Personal injury attorneys who want to defer their contingent legal fees have two funding vehicles to choose from: a structured settlement annuity or a deferred compensation plan. Each funding vehicle has a distinct process and can be advantageous depending on the attorney’s financial goals.
How to Defer Legal Fees Using a Structured Settlement Annuity
In a structured settlement annuity situation, attorneys have to create the plan for their structured annuity at the time of settlement. The attorney will have to decide exactly the amount they want to defer — and the attorney will also have to select the exact payment schedule for future annuity payments.
If an attorney choose the structured settlement annuity option, there is specific language that needs to be included in the release agreement between the plaintiff and defendant parties. There are other documents required as well, including a qualified assignment or non-qualified assignment and a release depending on the specific type of case.
How to Defer Legal Fees Using a Deferred Compensation Plan
Setting up a deferred compensation plan does not have any defense involvement. No terms need to be added to the release agreement. There’s nothing that needs to be included in the release agreement.
Just like when choosing an annuity, attorneys still need to determine how much or what percentage of their fee they want to defer into the deferred compensation plan on a particular case. Then, the attorney must enter into an agreement with the deferred compensation plan administrator (which is similar to a 401k plan administrator) agreeing to defer the specified amount or percentage of the legal fee on that particular case. These agreements need to be completed and signed before the underlying release agreement in the case is signed.
Once the deferred compensation plan is established, the settlement process continues as usual, and the plaintiff attorneys settle the case for cash as they normally would. The defendant can fund the deferred compensation plan directly, or the plaintiff attorney can submit the funds from the firm’s IOLTA account.
The Difference Between a Structured Settlement Annuity and Deferred Compensation Plan When Deferring Legal Fees
The main differences between the annuity option and the deferred compensation plan are as follows: In the deferred compensation plan-based model, there’s no requirement that the defense or defense counsel be involved or even know that the attorney is deferring fees. Because the defense doesn’t need to be involved, using a deferred compensation plan is much more private. When using the structured settlement annuity-based model, the defense has to be involved because language must be included in the release agreement, the defense must sign the qualified assignment, etc.In the annuity option, the deferred fees must be paid directly from the defendant to the annuity company.
When deferring legal fees, attorneys have two main options – a structured settlement annuity or a deferred compensation plan. There are some differences in terms of how the plans are established. Deferred compensation plans offer more privacy since there is no defense involvement.
In both funding vehicles, decisions must be made by the attorney before the release agreement in the underlying cases is signed, and the attorney needs to choose the amount to be deferred (and when using an annuity, the payment schedule for the funds).
If you are interested in deferring your fees, give us a call so we can help you make sure that the timing of your election to defer is done correctly. We’d love to help you explore whether an annuity or deferred compensation plan makes the most sense given your needs and goals.