Every attorney knows that a winning case starts with a solid strategy. When advising contingency-based attorneys on how to maximize their settlements, I adopt a similar approach. A tax-intelligent strategy, combined with expertise in structuring attorney settlement fees, can serve as a powerful tool for helping attorneys optimize their financial outcomes.
Structuring legal fees involves more than just a tax strategy; it also presents an opportunity to enhance long-term financial security and investment potential. Additionally, attorney fee structures provide unique financial planning benefits, which we will explore below.
Tax Advantages: Reduce Your Liability Over Time
One of the most compelling reasons to structure attorney fees is tax planning. While receiving a lump sum is often a welcome event, it can unexpectedly push the recipient into a higher marginal tax bracket, subjecting them to higher taxes. Enter attorney fee structures, which allow attorneys to choose to receive payments over time, ensuring they are only taxed when funds are received. This deferral strategy can be beneficial in several ways:
- Spreads tax liability across multiple years.
- Potentially lowers overall taxation.
- Offers greater control over income recognition.
By collaborating with a financial advisor knowledgeable about attorney fee structures, attorneys can strategically plan their income to optimize their tax situation while maintaining financial flexibility.
Investment Growth: Let Your Money Work for You
Structured fees also enable attorneys to use their money before taxes. With more capital available for investment, structured fees can lead to higher long-term payouts than receiving a lump sum. Available investment options include:
- Fixed strategies: These provide predictable, stable returns.
- Indexed strategies: Growth potential is linked to market performance.
- Market-based options: Exposure to stocks and other investment vehicles offers a greater upside.
These investment options can be integrated for a tailored and diversified approach to fee structuring, providing a balance between growth and security.
Income Planning: Flexibility Without Restriction
Let’s compare attorney fee structures with traditional retirement accounts. Unlike traditional retirement accounts, attorney fee structures have no maximum contribution limits and no early withdrawal penalties. This means:
- Attorneys can customize their payment streams to align with their business and personal income needs.
- Attorneys don’t have to wait until age 59½ to access their funds.
- Enjoy the freedom to structure payouts for short-term or long-term financial objectives.
Since these structures are available only within the context of a legal settlement, contingency-based attorneys have a distinctive opportunity to enhance their financial planning strategies with more flexibility and less red tape.
So, Are Attorney Fee Structures Right for You?
We always aim to ensure our clients are aware of the benefits of financial decisions and the potential downsides. While attorney fee structures offer numerous advantages, they also bring considerations we will discuss when determining whether a fee structure can work for your unique situation. Some of these considerations include:
- Delayed fee collection.
- Fixed rates of return.
- Reduced liquidity.
- Setup costs and administrative requirements.
Our team of tax-focused financial advisors specializes in assisting contingency-based attorneys with navigating these options. We work closely with attorneys to create customized payment streams that meet their firm’s financial needs and align with their long-term personal wealth goals. The strategies mentioned may not be appropriate for all investors. Please consult your tax and/or financial advisors to determine a strategy that works best for you.
Interested in discovering whether an attorney fee structure could benefit you? Reach out to us today to schedule a complimentary, no-obligation consultation and improve your financial future.
Actual tax rates may vary for different taxpayers and assets from those illustrated (for example, capital gains, and qualified dividend income). Actual performance of your investment also will vary. Lower maximum tax rates on capital gains and dividends would make the investment return for the taxable investment more favorable, thereby reducing the difference in performance between the examples shown. Consider your personal investment time horizon and income-tax brackets, both current and anticipated, when making an investment decision.