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 legal their fees.
However, there is another (arguably more attractive) option for deferring attorney fees. This option to defer fees uses 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).
This option — placing deferred legal fees into an investment account — allows attorneys to invest as aggressively or as conservatively as they choose, and thereby earn market rates of return (unlike the structured settlement annuity).
Another advantage of this option is that the payout timing is much more flexible, whereas with an 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, in the future, they would want to receive that income. With the nonqualified 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 the 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.