The structuring (or deferral) of Attorney Fees has been affirmed by the U.S. Tax Court in the case of Childs v. Commissioner of Internal Revenue, 103 T.C. 634 (1994). This ruling allows the combined power of 100% tax deferral and compound growth rates to work for the benefit of attorneys. Should you decide to take advantage of this powerful tool, Robert W. Johnson & Associates can help you determine the best approach to structuring your attorney fees.
Why Should You Consider Structured Attorney Fees?
Tax Advantages of Structured Attorney Fees:
Thus, the financial impact of the tax-deferred growth to the attorney, whether looked at from either a long-term or short-term perspective, is spectacular.
A Long-Term Scenario: Prepare for Retirement or College Costs
For many attorneys, the long-term perspective comes into plan when they think of using the structured fees to fund their retirement or to pay for a child's college education. To better understand the significant financial impact of the 100% tax-deferral, let's consider the following scenario.
A 40-year-old attorney, who plans to retire in 20 years, has just settled with the last of three defendants. Prior settlements, in the instant case, have netted the attorney over $1 million in fees, and the latest settlement will net the attorney an additional $250,000 in fees. The attorney has the option of either structuring his $250,000 fee or paying the tax (50% tax bracket) and investing in a tax-free municipal bond.
If the attorney structures his fee (at current rates), the $250,000 will payout $1,004,000 before tax (or $502,000 after tax) in 20 years (guaranteed). On the other hand, if the attorney pays the 50% tax ($125,000) and invests the balance ($125,000) in a municipal bond (at the current tax-free interest rate of 5.1%), the after-tax payout in 20 years would be only $338,000. This is a shortfall of $164,000 when compared to the structured attorney fees payout of $502,000.
In addition, for the pay-the-tax option to generate the same $502,000 after-tax payout would require the pay-the-tax option to have an after-tax investment rate of return of over 14% per year. The structured attorney fees is the obvious choice.
A Short-Term Scenario: Increase Cash flow and Reduce Taxes
When the structured attorney fees are looked at from the short-term perspective, the financial results are even more impressive. The short-term perspective focuses on increasing cash flow while simultaneously reducing taxes. Consider the following scenario.
A 60-year-old attorney wants to ensure that her office expenses, approximately $10,000 per month (for the next five years) are covered in spite of sporadic case settlements. Her attorney's fees in a current case are $600,000. She has the option of either structuring the fees or paying the tax (50% tax bracket) and investing the balance in a tax-free municipal bond. If the attorney elects to structure her attorney's fees (at current rates), the $600,000 will payout $10,000 per month for the next five years guaranteed. In addition, since the taxable income from the annuity matches the tax-deductible office expense, the net tax is zero.
On the other hand, if the attorney pays the 50% tax ($300,000) and invests the balance, $300,000 in U.S. government bonds will generate less than $5,500 in monthly income. The attorney would need an investment return of over 27% per year (on $300,000) to generate enough cash to make the $10,000 per month payment for the full five years. Not even high-yield junk bonds have a yield that extravagant. Again the structured attorney fee is the obvious choice.
In summary, a) the 100% tax deferral, b) the ability to increase cash flow while lowering taxes, and c) the unlimited contribution allowance illustrate that the case for structuring attorney fees is financially clear, convincing and beneficial to the future security of the attorney.
Remember, it's not what you make, but what you keep. For assistance with structuring your attorney fees, contact Tory K Owens