Trial Lawyer Myth:
“I have to get a big fee in order to make deferral and accumulation actually work.”
Waiting for the big fee to come along – and not already having it spoken for when it arrives – is a significant reason why wealth accumulation doesnt happen for so many attorneys.
In truth, trial lawyers should start planning person wealth now if they haven’t already begun – and that goes for equity partners and associates as well as those brand new to the trial bar. Self-confidence and tireless legal work do not automatically correlate to financial success at home. In addition to putting your nose to the grindstone, it’s crucial to have an overall personal financial plan in place – for both building wealth and managing cash flow at your law firm.
Now more than ever, the ability to build wealth starts right out of the gate. Younger trial attorneys are serving in a variety of leadership capacities in lawsuits and in the legal community. Female lawyers are fiercely closing the gender gap. More opportunities are on the horizon. That’s why it’s critical to start planning for financial success now, so it can grow alongside your professional success.
One strong (but not absolute) suggestion is structuring attorneys’ fees, which can be one effective part to that overall plan for financial success. Wherever you are in the timeline of your practice, consider the following factors about deferred compensation and structured fees:
- Deferred compensation is essentially an extension to your savings plan. Once you begin, you flip the switch to becoming a saver versus someone who is just perpetually generating revenue.
- The IRS limits how much anyone can defer in any one tax year–unless you are a trial lawyer working on contingency. Then it’s unlimited. Take advantage of it!
- Not all partners in a firm have to participate.
- Structured fees operate outside of 409A. Therefore, they don’t have minimums or maximums, are not census tested, don’t require a commitment on an annual basis, and are completely flexible in design.
- Attorney tax payers are taxed in the year of distribution; it’s recommended that the plans are put in the individual name of the lawyer, not the firm. So no tax is due on earned fees in the year the case settled. Control when you recognize income.
- Fees deferred and not recognized by the firm are accounted for in the same manner as cash distributions amongst partners for equity of distribution. Associates and newer attorneys to a firm can be rewarded with additional deferred comp as a tool for retention.
- Referring attorneys would be grateful to know you are thinking about their bottom line and not just sending them a check, but rather you are negotiating settlements that provide options for your firm and theirs.
- The growth of the assets can be based upon broad equity markets, so it’s not just your three percent annuity anymore.
When considering these factors, it’s important to remember that long-term financial security comes from continuous efforts and small wins. It’s the accumulation game. A consistent approach to deferral and accumulation can really make the difference over a decade. We have clients who have consistently done this on three to five cases a year for the past decade, and they have over $1 million pretax dollars working for them. It’s as simple as getting base hits.
Indeed, a trial attorney and his or her practice has to be financially ready to put a plan in place and stick to it. Consider your options carefully. The structured fee could be in your arsenal of long-term financial planning. Find your own expert and plan to incorporate this strategy into your planning and goals.