IRS published a Generic Legal Advice Memorandum (GLAM) focused on an attorney seeking to defer their contingency fee through an arrangement inclusive of a third-party and a “rabbi trust”. Bua Settlements has not and does not recommend this approach be utilized by its clients. To learn more on the implications of the GLAM, please click the red button to read an in-depth analysis from Robert Wood of Wood LLP, a national leader on the taxation of legal settlements.

analysis from tax expert robert wood

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