As an alternative to receiving a lump-sum payment at the end of a personal injury or workers’ compensation case, attorneys can elect to receive their entire fee or a portion of their fee over a set time through an annuity. The annuity is purchased from a high-rated insurance company. Attorney fees are paid through an assignment company (typically an affiliate of a life insurance company) that will purchase an annuity from the affiliated insurance carrier to fund the obligation. This assignee then takes over the liability from the defendant in the case and begins making payments to the plaintiff’s attorney according to the agreed-upon payment schedule.

Structuring fees can be created in non-injury (non-qualifying) cases. While many large life insurance companies write attorney fee-structured annuities in personal injury cases, it is also feasible to write attorney fee-structured annuities for just about every type of non-qualified case–as long as the attorney fee agreement meets the insurance company’s specific criteria.

If you wish to have all or part of your fees structured, the claimant must direct the Life Company to issue your fees in the form of periodic payments in the settlement agreement. The tax-deferred periodic payments will be sent directly to you, as the attorney, or your law firm from the Life Company for the convenience of the claimant. You can also designate your estate, your spouse or children as your beneficiary for the guaranteed payments.

Since attorney fees come out of the client’s damages, the decision to create a structured fee schedule is best done prior to the completion of the settlement (whether the injured party structures their money or not). The creation of an annuity for attorney fees must be handled in the same manner as an annuity for an injured client. Funds for the structured fee annuity must come from the defendant (or its insurance company) and go directly to the life insurance carrier issuing the annuity.

While similar to an injured party’s structured payment schedule, attorney fee payments do not enjoy the same tax-free benefits. The proceeds from an attorney fee structured annuity are taxed-deferred with taxes due in the year they are received.

Not surprisingly, the IRS has strict reporting requirements regarding structured fees.

Because of potential tax issues, consult a tax advisor to review tax laws as they pertain to structuring your attorney fees.

Note About Tax Laws

Because of potential tax issues, consult a tax advisor to review tax laws as they pertain to structuring your attorney fees.

• Income from the structured fee annuity must be reported to the IRS annually on IRS Form 1099 (provided by the life insurance company that issues the annuity in the years in which the attorney or firm receives payments).

• Hold Harmless Agreement required by the insurance company issuing the annuity.

• IRS forms W9 and W4.attorney fees.

Structuring a fee has benefits beyond its possible tax advantages. Payment amounts can be increased annually to consider inflation and can be paid directly to the firm. Providing stable firm revenues can be one of the most appealing outcomes of a fee structure. Knowing that the firm will receive guaranteed income makes decisions on whether to accept a large contingency case a little easier. The decision can be based on case merits instead of whether the firm can weather the significant financial outlay required to manage these types of cases.

A 40-year-old sole practitioner is owed $750,000 in contingency fees. Instead of receiving a fully taxable lump sum, he takes $150,000 immediately in cash and spreads the remaining $600,000 balance over seven years, thus ensuring predictable cash flflow to his small practice. Beginning a year from the settlement date, he will receive $8,378 monthly payments. The $600,000 becomes a $703,794 guaranteed benefifit over 7 years.

A 50-year-old attorney decides to structure $200,000 of her total fee. The attorney delays receiving the $200,000 portion until she reaches age 70 (and presumably retires). The money is compounding at 4.78 percent during those 20 years so the $200,000 becomes a guaranteed benefifit of $762,672. When she turns 70, she will receive at least $3,171 a month for 20 years. Her marginal tax bracket may be lower by the time she retires so she will pay less tax on the fee proceeds. Spreading out income over several years can possibly reduce her tax obligation even more.

A 44-year-old attorney sets up annuity payments from a $75,000 fee to coincide with his son entering college in 11 years During his son’s four years in college, the attorney will receive $33,304 annual payments (the $75,000 compounds to $133,216 at 4.55 percent over 14 years) so he can use the funds to pay his son’s tuition.

Attorneys may be hesitant to tie up fee proceeds in an annuity in case interest rates rise. While the peace of mind that comes with guaranteed, long-term payments is the most often cited benefit of structured fees, one way of reducing investment risk in a rising interest rate environment is to take a significant portion of the fee in cash. It is also important to consider structuring fees as a long-term strategy. By consistently structuring attorney fees, the attorney can dollar cost average into the market over time–thus, averaging out the interest rates of the day.

What is the trade-off for the tax benefits?
The structured fee payments cannot be accelerated, deferred or pledged as security for a loan–much like structured settlements for clients. Even so, the benefits can make an attorney fee structure very attractive.

Before structuring fees, however, check with a tax advisor or CPA who is knowledgeable in this area to ensure compliance with IRS rules.