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Thursday
Oct292009

Tax Law Expert Rob Wood on Structured Legal Fees

Tax Law Channel host Rob Wood discusses structuring legal fees...a versatile tool only available to contingent fee lawyers.

If an attorney has a contingent fee arrangement with a client, the lawyer may enter into a structured legal fee arrangement under which the defendant, instead of paying the attorney’s fees for the case in a lump sum at the time of settlement, can fund an arrangement that pays the fees over time. As discussed below, payments under a structured legal fee arrangement have been held to not be taxable until actually paid to the attorney. Structured legal fee arrangements are designed to level out the peaks and valleys that generally characterize the fluctuating income of plaintiffs’ attorneys. These arrangements let lawyers defer paying taxes on their fee income. Structuring legal fees is a good way to spread out income, reduce income tax burdens, provide for retirement, or contribute to estate planning.  

A structured fee arrangement will generally be funded by an annuity purchased by an assignment company. That company purchases the annuity with funds provided by the defendant in the case—funds that would have paid the lawyer’s fee. Properly set up, a legal fee structure takes the lump sum that would otherwise go to the client and puts it to work in a tax-deferred annuity. The lawyer pays tax only as he or she receives the periodic payments. For example, instead of receiving a $500,000 lump sum, the lawyer might receive $70,000 a year for ten years. The extra $200,000 in this example is attributable to the tax-deferred return on the money.

With all the talk of tort reform in Washington, plaintiffs’ lawyers may feel discriminated against by Congress in various ways. Even so, they are entitled to a benefit no one else receives: the ability to structure their legal fees. Indeed, contingent fee lawyers are the only ones who can structure legal fees.

 

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