A Trial Lawyer’s Twist on Deferred Compensation

Trial lawyers are hardly known for their tax and financial planning skills. And yet, they're uniquely eligible for one of the most generous forms of retirement investing. The "structured fee" resembles an uncapped 401(k), providing tax deferral on both principal and earnings without any cumbersome ERISA restrictions. 

Recently, advisors have combined this option with other tax-saving strategies. For example, the "Attorney feeSaver" combines the "structured fee" with the "split-dollar" employee benefit strategy. In exchange for not receiving their fees today, it helps trial lawyers avoid income tax altogether on contingent fees.

Three Decades of Fee Structures

The attorney "fee structure" became common after 1996 when the U.S. Eleventh Circuit Court of Appeals affirmed the structure's ability to defer a lawyer's tax on contingent fees. The IRS initially fought the strategy, losing first in the U.S. Tax Court and then again on appeal. Since then, the IRS has cited those rulings with approval.

Fee structures are quite similar to structured settlements. In a fee structure, the lawyer's fees are paid to a third-party company to be held, invested, and distributed over many years. For example, a MetLife affiliate might hold the funds, buy an annuity, and distribute the proceeds over twenty years. Distributions to the lawyer include principal and interest, and are taxable only as the lawyer receives each payment. Fee structure options are also provided by non-insurance companies, which typically invest in pre-approved funds.

A Longer History of Split-Dollar Policies

The tax advantages of "split-dollar" strategies pre-date fee structures by multiple decades. The IRS ruled on their treatment in the 1950s and issued regulations in 2003. Companies continue to use and modify different versions. 

Typically, a split-dollar employee benefit plan provides a large life insurance policy for the shared benefit of employer and employee. Often, the employer makes premium payments on a life insurance policy owned by the employee, then treats those payments as a low-interest loan to the employee. Thus, the employer is able to fund a valuable life insurance policy for the employee without the employee incurring taxable income.

Combining for Greater Effect

The two strategies match well together. In many circumstances, a law firm might borrow to fund the split-dollar policy's premiums, then use pre-scheduled structured fee payments to satisfy its interest payments. In this way, the firm's deferred fees can fund a significant tax benefit to a key employee or partner. Applying the split-dollar rules, and scheduling the right interest and structured fee payments, is critical to the strategy's success. 

The Attorney feeSaver strategy has been developed by Joe Di Gangi of Elana Financial, a Certified Financial Planner and former President of the Society of Settlement Planners. Di Gangi has presented on structured fees for the Federal Bar Association, and advised on plaintiff financial literacy for the University of Delaware's National Leadership Consortium on Developmental Disabilities.

More for Plaintiff Lawyers

In addition to developing the Attorney feeSaver, Di Gangi co-founded NextPhase Community, the first online community for personal injury plaintiffs and their families. His partner in NextPhase,  

Dr. Darren Aboyoun, is a clinical psychologist experienced in counseling on personal issues raised by financial complications. Together, they created a website where injured plaintiffs find support through community discussion, mentorship, and educational courses on a variety of plaintiff-focused subjects.

Di Gangi has also sought out other tax-saving strategies for plaintiff lawyers. He's presented on the Plaintiff Recovery Trust, a simplified strategy to avoid double taxation of settlement proceeds in taxable cases. And sponsored Destination CLEs' trips for personal injury lawyers, including to the Virgin Islands - a far more enjoyable way to accrue business deductions. 

Joe Di Gangi, Certified Financial Planner and President of Elana Financial.

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