Attorney Fee Structures
Attorneys in contingency fee practices face a great challenge when it comes to managing cash flows due to the unstable nature of inflows relative to the fixed nature of outflows. A typical personal injury law practice is plagued by uncertain revenues, fixed expenses, the need to finance client cases, and very little time to focus on management issues. In 1994, the Childs vs. Commissioner case opened the door to allow attorneys to structure their fees. Not only does a structured fee level out cash flows, but it also reduces the tax bite for both attorney and client, provides asset protection, is flexible in design, and puts the entire pre-tax amount to work for them. No other profession has as much flexibility in the timing of the recognition of income as personal injury attorneys.
Many attorneys can identify with being in the highest tax bracket one year and the lowest the next. A structure acts to mitigate these circumstances and provides the opportunity to do prudent tax planning. Instead of recognizing the income from one or several large cases in the year in which they are settled, potentially causing an Alternative Minimum Tax problem for their client(s), attorneys have the ability to spread the tax burden over many years. This also allows the client to recognize their income, represented by the attorney fee, over the same period of years thereby deferring and reducing the tax consequences for the client.
A structured annuity funded by fees can also be used to provide retirement income, fund a child’s college education, manage risk, or meet estate planning needs. These annuities are extremely flexible in design which makes it very easy to plan for just about any conceivable future need.
Asset protection is another consideration when making the decision to structure fees. The mechanics of a structured settlement annuity make future cash flows unavailable to creditors or litigants because they are non-assignable and cannot be accelerated once they have been designed and funded. This protection ensures that money earned will continue to be received free of the risk of confiscation.