In order to successfully defer income taxes and properly establish the future payments, it is imperative to consider all factors when structuring all or a portion of an attorney fee. Below is a list of commonly asked questions and items that need to be addressed:
If the plaintiff wants to cash out of the settlement, can the attorney structure his or her portion of the settlement?
- Yes, an attorney can structure a fee on a stand-alone basis if the plaintiff does not want to participate in a structured settlement for him or herself.
- Yes, it can be completely independent. The timing and amount of payments do not have to correspond with those of the plaintiff.
- Yes, it is permissible for each attorney to have his or her own unique payment schedule. Furthermore, not every attorney has to structure his or her portion.
- Yes, it is possible to have a structured fee pay a beneficiary on a tax-deferred basis. It is important to thoroughly discuss the beneficiary designation prior to concluding the structured fee because many life companies will not allow you to change beneficiaries in the future. For this reason, the estate of the attorney should be considered as the beneficiary.
Payments can be made to either the law firm or an individual attorney. This is a critical consideration when structuring an attorney fee. It is necessary to review many factors when determining where the future payments should be made, including the following:
- How is the firm incorporated? Is it a C-corporation, S-corporation, LLC or partnership?
- Is there an employment agreement in place between the various members within the firm? Furthermore, is there a plan in place in the event of a dissolution of the law firm?
- From a tax-standpoint, is it more advantageous to have the fee paid to the firm or the individual attorney?
- If the fee is paid to the firm, how does this affect the beneficiary designation?
Does the initial contingency fee agreement matter when structuring a fee?
- Yes. Ideally, the contingency fee agreement with the client specifies that the attorney can accept all or a portion of fees earned in the form of periodic payments. It is recommended to include this provision in every fee agreement. If it is not in the existing contract, it is a still a good idea to amend the fee agreement, even if that amendment occurs simultaneous to the settlement.
- For the most part, the same rates are applicable for both the attorney and plaintiff. If the attorney has a medical condition impacting his or her life expectancy, it is possible to secure rated age underwriting.
- Most life companies require that their own hold harmless agreement be filled out. Furthermore, there must be language included in both the settlement agreement and uniform qualified assignment document (if applicable). Lastly, it is also necessary to submit a W-4P form.
- An attorney cannot own the contract. The assignment company must be the owner, even though the attorney is the recipient of all the payments. This ensures that the attorney is not in constructive receipt, which would make the payment immediately taxable.
- All the documents (including the annuity contract, the settlement agreement, the fee agreement, etc.) should clearly indicate that the attorney has no right to accelerate any of the payments. This also avoids any argument that the attorney had constructive receipt of the funds.
- When is it too late? An attorney must agree to a structured fee prior to the case being resolved. This means that before a client signs documents and checks are issued, an attorney fee structure must be in place.
