You’re in the process of settling a case for your injured client. Congratulations. You’ve worked hard. Now comes the question of how and when you will be paid for your services. An increasingly attractive option is structured fees. Instead of receiving a lump-sum payment at the end of the case, you receive your fees in periodic payments over a set time through an annuity. While not tax-free like an injured client’s annuity payments, taxes are deferred on fees until payments are actually received.
Fees that qualify for structuring must come out of the client’s damage award. Because of this, wording outlining fee payments (total fee amount and payment schedule) needs to be included in the settlement agreement and all other settlement documents followed by language such as:
The claimant solely for his/her convenience directs the above payment stream(s) to be paid to (name of attorney or firm with whom claimant has a contingent fee arrangement). Claimant consents to the above-mentioned portion of the settlement obligation assigned to the assignment company, (insert name of Assignment Company once Life Company is chosen). The assignment company will purchase an annuity from (insert Name of Life Company) to fund this obligation in an assignment intended to meet Section 130 of the IRC.
Filling out and submitting IRS forms W-9 or W-4 is required when structuring attorney fees so as to comply with IRS tax-deferred rules. To be on the safe side, always consult a tax advisor to help ensure that the attorney fee structure is created properly.
Structuring a fee has its benefits: better money management of future expenses such as a child’s education or your retirement, possibly lowering your tax bracket, guaranteed payments, and, as with injured-party settlements, receiving more money than if you had taken an initial lump sum payment.
More Information on Structured Fees: Sample Structured Attorney Fees | Articles on Structuring Attorneys Fees
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