Many contingency-based plaintiff attorneys are interested in deferring their legal fees to future tax years because of the many benefits fee deferrals offer. Fee deferrals reduce current year income taxes because income earned in the current tax year are deferred to future years and therefore not taxed until they are received in future years.
Deferred fees are invested and grow on a tax-deferred basis. You’re using Uncle Sam’s portion — that you otherwise would have paid in taxes — to invest in an investment portfolio of your choosing, which grows on a tax-deferred basis until you receive those future payments in future tax years, just like in an IRA or a 401k.
How Do Deferred Compensation Plans Get Distributed in the Future?
Here is a quick overview of how payout periods work with deferred compensation plans: Once the deferred compensation plan is established, the fees are delayed until you opt to receive the first payment. A one year’s notice prior to receiving the first payment is required. Payments are scheduled quarterly for 5 years or 20 total payments by default.
You have the option to receive all or a portion of each of those payments. If you choose to get only a portion of the scheduled payment, the rest will continue to leapfrog to the back of the line, and the compensation plan will continue to roll forward.
Contact us if you are interested in learning more about the payout period overview for deferred compensation plans, or just private deferred compensation plans in general. Aside from saving thousands of dollars in income taxes, the flexibility in distribution terms makes it a powerful financial planning tool. We can discuss it in greater detail, help you see if it’s a good fit for you in your next cases, and help set up a compensation plan that works for your specific case.