For contingency-fee attorneys
Defer the fee.Compound the result.
Attorney fee deferral is a legally established strategy — validated by Childs v. Commissioner — that lets you spread fee income across years, defer the tax, and let pre-tax dollars compound, when elected before settlement.
- Advanced designations
- CFP® +5
- Top of the Table
- MDRT
- PI experience
- 20+ yrs
- By legal duty
- Fiduciary
- Served nationwide
- 50 states
Advanced designations
Top of the Table
PI experience
By legal duty
Served nationwide
What it is
Paid over years,
taxed as received.
When a contingency case resolves, the fee is ordinarily taxed in full in the year of settlement. Fee deferral lets you agree — before the case settles — that the fee will be paid out over a future schedule instead. Income tax is then owed only as each payment is received. The fee is assigned to a third party before settlement, and you become an unsecured general creditor with no present right to the money.
How this fits a wider planThe legal foundation
Childs v. Commissioner
The strategy is established by Childs v. Commissioner, 103 T.C. 634 (1994), aff’d, 89 F.3d 856 (11th Cir. 1996). The court held that an attorney who arranges to defer contingent fees — before having an unconditional right to them, with a promise that is neither funded nor secured — is taxed only as payments are received, not in the settlement year, and that constructive receipt does not apply.
The IRS has never overturned Childs. Recent IRS scrutiny is aimed at aggressive arrangements — for example, taking a loan against the deferred fee — not at properly structured, Childs-compliant deferrals.
Why attorneys defer
The case for deferring a fee
Four reasons contingency-fee lawyers structure their fees rather than recognize them all at once.
Spread income across years
Level a large fee over several tax years instead of recognizing it all at once — avoiding an avoidable spike into the top federal marginal bracket in a single big-fee year.
Defer the tax
Income tax is owed only as each payment is actually received, not in the settlement year. The deferral moves the liability to the years the money arrives.
Compound pre-tax dollars
Because tax is deferred, the full pre-tax amount stays invested and compounding — which can produce a materially larger after-tax result than taking the fee, paying tax, and investing the net.
A plan for lumpy income
With no statutory contribution cap, deferral can work like a retirement plan for contingency practice — smoothing the peaks and valleys of irregular fee years to build steady future income.
How it works
The mechanics, in four steps
The structure has to be set up correctly from the start — the election precedes any unconditional right to the fee.
Build it into the agreement
The deferral option is written into the fee and settlement documents before the case settles — ideally early in negotiations, since the defendant or insurer’s cooperation is needed.
Direct the fee to a third party
The defendant, insurer, or a Qualified Settlement Fund pays the fee amount to a third-party assignment company — not to the lawyer — which assumes the obligation to pay on the agreed schedule.
Fund the future payments
The assignment company funds the schedule, typically by purchasing an annuity or making an investment, depending on whether the plan is fixed or market-based.
Receive on schedule
You receive payments over the agreed years, reported on Form 1099 in the years received — and taxed only then.
Structured fees & Qualified Settlement Funds
Two structures.
One clean election.
Structured attorney fees come in two families: fixed annuities for guaranteed, bond-like income, and market-based plans for growth potential and more flexible payout timing. And when a case settles quickly or at year-end, a Qualified Settlement Fund under IRC §468B can hold the proceeds — releasing the defendant while you are not yet in constructive receipt — buying time to make a clean deferral election.
- Fixed annuity — guaranteed, predictable, no market downside
- Market-based — growth potential and flexible payout timing
- A QSF buys time without anyone reaching constructive receipt
- A QSF is not required to defer — we use it only when it earns its place
The one rule
Elect before settlement.
This is the single gating requirement. Once you — or your firm — have an unconditional right to the fee, the constructive-receipt and economic-benefit doctrines treat it as already taxable, and the chance to defer is gone. The conversation has to begin before the settlement agreement and release are signed. The cleanest path is to keep deferral language standing in your fee agreements, so you are never caught unable to elect.
Educational information for contingency-fee attorneys — not tax or legal advice. Every attorney’s situation differs; consult your own tax and legal advisors before deferring fees.
Comprehensive planningCommon questions
Fee deferral, answered.
The questions attorneys ask most about deferring contingency fees. See more in our full FAQ.
Read the full FAQAttorney fee deferral lets a contingency-fee lawyer agree, before a case settles, to receive the fee as a stream of future payments instead of a lump sum. Income tax is then owed only as each payment is received, rather than all at once in the settlement year.
Yes. It is a legally established strategy validated by Childs v. Commissioner, 103 T.C. 634 (1994), aff’d, 89 F.3d 856 (11th Cir. 1996), which the IRS has never overturned. Properly structured, Childs-compliant deferrals remain sound; the IRS scrutiny targets aggressive arrangements such as loans against the deferred fee.
Because of the constructive-receipt doctrine. Once the lawyer has an unconditional right to the fee or could draw on the money, it is taxable even if payment is deferred. The election to defer must be in place before the fee is earned, so the lawyer remains an unsecured general creditor with no present right to the funds.
Deferral spreads fee income across multiple tax years to avoid a spike into the top bracket, delays tax until payments are received, and lets pre-tax dollars compound until distributed. With no statutory contribution cap, it can function as a retirement-style plan for lawyers with lumpy contingency income.
A Qualified Settlement Fund, established under IRC §468B, is a court-supervised fund that receives the settlement so the defendant can be released while the plaintiff and attorney are not yet in constructive receipt. It buys time to make a clean fee-deferral election when a case settles quickly or at year-end.
Set up the deferral before settlement.
Bring us in early — we’ll structure the fee correctly and coordinate the QSF when it helps.