What is the impact of a structured settlement on attorney’s fees?

Attorney’s fees can be impacted and have an impact on a structured settlement in a couple of different ways, and they could actually lead to a conflict between attorney and client if not planned for in advance. Many times when you hire an attorney to handle your personal injury case, you sign a fee agreement which provides that your attorney be paid a contingency fee upon conclusion of the case, whether it settles or goes to trial. This is typically 20%-40% of the settlement amount or jury award. There is often no mention of a structured settlement possibility in the initial agreement.

The attorney and client have to work it out and sometimes sign a subsequent agreement just prior to settling. One way the fee can be paid with a structured settlement is up front, i.e., taken out of the settlement dollars, and then the structure is purchased with the balance. The down side for the client is that this could wind up taking quite a chunk out of the annuity. For example, if the offer to settle is $50,000, and the attorney’s fee is $20,000 (40%), then the annuity will only be purchased with the remaining $30,000, which will have much less substantial earnings over the life of the annuity. This, of course, allows the attorney to be paid quickly, but he must then pay income tax on all of that income at once.

Another way the fee may be paid is the attorney can agree to structure the fee over time and be paid from the proceeds as payments are made to the plaintiff or on a separate schedule worked into the structure. This seems to be done more and more these days with large settlements. Legal fees may be structured as installment payments or deferred lump sum payments, and deferral may extend until the attorney’s retirement or other event.

The tax ramifications for attorneys who choose to do this are complicated and attorneys should seek advice from a tax professional prior to agreeing to this type of fee arrangement. The one benefit for the attorney who accepts a structured fee is that he may be able to defer paying taxes on some of the income until he actually receives it. A disadvantage for the attorney is the same possible disadvantage for the client who agrees to a structure, and that is, if the third party insurance company paying the annuity is not government insured and becomes insolvent, the attorney may have to forego the balance of his unpaid fees.

(Reviewed 9-08)

Case Studies: Impact of Structured Settlement on Attorney’s Fees

Case Study 1: Upfront Payment

Mary hires an attorney to handle her personal injury case. They reach a settlement agreement of $100,000, and the attorney’s fee is set at 30% of the settlement amount. Since Mary wants a structured settlement, they decide to deduct the attorney’s fee upfront. Therefore, the attorney receives $30,000, and the remaining $70,000 is used to purchase the annuity. While this allows the attorney to be paid quickly, it reduces the amount available for the annuity, potentially impacting the long-term earnings.

Case Study 2: Deferred Fee Payments

John’s personal injury case results in a substantial settlement of $1,000,000. His attorney agrees to structure the fee over time, allowing John to receive the full settlement amount upfront. The attorney and John agree that the attorney’s fee will be paid from the annuity payments as they are made to John. This arrangement benefits John by providing immediate access to the full settlement, while the attorney’s fee is paid over time. However, both the attorney and John should seek advice from tax professionals to understand the complex tax ramifications.

Case Study 3: Installment Payments

Sarah’s attorney successfully negotiates a settlement of $500,000 for her personal injury case. Instead of receiving a lump sum payment, Sarah decides to structure the settlement as installment payments. The attorney’s fee is also structured to align with the settlement payments. This allows Sarah to receive regular income over time, while the attorney’s fee is paid in proportion to each installment. The attorney’s decision to accept a structured fee may provide them with the advantage of deferring tax payments until they receive the income.