Just recently one of my clients made partner in a respected law firm. A dedicated and passionate female lawyer, she now stands among the 23.3% of women lawyers in this country who have risen to the top of their profession. This is an achievement worth celebrating, but it’s also a step that requires careful planning and a practical strategy to support the personal and financial implications of such a move.
Achieving equity partner status in a law practice is a demanding role that comes with considerable financial responsibilities. Each partner is expected to maintain and grow the book of business they bring to the firm over time. This requires female lawyers to focus time and attention on marketing themselves and their skills, and leveraging their networks.
Make no mistake, there is still gender bias to be overcome, even at this level, so having a strong and supportive team is key as you make this career transition. Among your trusted inner circle should be a financial advisor who can help you navigate the wealth management implications that derive from becoming an equity partner.
Financial Implications of Becoming an Equity Partner
There are a host of financial considerations that need addressing in the lead-up to becoming an equity partner, as well as the day-to-day management of your finances in the future.
In recent months I’ve worked closely with my female lawyer client as she deals with the mindset shift of now being paid once a month as a K-1 business partner employee, without having taxes withheld, as was previously the case.
A considerable change to incorporate into your new financial habits is the fact that each partner is responsible for reporting her own share of the firm’s income and paying the applicable federal and state taxes. This requires financial discipline to estimate quarterly tax payments and save the necessary funds each month.
Depending on the firm in question, benefits may also no longer be covered. If this is the case in your situation then it is vitally important to pay careful attention to the best ways in which to manage considerations like retirement and healthcare plans, which may end up becoming the full financial responsibility of the new equity partner. This has profound effects for cash-flow planning.
In my client’s case, her law firm also mandated the use of cash balance plans to increase her retirement contributions, a requirement which we used to take advantage of significant pre-tax retirement savings.
This stipulation also necessitated careful planning on our part around the implications for her budgeting. Cash balance plans are based on average career earnings and enable the holder to shift contributions into six figures and build large retirement funds quickly.
In addition, since equity partners are required to make capital ‘buy-in’ contributions to the law practice, usually payable over several years, this debt to the firm also needs to be planned for.
In some cases, it is possible to make monthly contributions, sometimes year-end bonuses can be utilized and, in some instances, bank loans are taken out as a financing method. Each new equity partner needs to strategize carefully for these buy-in payouts and how they impact cash-flow and take-home pay.
How to Adjust Your Wealth Management Strategy
For female lawyers taking on the pressure of equity partner responsibilities, it is inevitable that the time and attention focused on building and growing a successful law firm will feature highly among your personal milestones for some time to come. After all, responsibility for the success or failure of the firm now rests partly on your shoulders.
This may initially leave little time for dealing with the new personal complications associated with tax returns, asset allocation, budgeting, insurance cover or managing changes to your estate planning. That’s where a team of professionals comes in, to manage those issues on your behalf, while ensuring that you can also enjoy the spoils of your success.
In my experience, planning carefully for this transition is crucially important – from the build up to becoming an equity partner to how you handle your finances and financial milestones thereafter.
Female Lawyer to Equity Partner: Points to Ponder
Even before you make partner, you should be pre-planning for this career shift by raising the following issues with your financial advisor:
- If you are on track to become an equity partner, consult with your advisor up front to discuss cash-flow implications and ways in which to increase your line of credit for the future.
- Undertake due diligence on your own firm by asking for copies of the firm’s accounts to determine the future financial risk you’ll be taking on. Ask for information about profit per partner expectations, whether the office premises are owned or leased, and the personal liability carried by partners.
- Ask for details of the firm’s provisions around capital buy-in contributions and what the implications are for leaving the partnership.
Once you’ve become an equity partner, pay attention to the following:
- Buy-in implications: Are you required to pay cash up-front towards the capital contributions required of new partners? Or will this be taken from earnings over time? If so, over what period?
- Managing cash flow: Not only do you need to set aside funds for taxes, you may also find yourself covering additional retirement and healthcare contributions.
- Make provision for extras: Factor in requests for charitable and sponsorship donations, since most partners are personally liable for these.
- Beware lifestyle creep: The pressure to vacation in the same spots as your fellow partners, send your children to select schools or move into up-market neighborhoods can be great, so use your financial advisor as a trusted sounding board about what you can afford now, or defer to a later stage.
Build Your Support Team
As an advisory firm that specializes in serving female executives and professional women such as female lawyers, we understand that setting goals in life – and in wealth planning – is a critical component for living your best life. I delve into my own experience of setting priorities and developing milestones in my book, Corner Office Choices.
For women in the law looking to take the next step into equity partnership, my recommendation is to do so mindfully and by ensuring alignment between your professional and personal goals. If you need a helping hand on this journey, contact me today. I look forward to hearing from you.
