This year marks the 30th anniversary of the United States – Barbados Tax Treaty and the 20th anniversary of Childs v. Commissioner, 103 T.C. 634.
Childs v. Commissioner
In Childs v. Commissioner, the Tax Court ruled in favor of an attorney fee deferral arrangement. This decision marked the first and only case supporting the right of an attorney to defer contingency fee income. The court ruled that the attorney did not have constructive receipt of his fees because the attorney did not have any right to a fee until the settlement agreement was signed. Before signing the settlement agreement, the attorney agreed to receive his fee over time instead of at the time of settlement. The attorney did not receive any economic benefit as no funds were accessible by the attorney before the agreement.
United States - Barbados Tax Treaty
The United States tax code imposes a withholding tax up to 30% on earnings of dividends and realized capital gains within all investment accounts. Attorney Advantage can mitigate these taxes by ‘wrapping’ each account with a private placement annuity per Article 18 (2) of The US / Barbados Tax Treaty. Furthermore, Attorney Advantage is compliant with IRS § 72(u) meaning clients are able to obtain distributions, without the imposed 10% penalty, before age 59 ½. In short, assignments through Attorney Advantage have more flexibility than those offered through domestic assignment companies which are subject to withholding tax and IRS§ 72(u).
So, this brings up the question, Why aren’t more Attorneys using Attorney Fee Deferral Plans?
Since the positive ruling for attorneys some 20 years ago, the attorney fee deferral marketplace has indeed expanded greatly offering more programs and a wider variety of options and investments available. But, and this is a big but, the total amount of dollars that have been deferred by attorneys and firms has remained stagnant. Let’s look at the pro’s and con’s.
Pro's of Attorney Fee Deferral Plans
- Plan retirement
- Withdraw funds
- Protect assets
- Defer taxes
- Invest higher amount of money
Because most attorney fee deferral programs do not have caps on the amount of money you can choose to defer, you can more easily plan for retirement. There is no cap in the amount of money you choose to defer, nor in the amount you choose to withdrawal prior to the age of 59 and a half. In most cases, attorney fee deferral vehicles are structured to be protected from creditors and other claims. Fee deferral plans allow you to defer your taxes for the current year or a number of years so those monies that otherwise would be taxed can continue to gain interest.
Con's of Attorney Fee Deferral Plans
The most important aspect to keep in mind when dealing with attorney fee deferrals is your situation differs from the next situation, which differs from the next situation. If you just opened your firm and are trying to grow your business, it may not sense for you to invest into your retirement. It may make sense to use that money this year for hiring, marketing, and advertising for business growth. If you took out a business loan to start your firm, it may make sense to prioritize paying off the loan before investing. This industry can be volatile in the sense that you may have 10 cases with positive outcomes in one year and only 5 the next so it may make sense to create an emergency fund before investing.
It is important that your attorney fee deferral consultant works in collaboration with you, your accountant and your financial planner to ensure the best strategy for YOU.
Conclusion
Like every other retirement plan, attorney fee deferral plans have both risks and benefits. If the plan is used in conjunction with your current retirement plan, you can overcome many if not all of the con’s listed above. The benefits of deferring legal fills differ between the individual attorney, the plan chosen and the terms of the plan chosen. All attorneys should consult with a tax and financial professional to develop the best strategy for your current and long-term wants and needs. Please contact an Attorney Advantage professional to learn more.
