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Childs v. Commissioner, 103 T.C. 634 (1994), forms the legal basis for attorney fee deferral and outlined several benefits for attorneys who defer legal fees. The case involved an attorney who had deferred a portion of his contingency fees from representing clients in personal injury cases. The IRS challenged the attorney’s deferral arrangement, but ultimately the Tax Court ruled in favor of the attorney.

Over the past twenty years, the marketplace has expanded greatly. According to the Insurance Information Institute, in 2020, the total losses for liability insurance reached $202.9 billion (inclusive of personal injury, medical malpractice and wrongful death claims). Similarly, the fee deferral programs available have increased and now attorneys have a wide variety of options and investments available. However, the total amount of dollars that have been deferred by attorneys has stayed stagnant.

Why more attorneys defer taxation of their contingent legal fees?  Great question when you look at the benefits of doing deferral.  But there are important considerations and issues to make sure it is the right choice for a specific fee:

The benefits:

Tax Deferral:      By deferring the receipt of income, one can potentially defer taxation in the current year, lower the overall payment of tax and have their fee grow tax-deferred until received.

Income Averaging: This can help attorneys manage their income and tax liability by spreading payments into more equal annual income to reduce the amount taxed at higher rates. It also allows the firm (business) to plan revenue out with more certainty.

Investment Opportunities: The investment options in a deferral program allow all the dollars to potentially earn interest or capital gains without taxation while they are held in the program.

Asset Protection: Depending on the structure of the deferral agreement, the deferred legal fee may be protected from creditors and other claims.

Retirement Planning: Most of the programs do not have deferral caps and integrate well with other traditional retirement planning strategies.

No limit (amount or age): The benefits are like most retirement plans but do have the added advantage of no cap on the amount you can defer in a single year and allowable withdrawals prior to age 59.5.  These are extremely valuable when used in conjunction with other retirement planning programs.

The downside: 

Financial Constraints: Attorneys and firms often utilize their personal finances to fund their law firm’s investment in cases. They may prioritize paying down debt or saving for future cases.

Lack of Awareness: The programs available are not widely known in the Tax Attorney, CPA, or Financial Planner markets. These groups are who attorneys typically go to for guidance and advice in their planning. The programs are specific to attorneys working on contingency fees and unique to this profession.

Short-term Thinking: There is always a battle between using funds now and receiving instant gratification versus savings for the long term.

Fear and Uncertainty:  Trial lawyers have income that varies from year to year, sometimes with huge swings up and down. This variance often creates a fear of not being able to access the funds in case of an emergency. In addition, many professionals fear the uncertainty of the economic environment and the performance of markets.

Access Limitation: The programs available have limits on the ability to access funds. You typically cannot increase the amount or frequency of the withdrawal schedule for immediate access.

Time: The programs available require decisions and documentation that is more complex than most retirement plans and becomes part of the settlement documentation. It may take a prospective attorney longer to understand and seek advice from their advisors. Typical plans need to be implemented and set in motion prior to a case coming to a resolution.


Like most retirement plans, attorney fee deferral programs have benefits and risks associated with implementation. If the program is used with other retirement plans, you can overcome many of the obstacles listed above. The benefits of deferring legal fees will vary based on the individual circumstances of the attorney and the terms of the program they utilize. Attorneys should consult with tax and financial professionals to review their specific situation and develop strategies that work best for their wants and needs. Attorney fee deferral programs do not work for everyone but should be considered as part of your overall financial strategy.

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