Structuring an attorney fee deferral on a $2 million contingency fee

CASE STUDY DETAILS

The opportunity in a contingency fee

When a plaintiff attorney earns a significant contingency fee, the default is often to take the full amount at settlement. In California, one of the highest-tax states, a high earner could lose roughly 54.1% of the fee to federal and state income tax before investing a single dollar (37% federal tax, 13.3% state tax, 3.8% NIIT).

With a properly structured attorney fee deferral, an attorney can choose to postpone some or all of a contingency fee. Instead of taking the fee now and investing what’s left after taxes, the attorney keeps the full pre-tax amount invested. Taxes on the fee and all interim gains are deferred until distributions are received.

A hypothetical comparison

Prospera modeled a $2 million contingency fee earned by a hypothetical California plaintiff attorney, comparing three strategies: - Fee deferral: defer the fee and invest the full pre-tax amount, with taxes on the fee and gains deferred until distributions are paid. - Immediate receipt: take the fee at settlement, pay taxes, and invest the after-tax proceeds. - Indexed annuity: direct the proceeds into an indexed annuity. The analysis assumed a 10-year horizon and an aggressive allocation with a projected annual return of 7.46%.

The results

Fee deferral produced the strongest projected outcome. After taxes, the deferred fee was projected to generate $2,488,390, compared with $1,908,586 for immediate receipt. That’s nearly $580,000 more in after-tax wealth from the same fee. The indexed annuity projected an after-tax value of $1,927,806, ahead of immediate receipt but short of fee deferral.

Why the difference matters

More money stays invested from day one. Taking the fee at settlement means taxes claim nearly half of it before it can grow. Fee deferral keeps the full pre-tax amount in the market, compounding on a base almost twice as large. Taxes are also paid gradually as distributions arrive, not all at once in the year the fee is earned. Keeping the full amount invested while controlling income timing can meaningfully improve long-term effective tax rates and the attorney's after-tax dollars.

A planning opportunity, not just a tax decision

For many plaintiff attorneys, a large contingency fee is one of the defining financial events of their career. Yet they often decide how to receive it without weighing the tax implications or the option to stage the income. Fee deferral can amplify the economics of a contingency fee, potentially creating hundreds of thousands of dollars in additional after-tax wealth.

This is a hypothetical scenario created for illustrative and educational purposes. It does not describe an actual attorney or client results. Projections are hypothetical and are not guarantees of future performance. Market-based investments involve risk, including potential loss. This is not tax advice; attorneys should consult their own tax advisor about their situation.

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Imagine what we

could do together.

Prospera Market Strategies creates market-based structures that turn simple settlements into meangful legacies.

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