Financial Advisor

Cutting Down a Lawyer’s Tax Burden

March 09, 2021

by Karen DeMasters

Sometimes, lawyers only charge for their services when they win cases or otherwise help their clients recover money. These are called contingency fees, and they’re paid from a percentage of the recovered money.

Lawyers are happy to receive these large fees after winning big cases, but since the payments come all at once, the fees can also generate huge income tax bills in the year the lawyer gets them.

Tom McCann, co-founder of Crestview Capital Management in Agoura Hills, Calif., has a client who faced this situation. But McCann uncovered a strategy that saved this client hundreds of thousands of dollars in federal income taxes and helped defer the payment into the client’s retirement years.

And the same strategy can be used by any attorney paid through contingency fees.

McCann’s client, a successful attorney located in Southern California, is a highly respected trial lawyer who has helped recover almost $1 billion for clients. His success has allowed him to earn large contingency fees paid in lump sums. This trial lawyer and his wife wanted to save more of their contingency fees for their retirement, which is about 10 years away, and wanted to spread out their income tax liability.

The attorney turned to McCann, who had founded Crestview Capital Management with business partner Brian Bucell three years ago. (They are affiliated with Dynamic Wealth Advisors.) McCann had worked for large wealth management firms previously, and many of his clients have followed him to his new firm. Crestview works with high-net-worth attorneys, business owners, executives and engineers.

“Our clients—and those of many advisors—need more than just investment advice. We need to understand their objectives,” McCann says. “In particular, this client wanted to save for retirement and spread out his tax liability.

“High-net-worth families like our clients face a myriad of complex planning challenges, particularly as tax laws change,” McCann says. “We sat down with the client, as we do with all of our clients, to create a comprehensive financial plan that was tailored to his specific situation. By establishing and prioritizing the client’s goals and strategically reviewing them on a regular basis, we help clients stay on track towards reaching their goals, make tactical adjustments during life events and avoid possible pitfalls.

“This client was looking for a tax solution and a way to get a larger payout after retirement, but he and his wife did not feel annuities were the right choice,” McCann says.

While doing research on his client’s case, McCann discovered a deferred compensation mechanism allowed for attorneys. A well-respected tax attorney had written extensively about fee deferrals, which had been approved by the U.S. Tax Court along with the Court of Appeals for the Eleventh Circuit.

The IRS income tax code regulation allows attorneys (and a few other professionals) to create a structured deferral for contingency fees. The money can be set aside, tax deferred, for as long as the person chooses and can be withdrawn over any period of time. The tax deferral lasts until the money is withdrawn so that the full amount can be invested to grow during the time it is held away.

Once an attorney decides to defer a contingency fee, the financial advisor works with a third-party firm known as an IRS-compliant qualified settlement fund (there are several available, McCann said) that holds the money in a trust until the distributions begin.

Tom McCann and Crestview Capital Management do not provide tax or legal advice. To the extent that this material concerns tax matters, it is not intended to be used by a taxpayer as tax advice. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. All investment advisory services are offered through Dynamic Wealth Advisors.

Photo credit: Markus Winkler, Unsplash

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