Financial planning for attorneys

There’s a reason why so many of you bill in six-minute increments: because time is by far your most valuable asset. For years, you’ve devoted the majority of your waking hours to protecting and serving the interests of your clients. The all-too-often unasked question, however, is whether someone is being as diligent in watching out for your financial best interests? Even for successful attorneys who’ve achieved partner status at mid-sized or larger corporate law firms, thoughtful financial planning can prove a difficult and complex challenge.

You may have the financial acumen to effectively manage wealth on your own, but you also have incredible demands on your time—demands that can preclude you from addressing all the interrelated aspects of comprehensive financial planning.

According to Mark DiCristina, a client advisor and founding member of Truist’s Legal Specialty Group, there are three common fundamental financial questions that corporate attorneys wrestle with:

1. What would it take for me to have the financial flexibility to walk away at some point in the future, when and if I choose? For professionals in high-stress careers, there’s an incredible sense of calm that comes with knowing your financial future is fully secured.
2. As my income increases, what should I do with the extra money? Should I be paying down debt, adding to my taxable accounts, contributing to my children’s 529 plans, or putting that money into a life insurance policy? There’s no one-size-fits-all solution.
3. What financial strategies are other attorneys at my law firm pursuing that I’m currently not doing? There are unique aspects surrounding attorney compensation structures that make working with a financial advisor who truly knows the ins and outs of your profession essential.

"By undertaking a comprehensive financial planning process, each of these questions, along with a host of other secondary concerns, can be answered,” he adds.

Addressing income variability

Unlike other professions where monthly compensation is essentially fixed and predictable, law firm partner compensation tends to be heavily back-end weighted. It’s not at all unusual for an equity partner to only see roughly one-third of their income realized in the first half of the year, with the remaining two-thirds accrued in the second half of the year.

From a cash flow standpoint, this can be highly problematic. Not only do the majority of your monthly expenses not change (e.g., mortgages, tuition payments, loans, etc.), as an owner in the firm you also need to pay estimated quarterly income taxes based on your total anticipated annual income. Even in instances where firms distribute tax draws to partners to help assist with estimated quarterly tax payments, cash flow can still be a major issue.

As a result, it’s important to have access to some form of liquidity to help smooth out your income during the leaner months. Our Legal Specialty Group works with numerous attorneys who year after year will borrow against an established lending facility during the first two quarters, and then subsequently pay off whatever loan balance they’ve accumulated by the end of the year.

Managing “lifestyle creep”

Rarely are cash flow issues solely driven by income variability. Even partners earning $1 million or more can find themselves feeling strapped for cash. It’s not at all uncommon to have an attorney earning around $1.4 million annually say to us, “If you told me a decade ago I’d be making this much, I would have guaranteed you that I’d be saving at least $400,000 or $500,000 a year.” But after a rough calculation of quarterly taxes and monthly expenses (e.g., mortgages on a primary and secondary home, tuition for multiple kids in private schools, country club membership, etc.), the cause is apparent. The client’s lifestyle has expanded in direct proportion to their annual income.

“Several years ago, I was sitting down with one of my wealthiest clients and I asked him how he managed to accumulate more than $25 million in wealth,” explains DiCristina. “I was expecting the answer would involve some combination of family money and fortunate investment timing. But to my surprise, the client smiled sheepishly and said, ‘It’s simple. I spent a lot less than I made, and I haven’t changed my lifestyle much from the days when I was earning $400,000.” Each of you—because of your successful rise to partner—has a unique opportunity to create a level of wealth you never imagined possible; just by doing small things over an extended period of time.

Career mobility challenges

Partners at law firms typically have access to tremendous retirement benefits. These will usually include both a 401(k) and a profit-sharing plan, as well as perhaps a cash balance plan and/or a nonqualified deferred compensation plan. On the plus side, these vehicles afford you an opportunity to accumulate substantial retirement assets. But given today’s high degree of career mobility, they can also present issues.

Over the course of his or her career, the average corporate attorney will work at between three and five firms. As you move from firm to firm, however, you’ll have different corporate benefits, different retirement vehicles and different investment choices. Often, this results in substantial retirement assets being held across multiple “legacy” 401(k) accounts—with no cohesive global approach to ensure that all these different assets are working in tandem to meet your long-term goals.

Even with partners who have been at the same firm for their entire career, we’ll see situations where the individual set their asset allocation 20 years ago when they were an associate making less than $200,000. Yet even now, as a senior partner making $1.4 million, they still maintain the exact same allocation. Furthermore, over time your target asset allocations will inevitably drift as certain asset classes outperform others. This can result in you unwittingly taking on significantly more or less investment risk than you intended; this is why it’s essential to periodically review and rebalance your retirement plan accounts.

Capital Loan Program

When you become a partner at a firm, you’re required to buy your ownership units (your partner capital) from the partnership. When you decide to jump to a different firm, however, you may encounter a situation where you need to buy into the partnership at the new firm quickly, but your previous firm will only be willing to pay you back your partner capital over a two or three-year period.

To facilitate these types of situations, Truist has created a partner capital loan program that many of our corporate law firm clients avail themselves of—enabling us to lend the capital to incoming partners so they don’t have to stretch their liquidity or hamper cash flow.

Retirement income and legacy planning

While attorneys tend to be excellent retirement savers, they often overlook the importance of ensuring that their retirement assets are thoughtfully distributed across taxable, tax-deferred, and tax-free accounts so they will have greater control over their tax liability. At Truist, we spend a great deal of time with our clients explaining how asset location can dictate the tax efficiency of retirement income distributions—in other words, what’s the optimal sequence for drawing down assets to mitigate your tax liability? But it’s a conversation you should be having a decade or more before you retire rather than waiting until retirement is right around the corner. If your total wealth is predominantly comprised of a $2 million house that’s paid off and a $6 million retirement account, you really won’t have much in the way of flexibility.

Another thing we often encounter are older attorneys who purchased substantial permanent life insurance policies when they were younger. They saw the policy’s built-up cash value as an asset that could provide additional cash flow in retirement and afford some control over taxes. After successful careers with access to multiple retirement vehicles, however, they come to realize that they have no need for additional retirement income. So we engage in a lot of conversations around ways to potentially repurpose those policies—to direct them towards other needs (e.g., long-term care protection, legacy, philanthropy, etc.).

And when the estate and gift tax exemption was raised (currently $11.7 million per individual for 2021), fewer attorneys felt the need to worry about estate planning. Unfortunately, this has led to a somewhat laissez-faire attitude. In an ultimate embodiment of “the cobbler’s children have no shoes,” we often see very wealthy attorneys who don’t even have a will, let alone trusts or any other estate planning documents. What many fail to realize, however, is the importance of asset titling and maintaining updated beneficiary designations to ensure the proper distribution of wealth according to your wishes.

Creating attorney-firm symbiosis

Our dedicated Legal Specialty Group affords us a unique opportunity to forge relationships that encompass both the firm as an entity, as well as the individual attorneys who provide the intellectual capital that fuels the organization. This allows us to gain a deeper understanding of all the various organizational benefits available to you, but also to align and adapt your financial plan to any organizational changes that may be coming down the road.

Most importantly, the sooner you start diligently and faithfully planning, the more options you’ll have at your disposal and the greater the likelihood of achieving all your various future goals.