Every year, around this time, many attorneys we know would like to have finished the year with the prospect of paying fewer taxes in April. Most are so busy at the process of earning that the necessary time is not taken to develop a tax strategy. On a daily basis, FORGE Consulting presents to attorneys who earn contingency fees the potential tax benefits (current and future tax years) associated with receiving a contingency fee over a period of time. The structured attorney fee is also commonly employed as a means of preserving wealth and balancing income across five, ten or twenty years — or even a lifetime.

Instead of reiterating the same information, we at FORGE thought it would useful for you to hear from an expert specializing in federal tax law. Robert W. Wood, of the San Francisco law firm Wood & Porter, provided FORGE with a summary of his thoughts on structured attorney fees and the top ten points that every lawyer should consider when making tax strategy decisions. We have provided that information below and hope that you find it to be useful in your tax planning.

Charles T. Schell, Principal
FORGE Consulting, LLC
cschell@forgeconsulting.com
1-866-68-FORGE

WHAT’S MOST IMPORTANT IN STRUCTURING ATTORNEY FEES

By Robert W. Wood | Wood & Porter | San Francisco, CA

Tax issues are not known for being straightforward. In fact, the importance of form, exactly how you do something, is extraordinarily important in federal income tax law. Ever since Childs vs. Commissioner, 103 TC 634 (1994), affirmed without opinion 89 F 30 56 (11th Circuit 1996), attorneys have been able to structure legal fees in many cases. Yet despite more than a ten-year track record of structuring legal fees, many plaintiffs’ lawyers remain confused about what they can do, what they cannot do, and what is most important to securing the financial and tax benefits intended by structures.

At the request of FORGE Consulting, from my perspective as a federal income tax lawyer, I’ve listed here my top ten points every plaintiff’s lawyer should know about structuring fees.

1. Timing Is Everything. If you want to structure fees, you need to get the ball rolling before you have a right to your fee. Once the settlement agreement is signed, it is too late to structure your fees. As your case is ongoing and as settlement negotiations heat up, start thinking about this and the get the appropriate professionals involved (more about professionals in point 8 below).

2. Consider Your Legal Fee Agreement. You’ll probably be asked to amend your contingent fee agreement with your client. To avoid any awkwardness, consider revising your generic contingent fee agreement to expressly contemplate periodic payments for all your cases in the future.

3. Client Structuring vs. You Structuring. Some lawyers believe they can only structure if their client does. This is not true. Some life insurance companies will only structure legal fees if the client is also structuring, but some companies will structure a “stand alone” legal fee. In any case, it’s a good idea to mention structures to your clients any time you are resolving a case. The client may or may not want to structure, but mentioning structures to your client is almost always a good idea.

4. Annuities vs. Other Alternatives. A legal fee structure should follow a tried and true format. There is great flexibility in the types of payment structures you obtain, but they all use life insurance annuity products. You should not structure legal fees with private annuities or other products.

5. 468B? A Section 468B trust, also known as a qualified settlement trust, may or may not be used in your case. Such trusts are often set up to be the repository of moneys in settlement of a case. They were originally designed so that defendants could pay money into a settlement trust and take an immediate tax deduction, while the various plaintiffs continued to scrabble over who would get what. Today, 468B trusts are often used to give plaintiffs and their lawyers more time to determine how they want to receive their money. One can use a 468B trust in this way, but you generally don’t have to create a 468B trust to structure legal fees.

6. Payment Alternatives. Consider carefully how you want to receive the payments over time. Do you want level payments for ten years, payments over your lifetime, or perhaps payments for the joint lives of you and your spouse? Do you want payments to start immediately or not to start for ten years? Do you want to have lump sums periodically disbursed when you might have particularly large expenses (for example, years in which you might have kids in college)?

There is infinite variety, but once you lock in your payment structure, it can’t be changed. This may make a 468B trust attractive (see point 5 above) to give you more time to consider alternatives. It also means you’ll need professional help (see point 8 below).

7. Contingent Fees Only. Plaintiffs’ lawyers may feel discriminated against by Congress in various ways, but they are the only ones who can structure legal fees. Only contingent fees can be structured, and you need to do it before the fee is earned. Structuring legal fees is a great way to spread out your income, provide for retirement, etc. If you do it correctly, you can take part of your fee in cash and part in structure. Moreover, it is sometimes possible to interpose a fee structure even in cases going to judgment, or in cases where a court award of attorneys’ fees is made. For this kind of esoterica, though, you need a qualified tax lawyer to help.

8. Work With A Broker. A qualified settlement broker has access to the life insurance markets and to the various annuity tables you’ll need to review. A broker earns a commission on the sale of the annuity product, but the broker usually earns nothing unless the transaction closes. Brokers therefore have an incentive to provide you with all the data you need. The only dumb question is one you don’t ask, so ask your broker to run as many financial scenarios as you think make sense.

Plus, brokers usually have a good idea of desirable payment structures, perhaps a better idea than you have. Don’t hold back on providing your broker with financial information about you and your family, you and your practice, partners, etc.

9. Don’t Get Creative. This is counter-intuitive to most plaintiffs’ lawyers, particularly successful ones. Although there is almost infinite flexibility in payment streams for structured legal fees, this is not a time to get creative on the legal structure. The timing of your income stream, any blips in the stream, unusual disbursements, etc., are all possible. But don’t try to get creative and invent a new form of legal fee structure. If you are a real high-roller and like to take big tax risks as well as risks with your cases, it’s okay to investigate this path. Otherwise, I wouldn’t recommend it.

10. Consider Firm Arrangements. If you are a solo practitioner, structuring legal fees is the simplest. If you operate in a firm, there are usually additional legal niceties to be observed. For this, you probably need not only a broker (who should be used in every legal fee structure in any event), but also a tax lawyer. In my experience, many plaintiffs’ lawyers and their firms don’t adequately consider who is buying the structure, how the structure will be paid and taxed in the context of a professional corporation, partnership, limited liability partnership, etc. It is usually possible to cross all the requisite t’s and dot the i’s so a structure works even in big law firms, but you’ll need a little extra time to do this.