For contingency attorneys, income rarely arrives in steady intervals. It comes in waves — months or even years of investment in a case followed by a large payout when it finally settles. That volatility makes financial planning especially important.
If you’ve just received a major case settlement, here’s how to think through the competing goals of covering taxes, preserving liquidity, and putting the rest of your capital to work.
Step 1: Set Aside Taxes Immediately
Before anything else, reserve roughly 35–45% of the payout for federal and state taxes. Even if you plan to use charitable or retirement strategies later, start with this conservative assumption. It’s easier to reallocate extra funds later than to scramble for taxes owed.
Step 2: Evaluate Tax Reduction Opportunities
Once your base tax reserve is in place, you can consider ways to reduce your overall liability:
- Donor-Advised Fund (DAF): If you’re charitably inclined, this can be an efficient way to offset income in a high-earning year while giving you flexibility to support causes over time.
- Defined Benefit Pension Plan: Depending on how your firm is structured and whether you have employees, this strategy can allow much larger pre-tax contributions than a traditional 401(k). Properly designed, it could shelter hundreds of thousands of dollars from immediate taxation.
Both options require coordination with your CPA and plan administrator, but they can make a meaningful difference in smoothing income and reducing the year’s tax burden.
Step 3: Maintain Strong Liquidity
Unlike a one-time inheritance or bonus, your payout likely needs to fund future case expenses. Before investing, model out at least one to two years of personal and professional cash flow, including:
- Personal spending
- Firm overhead
- Expected case costs
Keep these reserves in a high-yield money market or short-term municipal fund, where you can earn interest while maintaining full access. That balance between liquidity and earnings is critical for attorneys who regularly fund their own case pipeline.
Step 4: Plan Around Future Income Variability
Look ahead at your next 12–18 months. If you expect significantly lower income after this case, you may have an opportunity to use that lower-income year for additional tax planning — such as Roth conversions or adjusting your retirement contributions.
Aligning tax strategy with the rhythm of your casework can make a large difference over time, especially when income swings dramatically year to year.
The Bottom Line
A seven-figure contingency fee is both an achievement and a challenge. Start by locking in taxes and liquidity, then use what’s left to strengthen your long-term financial position through charitable or retirement strategies.
With the right plan, a single case win can fund not only your next case — but also your future.
This post is adapted from a recent episode of the Scholar Wealth Podcast. For more perspective on windfall management and tax planning for contingency attorneys, listen to the full podcast episode here.