Sometimes, lawyers only charge for their services when they win cases or otherwise help their clients recover money. These are called contingency fees, and they’re paid from a percentage of the recovered money.

Lawyers are happy to receive these large fees after winning big cases, but since the payments come all at once, the fees can also generate huge income tax bills in the year the lawyer gets them.

Tom McCann, co-founder of Crestview Capital Management in Agoura Hills, Calif., has a client who faced this situation. But McCann uncovered a strategy that saved this client hundreds of thousands of dollars in federal income taxes and helped defer the payment into the client’s retirement years.

And the same strategy can be used by any attorney paid through contingency fees.

McCann’s client, a successful attorney located in Southern California, is a highly respected trial lawyer who has helped recover almost $1 billion for clients. His success has allowed him to earn large contingency fees paid in lump sums. This trial lawyer and his wife wanted to save more of their contingency fees for their retirement, which is about 10 years away, and wanted to spread out their income tax liability.

The attorney turned to McCann, who had founded Crestview Capital Management with business partner Brian Bucell three years ago. (They are affiliated with Dynamic Wealth Advisors.) McCann had worked for large wealth management firms previously, and many of his clients have followed him to his new firm. Crestview works with high-net-worth attorneys, business owners, executives and engineers.

“Our clients—and those of many advisors—need more than just investment advice. We need to understand their objectives,” McCann says. “In particular, this client wanted to save for retirement and spread out his tax liability.

“High-net-worth families like our clients face a myriad of complex planning challenges, particularly as tax laws change,” McCann says. “We sat down with the client, as we do with all of our clients, to create a comprehensive financial plan that was tailored to his specific situation. By establishing and prioritizing the client’s goals and strategically reviewing them on a regular basis, we help clients stay on track towards reaching their goals, make tactical adjustments during life events and avoid possible pitfalls.

“This client was looking for a tax solution and a way to get a larger payout after retirement, but he and his wife did not feel annuities were the right choice,” McCann says.

While doing research on his client’s case, McCann discovered a deferred compensation mechanism allowed for attorneys. A well-respected tax attorney had written extensively about fee deferrals, which had been approved by the U.S. Tax Court along with the Court of Appeals for the Eleventh Circuit.

The IRS income tax code regulation allows attorneys (and a few other professionals) to create a structured deferral for contingency fees. The money can be set aside, tax deferred, for as long as the person chooses and can be withdrawn over any period of time. The tax deferral lasts until the money is withdrawn so that the full amount can be invested to grow during the time it is held away.

Once an attorney decides to defer a contingency fee, the financial advisor works with a third-party firm known as an IRS-compliant qualified settlement fund (there are several available, McCann said) that holds the money in a trust until the distributions begin.

The attorney never takes possession of the money. If he or she did, it would be taxed. While the money is held in the trust, the financial advisor manages the investments as the client wants. When distributions start, the third-party firm provides an IRS 1099 form to the attorney and his advisor for tax purposes each year, McCann said.

Using the tax code deferral strategy rather than an annuity to put money aside gives the client more flexibility in how the money is invested and withdrawn.

“This gives the person earning the money the chance to invest it as he or she wants with the guidance of their advisor, as permitted by the various deferred compensation plan administrators,” McCann says. “When the money is withdrawn after the recipient retires, he or she will probably be in a lower tax bracket than when the person is in peak earning years, therefore income will be taxed at a lower rate.”

But the money does not have to be used for retirement. It can also be used for a law firm’s operating expenses or other financial needs, McCann said.

“For our clients, we look at the planning process as climbing a mountain,” McCann says. “That is the accumulation phase. Then we get them down the mountain during retirement.”

McCann uses a hypothetical example to show how attorneys can realize savings. Take a lawyer who gets paid a contingency fee of $1 million after several years of work on a case. During the time working on the case, the lawyer did not get paid. Yet he or she could owe nearly $450,000 in income taxes on the contingency fee alone and be left with only $550,000 to invest—which is then taxed as it grows.

If the tax is deferred under the IRS tax rule, on the other hand, the $1 million can be invested, and the taxes can be paid over a period of years, possibly when the attorney is in a much lower tax bracket.

Under the rule, lump sum payments can be laddered to pay out at different times.

“This is not a new strategy, but a lot of attorneys are not aware of the possibility to defer payments,” McCann says. “Another of our prospective clients didn’t believe me at first because he thought it sounded too good to be true.” With an active manager, the client can select the way he wants to invest the money.

“Educating clients to this strategy can be a differentiator for a firm,” he adds. “This first client opened the way for our firm to work with other lawyers, so it has helped us as we continue to expand our business.” Crestview now works with several attorneys at different firms.

McCann says it’s important for advisors to open discovery talks with clients to uncover these types of opportunities—to have conversations with high-net-worth families that involve teams of investment, legal and tax professionals and determine what steps should be taken now and throughout the year to keep taxes at a minimum. There are a lot of planning strategies available, and it’s important for advisors to keep engaging with families.