What is an Attorney Fee Structure?
A fee structure can help a lawyer avoid the highest tax brackets by leveling off income spikes due to large fees and spreading the income out over several years. An attorney who otherwise would have an unusually high income in the current year, but elects to spread the income over several years, may avoid paying taxes in the highest bracket or at the very least will defer taxation over a number of future years. Couple the tax savings with guaranteed earnings on the deferred funds, and the benefits of an attorney fee structure becomes very obvious. An attorney fee structure allows an attorney to set up a personally tailored retirement plan without the monetary and age restrictions or other drawbacks of a qualified plan.
Structured attorney fees work very much like a non-qualified deferred compensation plan. The taxes that would be otherwise paid on the fee earned at the time the case is settled are deferred, and that money grows without tax on the growth. When distributions are made, the entire amount distributed during a year is taxable for that year. Based upon a taxpayer’s tax bracket, there may be some distinct tax advantages to entering into this type of arrangement as opposed to being taxed on the entire fee in the year it was earned and then investing it after tax.
Fee structures can be done by one attorney in a firm, without the requirement that other attorneys and employees participate, as would be the case in a qualified retirement plan. Also, there is no limit as to the amount of income deferred. By comparison, there are statutory limits to the amount one can defer in a qualified retirement plan. Even if the attorney participates in a qualified retirement plan or individual retirement account (IRA), he or she may still defer additional income through an attorney fee structure. Unlike traditional retirement plans, there is no requirement of annual deferments. An added bonus is that the attorney fee structure annuity has enhanced creditor and judgment protection other investments can’t provide.
In summary, a fee structure allows a plaintiff lawyer to not only defer receipt of (and tax on) his fees until he receives them, he can have the deferred fees invested, and have the income produced from it also taxable over time rather than immediately. A lawyer may want to consider structuring his fees as part of his or her own income tax planning, financial planning, and estate planning.
A SAM planner can assist you and your tax planner to decide if a fee structure is appropriate for you.