Why Structure Fees: Advantages and Benefits
During the past decade, it has become increasingly common for plaintiff attorneys to elect to structure their fees, deferring income until a predetermined future time. Not only does this reduce an attorney’s current taxable income, but it also offers a secure way to set aide income for future needs.
An attorney is taxed only as payments are received. Payments are reported on Form 1099 in the year in which the payment is scheduled. By using a structured settlement an attorney can:
- 1. Spread out legal fees over years, possibly helping an attorney to avoid a higher marginal tax bracket, allowing the money saved (resulting from deferring current taxes) to be invested with little risk and no management fees. It is important to remember that when structuring a fee, an attorney is investing pre-tax, locking his settlement proceeds into a high-yielding investment.
- 2. Choose when the payments will start at the time of settlement, there’s no need to wait until 59 1/2 for payments to begin.
- 3. Create a low-risk foundation for a diversified portfolio.
Attorneys have benefited from structuring fees to accomplish some of the following goals:
- 1. College Planning:
- Structuring attorney fees is an excellent way to establish a college fund for children. The flexibility inherent in establishing a structured settlement allows an attorney to receive scheduled payments when needed most. Unlike most institutionalized or state sponsored college plans, structures have no restrictions on how the money is spent, how much money can be set aside, or on the school selected.
- 2. Overhead Expenses:
- As tort reform has become more prevalent across the country, it has become even more difficult to secure successful settlements. A plaintiff attorney’s income is going to dramatically fluctuate predicated upon many factors. With that in mind, structuring a fee can provide an attorney with a dependable, fixed future income. Being able to secure a predictable income can take care of routine expenses such as office overhead of funding for lengthy cases. Best of all- it provides peace of mind that a steady flow of income will be available- regardless of market conditions.
- 3. Design Creative Payment Plans to Accomplish Goals within the Firm:
- With a potential retirement of a partner, a structured fee can assist with a potential buy-out. An attorney can also use a structured fee as a bonus plan for an associate within the firm, tying future compensation to continued employment ensuring that the associate remains with the firm. Most importantly, a attorneys or law firms can effectively achieve the results of a qualified pension plan without the annual administrative and regulatory burden required of employee benefit plans.
- 4. Retirement Planning:
- Structuring an attorney fee can create a source of supplemental retirement income that can provide an attorney with an additional measure of security. Additionally, there are no restrictions on when a structure can begin to make payments, allowing an attorney to opt for early retirement. Lastly, a fee can also assist with estate planning, providing a guaranteed source of income for a spouse or family members upon death.
- 5. Dollar Cost Averaging:
- A structured attorney fee can be a great tool for funding an equity account. Structuring a fee to pay into a brokerage account on a regular basis can allow an attorney to invest in a consistent and disciplined manner. This concept, called dollar cost averaging, helps to avoid the adverse affects of market volatility. If the market increases steadily, it is possible to invest at a lower cost per share than the average price per share. Since the monthly investment stays constant, more shares are purchased at lower prices and fewer shares at higher prices.
Structuring an attorney fee allows an attorney to reduce tax exposure, while at the same time securing an extremely competitive rate of return on a guaranteed basis.