Law Firms Are Overlooking this Key Cash Flow Strategy

Any law firm owner will tell you that winning cases and maintaining an inventory are how you keep the lights on. But optimizing a firm’s financial strategy requires even more of a lift – namely, planning out revenue before year-end while also supporting future firm growth. How can managing partners achieve that level of financial zen, when it’s impossible to predict exactly when settlement revenue will arrive?

The answer: Controlling the timing of incoming contingency fees

It’s true that trial lawyers cannot predict the day – or even the month – when cases will settle. However, they can control incoming revenue from contingency fees. To do so, they need to rely on two key financial management vehicles: the firmwide qualified settlement fund and attorney fee deferral.

A qualified settlement fund (QSF) is a trust that holds settlement proceeds from the conclusion of a lawsuit. While the money from a settlement is held in the QSF, there is no constructive receipt of those funds. This system allows the plaintiff(s) and attorney(s) to independently plan how they receive their portion of a settlement – making the firmwide QSF a gamechanger for managing firm cash flow.

Why qualified settlement funds exist

Although the qualified settlement fund is especially advantageous to plaintiffs and their attorneys, its inception was originally meant to benefit defendants. Congress enacted 26 US Code § 468B to help defendants receive their tax deduction immediately after a case settles, instead of waiting on the plaintiff’s side to plan for the incoming settlement funds. Today, QSFs have become the standard of care on the plaintiff’s side – both as a wealth planning tool for the attorney and law firm and a means of receiving adequate settlement planning time for the plaintiff – while remaining beneficial to the defendant.

A?qualified settlement fund?does not need to be established for each individual case. A law firm can open its own?firmwide QSF under a single court order, after which it stays open to use with any and all of its cases.

Deferring contingency fees for personal and law firm financial planning

A QSF gives contingency-fee attorneys and law firms the time and space to utilize an important investment and tax-planning tool called fee deferral, which allows them to spread contingency fees into a schedule of payments over time. This strategy can be helpful in several ways. Read more on the Milestone blog.