Attorney Fee Structured Deferrals: Case Study Analysis
To continue our conversation on Attorney Fee Structured Deferrals from our last blog post, I’d like to compare a few options that an attorney has at his/her disposal when deciding what to do with their contingency fees. The different scenarios that we will look at are as follows:
Scenario A: Take as a lump-sum and invest into an individual taxable account
Scenario B: Attorney Fee Structured Deferral – Fixed option
Scenario C: Attorney
Fee Structured Deferral – Variable (market-based) option
below for the outcomes for each of the above scenarios. Please note that distributions for each of these scenarios were made
on a quarterly basis; however, for the sake of saving space, we are
only displaying account value & after-tax quarterly distributions at 5-year increments.
As you can see, Scenario C (the market-based option) seems to outperform the other options when comparing the sum of after-tax distributions over this 20-year period. While we are not here to debate whether or not the market will provide you a 6% return – we are here to point out the benefit that an attorney can gain when choosing to defer taxes on their fees. When you start out with $200,000 and you have to pay taxes before you invest it, you are losing a good chunk of money that could have been invested – time in the market always beats market timing.
To another point – while Scenario B (Fixed option) grows tax deferred, the low
rate causes it to fall into last place in our case study when comparing the sum
of after-tax distribution. However, if you are someone that is low risk & values guaranteed returns,
Scenario B is a great option. It is also worth noting that the outcome of Scenario B (Fixed option) is not that much less than Scenario A (Lump sum into Taxable Account) - which really points to the value of deferring taxes.
Finally, with all of the above options/scenarios – depending on the program (or product) you go with & the institutions associated with it, there will be varying nuances & customizations that you will want to explore further. To help you better plan your future and navigate this space, do not hesitate to contact us.
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