Attorneys who have deferred their legal fees in the past or who have heard about attorney fee deferrals may be familiar with using structured settlement annuities for deferring their legal fees. However, another (arguably more attractive) option for deferring attorney fees is to use nonqualified deferred compensation plan rules to place deferred legal fees into an investment account.
This approach allows attorneys to set up and fund their own nonqualified deferred compensation plan (similar to the plans often used for Fortune 500 executives).
What are the Advantages of Placing Deferred Legal Fees Into an Investment Account?
Placing deferred legal fees into an investment account allows attorneys to invest as aggressively or as conservatively as they choose, thereby opening up the possibility to earn market rates of return (unlike structured settlement annuities).
Another advantage of placing deferred legal fees into an investment account is that the payout timing is much more flexible. With a structured settlement annuity, once the payment dates are set, there is little to no flexibility to change those payment dates. Attorneys have to determine the amounts and the dates of future payments at the time of the settlement.
This often creates a challenge for attorneys because there are situations where attorneys are unsure when they would want to receive that income in the future. With the non-qualified deferred compensation plan approach, attorneys have much more flexibility in the dates of receiving those future payments.
Regardless of whether an attorney uses an annuity or a deferred compensation plan to defer legal fees, the attorney is not taxed on the income until future payments are received. Deferring legal fees to future tax years is an excellent opportunity to manage income taxes — and doing so provides much better returns than taking the full fee in the year it is received, paying tax on the fee, and then investing the net amount.