Financial Planning for Attorneys

Carolyn Dolci:I'm Carolyn Dolci. I am a tax partner. I am co leader of our law firm services group, so the services I provide to clients are tax compliance, tax planning, consulting, and I want to call it general other planning, working with our other groups here at Eisner Amper. And I am also co-chair of our Women of Eisner Amper employee Resource Group. Larry.

Larry Seigelstein:Thanks Carolyn. My name is Larry Seigelstein. I also am on the Eisner Amper Wealth Management and Corporate Benefits team. Completing my 15th year here. I work with our clients, both individual and corporate in various aspects of financial planning and really trying to help them achieve both their life and/or corporate goals. Back to you, Carolyn, to get this thing kicked off. Thank you.

Carolyn Dolci:Thank you. So we have an agenda today. I'm going to talk a little bit about, you can see it here, our services, a few other items worth mentioning, retirement plans, succession planning, buy, sell, partner benefit offerings, and if we have time we will do some Q&A. But before I get started, I just want to do a special thank you to Jean Waldman, who is a senior manager in our law firm services group. She was very instrumental in putting this seminar together, so thank you Jean.

Okay, so just want to, many of you may know what we do, many of you may not, but I just want to talk a little bit about what we do with law firms: accounting audits, reviews, compilations, financial statements, benefit plan audits. We also have done SOC reports for law firms, taxation. We cover a lot of ground here, entities of all types, individuals, state and local, international. We have a forensic litigation valuation group that provides services to attorneys to help them in their practice. A couple other things to mention here, we have done trust and escrow account reviews for law firms and we bring in firms together, separate firms, bring in a partner and we have our wealth management group. One thing I did in here was a link to our website, so if you wanted to check out any services that you hear along the way.

So now I'm going to get into, I only have one slide, but I do have a few pages of notes. So I will go through them and I call it a few items worthy of mention because they are things that are affecting law firms and our law firm clients. First one being the employee retention credit. Now this was a credit that came about as of COVID and it was intended for businesses to keep their people employed. So I want to call it, there's say there's kind of two avenues to this credit. You can either get it by your business was partially or fully suspended because of a government order or there was a decline in revenues. So there's a basic ERC that was from 2020 and then there's the expanded with 2021. In either case, you can do the shutdown or you look at the revenues.

So for 2020 you had to have a 50% decline in revenue over 2019, 2021, there's a 20% decline in revenue. So the '21 credit's a little bit easier to get. There are a lot of rules of this, but I want to kind of get you into some of the highlights so that if you hear something you can follow up with us. The credit for 2020 was $5,000 per quarter per employee if you qualified for those quarters and it's 7,000 per employee per quarter. You do have to amend your payroll tax returns, the 941s, three years to do that from the date of filing. You also have to amend your business tax return because if you took that deduction for payroll and you do this credit, you have to go back and report it in the year that the credit relates to. So even though you may not get the cash yet, you do have to go back and amend and put it back in the year that it relates to.

So this has been a valuable credit for many businesses and generated a lot of cashflow. But of course whenever there's free money coming or someone thinks there's free money, there's always people that jump on and are trying to find ways to make money on this. So you've probably seen it on billboards, hear on the radio, TV, other places, there could be companies that are offering to get you an employee retention credit. Some of them can be your credit may be perfectly fine, but some of them are looking to do it basically to commit fraud to do it because they're going to take a piece of it.

But if something goes wrong, you're stuck with the audit payback of the credit and interest and penalties. IRS did add the employee resource credit abuses to their dirty dozen list. So if you haven't done it and might be eligible, look into it, but just be careful. It can be great, but you do need to be careful about these scams that are out there. Leading into the next thing, and I have my notes here, but I don't have a slide to switch. State taxes. Big thing for our law firms, the Sutton local group, I would say they're my best friends because I need them all the time for all our specialty items.

Nexus is really sent in front, in front here. So what is it? If you don't know what nexus is, it's do you have enough of a connection to a state in order for them to have tax jurisdiction over you? So years ago, years, years ago it was a little bit easier. You could say, well, do I have payroll? Do I have an employee in the state? Am I renting property? Do I have an office? I know if I have an office there and now it's a little bit more complicated. Do you have a remote employee? Did you forget about that person? Do you have a backup server in that state? So you have to look and say, "Do I have Nexus?"

There's also states that look to say, "Do you have economic nexus?" Meaning that you've never stepped foot in their state, but you've done enough business in their state where they think they should be able to tax you. So by example California, if you have 600 and I think it's $90,000 worth of revenue into California, you have economic nexus and you have a filing requirement. Sometimes with law firms they'll say, "N, I never did anything in that state." And then you look at their website and there's something on there saying, oh, we were so successful in this case and it relates to a state. If we can find that, so can a state tax auditor. So you just want to be careful to look at this and make sure you're doing reporting properly. Many states are also leaning towards market sourcing, meaning how do you source the revenue to your state?

Is it where you did the work or where was the benefit received by your client? Just adding to the complexity of this. As we sit here in August and we can't go through everything on Nexus, it's more an overview to make you think about it. And as I say, as we sit here in August, if you haven't done an analysis recently and haven't thought about these things, now's a good time to do it early fall. Now you don't want to be a week before the end of the year and you're doing your tax planning or before you're doing your tax returns and saying, "Wow, I didn't know we had this employee there and we weren't making any payments." So something to think about now. Pass through entity tax. Another big issue or a big item here with lots of benefits to it, most of us remember back in 2017 as a result of that tax act, there was a cap on state and local taxes, $10,000 on your individual return, and that goes from 2018 to 2025.

So states tried to do workarounds, so November, 2020 comes along and the IRS issues notice and says that the salt cap doesn't apply to pass through entities. So since that time, 36 states have jumped onto setting up PTE taxes. Connecticut I think was the first one. There are significant benefits to the PTE tax because you take the look at the revenue from the pass through entity, they figure out your state tax, they get a deduction for it at the entity level, it's passed out to you and you get a credit on your state tax return. There's no impact to the state. It only affects your federal. If you get a federal deduction, possibly savings on Medicare tax. Now you do need to be a pass through entity, need to be an S corp LLC or taxed as a partnership.

So if you are a sole practitioner, an employee or a corporation, regular corp, you're not going to be eligible to do this. So the thought is you might want to consider and it's consider should you make an election to be an S corporation, whether you're a sole practitioner or a corporation to take advantage of this. Just something to think about. Rules vary by state. They're not all exactly the same and of course they make changes to them. Sometimes they make retroactive changes. I will say when sometimes they make changes, even if they're retroactive, they're for the better. They're making clarifying rules or making the benefit a little bit better.

The pass through entity tax, it is more work for your finance team. They have to figure it out. They have to figure out how much to withhold from a partner's distribution because it's going to have to go over to pay their share of the pass through tax. So before you decide to make this election or not or change your entity, you want to do a careful analysis. We also don't know what's going to happen in 2025. Is the salt cap going to go away or is it here to stay? So just from some food for thought here, going to cover some planning items not to miss first one section 529 plans. These are qualified tuition plans. These help save for college or technical school for children grandchildren. A key item is to start saving early. Now, payments that you make into a 529 plan are generally not deductible.

Some states may offer it or credit, but federally they're not. And the earnings are deferred. Distributions are tax-free as long as they're used to pay for qualified educational expenses at an accredited college university or certified technical school. So this covers tuition, room board, books, supplies a computer. I forgot about this and my daughter the other day who was a senior in college was planning about her computer and I'm like, go take the money out of the 5 29 plan and get yourself a new computer for your senior year. So these are things that can be paid with us. You can set them up in different states. You don't have to just do it in the state you live in contributions towards 529 plans. They are subject to gift tax. So for 2023, anything over $17,000 would have to be reported and would be subject to gift tax, but that's $17,000 per beneficiary or per donee.

So you can have the grandparents make donations, 17 each. If you happen to have a family that has that kind of wealth and you and your spouse could do it. You can elect to make a lump sum contribution to E529 plan. So for 2023 you could elect to put $80,000 into the 529 plan and it's treated as it's paid over a five-year period. So you get that money in there early or a grandparent does it to get that money in there early for the kid.

So there was always a concern, am I going to overfund it? What happens if the kid doesn't go away to school or go to school? What do I do with that extra money? Because if you pull it out, it's subject to tax and a 10% penalty. So starting in 2024, and I think this is really neat, if there are unused 529 plan funds, you can take some of that money and you can roll it over into a Roth IRA, the beneficiary can. So it's limited to 6,500 a year, total 35,000 in lifetime. The plan, you have to have the money sitting there for at least 15 years. There's lots of little rules, but that kind of gets around what do you do with this money? Transfer it to a sibling possibly or have the chance to take something that was intended for college savings and turn it over into retirement savings.

Next item that we say is health savings accounts. So if you have a high deductible plan, you may be able to participate and you get an above the line deduction for your contributions to a health savings account. For 2023, the deduction is 3850 for self coverage or 7750 for family coverage and if you're over 55 you can add another thousand dollars to those amounts. Now if you do two people, you each have to do a husband and wife, you're going to have to each do that extra 1,000 in your own account. The amounts can be used for medical expenses only, so if you take them out and it's for non-medical, you pay tax and if you're before you're 65, you get a 20% penalty on it, but the money can be invested in anything that you would put into an IRA. So you have an opportunity to earn some interest and dividends.

It's your account, it's portable, you can keep it and maybe somewhere down the line you will need it. Maybe you'll need it to pay your Medicare premiums or something that you're planning in the future. So it's your money, you get a tax deduction for it. The last thing here, which I'm not going to talk much about because I'm going to let Larry talk about this, our retirement plans, but great idea how to get money put away and to get a tax deduction for it. The next item here that I just listed is if you hear something and you want to look at it further, you can click on this and you can get our 2023 personal tax guide and it'll explain lots of these subjects. You do have to put your email address in so that you can download it and you're also free to reach out to us. So onto retirement plans with Larry.

Larry Seigelstein:Carolyn, thank you so much and once again, a thank you to everyone joining the call today, taking time out of your busy schedules. We appreciate that. As Carolyn mentioned, we do a lot of work with planning for law firms, so in various aspects of their practice. One of the ways which I will touch on with the time that I am allotted with today is how we've been able to add value by educating, helping implement them on different ways to attract, retain and reward their key talent, key partners, key executives, whatever it may be. One method of achieving this is by looking at retirement plan strategies that might be available to them. So in consideration of the fact that we do work with different sized firms, really ranging anywhere from single member LLCs or sole proprietors to actually firms that have over a hundred employees obviously all possess different levels of sophistications and I'm assuming since there's probably a large range even on this call of different types of size firms.

With that in mind, what we wanted to do is provide you with a landscape of what types of retirement plans are out there and of course it is not one size fits all. It is all really dependent on the goals and objectives of the client and/or firm. So yes, we have this first slide here and there is a lot of information on it, but what I'd like to do is really just to share some key bullets for you on each type of plan to provide sort of an overview of the different options currently available in the retirement plan space. So starting at the top, which is what is called a simple IRA, this is typically used as a startup plan for smaller size firms willing to fund a minimum contribution to their employees as it does require either an employer 3% match or 2% non-elective contribution versus a three and a half percent safe harbor match and a 3% non-elective contribution in a traditional 401(k) plan or profit share plan.

So there is less cost to the employer. Now these are not used that often and one of the reasons is there also are lower employee contribution limits as opposed to other plans. So in 2023 the contribution limits are 15,500 and there's a catch-up of $3,500 for those folks, 50 and over. The next plan I wanted to touch on right below is the simplified employee plan or steps as they are known. These are really great options for sole practitioners as you could put up 25% of compensation capped at $66,000 per participant in this calendar year 23/ same limits as a 401(k) profit sharing plan but without the catch-up provision at age 50 or older. The caveat here is once you start hiring people and once they are there for three years, they too become eligible for the plan. Thus you would need to contribute to them the same exact percentage that you are contributing for yourself. So oftentimes we advise people to maybe flip into a 401(k) profit share plan before the employees become eligible to avoid those additional costs or contributions.

Third one down is the 401(k) profit share plan, which I might assume is the one that most people are really familiar with. The employee contribution limits for 2023 are 22,500 and it allows for those over 50, a catchup contribution of 7,500. So we're talking about $30,000 a year for the employees, so it can be a significant amount for them to put away on an annual basis. From the employer standpoint, this plan really allows for some nice flexibility. Now there's something called safe harbor. You don't need to have the safe harbor provision, but it does help relate it to some plan testing that gets done on an annual basis. But if you do the safe harbor, typically with that there's a 3% for the employees and potentially 2% combined with the profit share with that contribution, that may be enough for the owners or the key employees to max out at $73,500 for the year.

Okay? Again, if those people are 50 or over. However, unlike the other plans, there are more rules and regulations involved. As mentioned, these plans are subject to discrimination testing if there's not a safe harbor plan, there are also filing requirements. You'll need to file a 5,500, which is really basically a tax return that's done for the plans. There are also different notices required to be distributed to the participants and basically just overall there's more oversight from the IRS and the Department of Labor. And the last type of plan here is what we call a cash balance plan. This strategy becomes a plan in addition to or layering on top of the 401(k) or profit share plan. This is for those folks who feel that contributing 73,500 is just not enough. Some actually termed as a profit share plan on steroids. It allows the capability of, depending on the firm's demographics and goals, of course owners and or certain key employees can contribute low six figures plus on top of the 401(k) profit share amounts.

 Again, depending on the goal of the firm, you can design a plan like this by age, by class. As an example, class one could be owners and key employees. And what's nice about this is not everybody has to participate. There's lots of flexibility compared to the old pension plans. You have with the design. So if you want to focus on related to maximizing out contributions, this is a way to help owners et cetera. It really hyper speeds their retirement assets and there's also a tax deduction on these contributions as well. Last note before I move to the next slide is just to clarify, some plans are considered, this is more educational defined contribution plans where the employees are the ones making the contributions on their own behalf like a 401(k) and others like the cash balance plan is a form of defined benefit plan where the owners are making contributions on behalf of their employees.

So the question becomes, well, who is this for? Who might be able to take advantage of this? As I stated, there are multiple options to help firms design a plan that suits their needs and to reward. For the balance of the time today I'm just going to focus on the cash balance plan concept. And please, please bear in mind that these are not for everyone and serious due diligence would have to take place to determine if these plans are applicable or suitable for any firm. I'm really going to focus on the education of the cash balance plan just to get a little more information out there and to raise awareness on how these plans work from kind of like a 30,000 foot view today. So for starters, again, who might be good for this plan? What kind of companies would be good for these types of plans?

Well, as we discussed, any firms that have partners or owners who have a desire to put more in than just the 73,500 into a traditional 401(k) profit share plan. Yeah, those are potentially good candidates. Who else? Well firms that have fairly consistent cash flows. You want to make sure that you can support these plans for at least three to five years. Bear in mind also, as opposed to the discretion on whether or not you wish to make a contribution into a profit share plan, you are required, I repeat required to make contributions with the cash balance plan and the three to five years that I'm speaking about is from the eyes of the IRS. That's a good timeframe. The IRS does not want companies who maybe had a windfall, had a great one year to put the cash balance in for one year. They want to see a little bit of history three to five years. If you do it for one year, it's going to be frowned upon and there could be some issues there.

Who else would be a candidate? Yes, companies with older owners can really benefit from these types of plans. As you'll see in an upcoming slide, the older the demographic, the more they are permitted to contribute and you may actually be surprised by the significance of some of these amounts. It's also helpful with them since these older owners might have delayed saving for their own retirement as they've been probably reinvesting the monies back into the business along the way. And one important point, just in order to maximize for the partner or owner, there does need to be a willingness to also contribute from the owner anywhere from seven to 10% of their employees pay. So if there are owners who do not want to do this, this is not a plan for them. And the last one is just a fun fact. The majority of companies that enact these types of plans, you might be surprised, have less than 100 employees.

So we talk about this, we call this the opportunity and basically I'm not going to spend a lot of time on this slide, but the IRS does set limits on the maximum annuity that can be paid out and also they supply the annuity factor used to calculate a lump sum. So these figures that you see are based on the assumption with a participant age of 62 and a 5.5% interest rate from the IRS. So currently you'll see 265 is the maximum annuity paid out set by the IRS. So that means the most a participant can be paid out from a defined benefit plan is 265,000 based on the 2023 limit and the maximum lump sum would be in the $3.4 million range. You start to see how this might be powerful tool for some individuals related to retirement savings.

Okay, moving right along. As I mentioned just a little while ago, these types of plans and contribution amounts can become fairly significant as a participant gets older. So if you look at the left hand side under the 401(k) profit share portion, you'll see basically up until the age 50, it's $66,000 that could be contributed. And then with the $7,500 contribution after the age of 50, the total becomes 73,500. But if I could turn your focus kind of the right-hand side with the cash balance plan, you're going to see that even at a younger age, yes, the numbers are meaningful, whether it's the 56 5 or the $80,000, but take a look at the age of 60. So on top of $73,500, they could put in an additional $307,000 on top of that. That's really significant for people, again, who might have not saved a lot, who've been putting money back into the business who really want to kind of hyper speed the retirement savings.

So it's a way to accelerate those retirement savings as well as also again, getting that tax advantage along the way. So Onofrio, but what I wanted to show you this last slide is really to share with you briefly an example of a plan design kind of illustrating the power of combining the profit share plan with the 401(k) and the addition of the cash balance plan. Okay? Now bear in mind, the goal of this particular firm was to maximize the contributions for the two owners. You see them up there, owner number one and owner number two, they're on the top. So again, it's always going to be based on the goals of the owners. So if you look at the far right, you'll take a look at that under the design they're putting $27,000 each into the 401(k).

That's their own deferrals. Okay? Then this design also has them putting in $40,000 each into the profit share portion. Finally, if you look under the column, it's kind of to the left, it says cash balance plan contribution. You will see that owner number one is putting 181,000 and change in, and owner number two is putting $141,000. So in this particular scenario for this client, it works out very well based on what they wanted to achieve. The two owners are receiving approximately 91% of the entire cash balance plan contribution into the firm. And I will tell you that when we are looking at these and working with our clients, the goal would probably be to have that number somewhere between 75 to 90% to make it advantageous for the owners. So if you just take a look at the calendar year owner, number one combined between its 401(k) deferrals, the profit share contribution and the cash balance plan was able to put away $248,000 for retirement.

And while owner number two, just because they're a little younger, was able to contribute $209,000. Again for the right situation, for the right circumstance, this could become a powerful planning tool. And we do have law firms that utilize these in their practices. Again, as I mentioned, this could be designed on who you want to benefit, who could be omitted. It's a very flexible plan. And before I hand it over to Onofrio I just wanted to touch on a couple of follow-up items. Number one, cash balance plan documents a design call for specific returns. So people need to bear in mind that this is not the same as your 401(k) where you're looking to reach for the stars and get as much return as possible. You're not looking to be aggressive. Typically, the documents are written up for a 5% annual return.

So the goal of these plans is to return in that 5% range, which means it's going to be a less conservative, if you will, type of portfolio. So even if the market is booming terrific, you still want that 5% return, and if it's lagging, you still need to get that 5% return. So if you come up short in that allocation, that return, the sponsor will need to, they're responsible for funding the differential there. So just as an example, if the return of the investment for the year is 3%, the sponsor will need to kick in the additional 2% to complete that funding. And in reality, what happens is year after year, it really becomes a rolling actuarial calculation based on how the markets have done and how the portfolio has performed. The second point I wanted to make is just to advise unlike 401(k) monies where the participants are managing the monies themselves. This becomes a pool account in a cash balance plan where the assets are being managed based on the goals of the plan and what is stated in the plan document.

So though participants will see their balances, they do not control the allocation or the investments themselves. And the last point I want to bring up is really just an FYI. I feel like people should know this out there. I wanted to make you aware that there are now close to a dozen states that are mandating that companies of certain size employees and in business for a certain amount of years offer retirement plans or their employees. As an example, and let me emphasize it is not in effect right now or yet, but is under serious consideration for the state of New York. So what they're looking at is if you operate a business with at least 10 employees have been in business for at least two years, you must sponsor a qualified retirement plan. And actually for those in New York City, once again in consideration, that's going to apply to companies that have at least five employees.

So for those who qualify and don't have one in place, there will be either one imposed by the state, which may not be as appealing or flexible as the one you would design on your own and sponsor. So just a heads up on that. In closing, I just really wanted to restate today was really about education and awareness of what options are out there from a retirement plan standpoint. And again, yes, these tools have been successful for clients we've worked with in law firms and different types of vouchers where there's partners, key executives, et cetera. What works for you is going to be based on your individual goals and the objectives of your firm. And of course know that we are here as a resource. I am now going to turn it over to a Onofrio, who's going to show you different ways of attracting, rewarding and retaining.

Onofrio Cirianni:Thank you, Larry. And it's a good segue and maybe one just additional comment, which ties into my section of the presentation is that the one major advantage that closely held businesses have, which would include law firms, is that they have the ability to make financial decisions to improve maybe their financial wellbeing personally. And they have two pockets to maybe look at that. They can look at their personal income that they earn and how they may make financial decisions on their own or use the entity through a qualified retirement plan to maybe accomplish certain goals. And it's not shown in this example because some people may look at this and say, "I have to wait until I'm 50 to really take advantage of that, or 55." That's when you really see the contribution level opportunity really increase. The one main advantage I want to leave you with the flexibility of qualified retirement plans are that if you are an owner or if you're highly compensated, you can have different contribution amounts for those people.

I'll even take it a step further. We recently set up a plan for a law firm where there were a whole list of partners. The senior partners wanted to maximize. The ones that were younger, had kids in college, they were at a different stage of their financial life. A few of them actually chose to be excluded from the plan completely, and they did other things to maybe equalize compensation that we help give guidance on. But again, the power here is maximizing the tax advantages, the accumulation, and last but not least, even creditor protection that you get out of retirement plans. I'm going to shift gears a little bit and talk about succession planning.

Businesses all go through private businesses, I should emphasize all go through a different phase in their financial life. And unlike public companies that are traded where you have instant liquidity through markets, with a private business there has to be a transition. The question is it in writing? Is it a well-developed plan that focuses on how do we protect the interests, the assets, the employees and the clients of the firm? How do we grow it and have continuity? And ultimately, at some point in the future, based on certain triggering events, which we will touch on is what is going to be the exit strategy for individuals. Another common unique characteristic with law firms and professional service companies, again, unlike maybe a manufacturing business or a technology company where they may sell the business to a third party or a private equity firm, the value in most professional service companies are their reputation, their brand, the relationships they have with their clients, and transitioning that relationship to younger partners and those that are rising through the ranks so that that continuity of revenue is uninterrupted for the future.

So who's going to actually buy the firm or who will keep interest in the firm? Generally speaking, it falls into four categories. It's going to be another partner or a co shareholder depending on the type of firm structure that you have. It could be the firm buying it back. It could be key employees. You may have an employee that's not an equity partner yet at this point in time, or it may be through some type of merger and acquisition combination with competitors, other firms, and that could be a growth strategy by geography complementing specialties if firms have certain niches. That is a project in itself. Today, I'm just highlighting some of the key components when going through this process.

Generally speaking, the foundational document that most businesses have is some form of operating agreement. The question is, do they have buy sell language in there that will address based on certain triggering events, how is that transition of ownership going to occur? And in exchange for that change in ownership, what is the financial impact? Who's going to get X dollars over what period of time? So that, again, there's continuity. I like to refer to it as a business owner's will or a prenup. You're making promises to one another, you're working under a common understanding and memorializing what's important to you. There are certain triggers like death, disability, retirement, maybe other events which we'll touch on. And the question is, what is the financial value that the partners are going to be agreeable to, which has to be determined over time, and this will vary again, as Larry noted.

And Carolyn, based on the size of the firm, at what stage of your financial life that you're in, what type of firm too, like in terms of the type of work and specialty that you provide and the streams of income and revenue. What are some of the advantages? Some of them are obvious. We're trying to avoid conflict. So when there's nothing in writing which has happened, or if something is in writing, but maybe it's vague, not clear and doesn't address all the different triggering events, it creates potential conflict with that spouse, with an estate, with a child, and maybe with just a retiring partner in terms of his or her expectations at that point in time.

Continuity of management. I'd like to add here, based on my experience that giving clarity to those that are being recruited, trained and developed, it's creating a career path. What does my future opportunity look like and at what stage will I have the opportunity to go from non-equity to an equity partner and what does that mean financially in terms of compensation, income, et cetera, and so on, which provides stability, right? Stability to the practice, less turnover, to the clients, maybe even vendors, third parties that you do business with. And again, it's establishing a fair and reasonable price so that there's no surprises. It's known you can plan for it and with certainty.

Here are some of the buy sell triggers. I'm not going to go through all of them, I'm just going to highlight a few. There are involuntary and voluntary parts of a buy sell agreement. A few of them could be, I'm going to say handled fairly simple and straightforward that if somebody passes away prematurely, you can ensure that risk, even if somebody becomes disabled. So that gets into funding aspects, which we'll touch on as well. I'm going to say probably one of the biggest factors is the retirement piece. We're all going to work under the assumption that everybody's going to live a long time, build a practice, generate revenue for the firm, take care of their clients. It's not common that there's an exact mandatory retirement age in many law firms, which has its pros and cons depending on who is involved here. So just by way of some examples, which we have seen over the years is when there is no retirement age, even no retirement range, you may have partners that are being paid the most of all the partners in the firm.

Now granted, they may be generating the most revenue, but hold that thought. But if they continue to be paid, continue to manage those relationships, and they're entering later stages of life, 60s, 70s, we've seen even in their eighties, when is the transition of those relationships going to begin? Because those take time. And if someone passes away prematurely and that process hasn't happened or they had a change in health, you're risking the firm, you're risking relationships with those clients. So having an age is a serious discussion in terms of when to have discussions, how does compensation change and have a smooth transition of those relationships and the economics of earnings sharing and profits and compensation to those partners that are going to come within.

So again, that's one we, I am going to say probably takes the most time and thought and analysis. And you definitely need a team, whether it be financial advisors like us, CPA, Carolyn, one thing I will note in my experience is that even if the law firm has talent within core competency and corporate structure, operating agreements, by sell agreements, we always encourage to look at maybe having outside counsel for this discussion who's independent, a moderator, looking from the outside in to give some independent advice and help facilitate the process.

Key employees. So another observation we've made over the years is that if you're not addressing those key people that have been with the firm that have been productive and giving them that path of eventually when are they going to become a director, non-equity partner, owner, et cetera, is that there's risk that they're going to leave. And we've seen where this may be have been delayed and there's a fallout. And if it's more than one person, again, depending on the size of the firm, this has more impact than others.

The firm succession plan or the retirement plan in terms of future cashflow streams for those retiring partners, it might fall apart. It's actually cause firms to actually shut its doors if they really didn't develop mentor and create a plan in writing for their key people. In exchange for that, there may be some golden handcuffs and incentives, creating employment contracts, having certain benefits that they're eligible for above and beyond the rank and file employees cash balance retirement plans are just one example. I'll touch on a few more. We want to protect both the firm, the retiring partners who are going to exit as well as those who are growing within the practice and giving them incentives to stay

At a high level, what types of buy sell agreements are available in terms of structure? And I'm going to say there's really generally three approaches. One is an entity purchase or stock redemption. Again, depending on the type of entity you are, and it's where the firm's actually buying back the equity interests or shares of the firm. Cross purchase is where the individuals are actually buying the interest from other partners that are either retiring or if one of those triggering events occur. Or it could be some kind of hybrid wait and see approach could be redemption first if the firm doesn't buy back, could be the individuals that buy those shares. Again, just we want to be mindful. This is not an easy process and my experience, it takes time and it's not a set it and forget it. Creating an operating agreement, creating a buy sell agreement, as your firm matures and grows and goes through its growth pattern, you're going to make amendments and changes along the way. Funding... Oh, I'm sorry.

Funding a buy sell agreement. So there may be a little bit of a glitch here. I'm sorry. So I'll just talk it through. I'll leave this slide. So there's different ways you can fund an agreement. So let's use the retirement option as a choice here. So if a partner is going to retire, how is the firm going to buy that partner out? Could be through cashflow, may include generally the receivables. The firm may have to make a decision along the way. Do they want to put a cash balance or may one of these retirement plans that get more money that can actually have a partner retire and maybe get a deduction for it. So this could be part of the exit strategy integrated with the buy sell planning. It could be putting money aside into some kind of sinking fund, creating that surplus and cash or bucket that's earmarked for these events. Could include insurance of some sort, particularly if somebody becomes disabled or if they die prematurely and structuring the life insurance in such a way that it would be able to do so.

And last but not least would be borrowing, which is always a challenge, right? It's managing debt and cashflow and managing debt or borrowing more when maybe a key partner who may be a large revenue producer is looking to exit the firm may not be the most appropriate time because there's sometimes uncertainty in terms of how successful the transition of those relationships and the revenue streams moving forward. How do we attract reward and retain attorneys? I had to do an informal survey, I would think that if we asked this question five years ago, regardless of what industry, including the legal industry, the answers might be different. So and why the pandemic had something to do with it. People are looking for different things. It's a very competitive environment in terms of trying to get talent in the legal industry, and it's not competing against other law firms.

A lot of people have taken a step back and viewed what they may want to do in the future. So looking at in addition to compensation and typically the next most important item when we talk about benefits is usually health insurance is looking at benefit type programs where you can actually carve out the partners. Again, you're limited in terms of what you can carve out in a 401(k) or a pension plan. You can't just exclude rank and file employees. I'm going to touch on a few where you can actually just offer certain executive carve out benefits that can be part of a total compensation and benefits package for attorneys. Again, to help differentiate themselves from other law firms, but also differentiate themselves from where they're seeking talent. Because what we're finding, it's a lot more fluid in the workforce today. It's not law firm, somebody leaving from A, B C going to X, Y, Z law firm. They may be going to somebody like Amazon or a technology company. So you have to look at the scope of what these other industries are offering as well. So one example I use is disability insurance.

Probably the biggest asset of an attorney is their ability to generate and earn an income, and what they do with that income is going to really determine their financial success to reach their life goals. Well, one of the roadblocks or obstacles there is what if they can't work due to an illness or an injury? So it's pretty common that many firms have a group long-term disability program, which would ensure a percentage of their income. The challenge is there's typically a lot of disparity with income from partners to maybe non-equity partners to rank and file employees. So typically the monthly benefit, maximum amount, if a partner, a senior partner becomes disabled, it will not insure 60% of their total income. It'll ensure maybe 55 or 60% of their income up to a certain cap, 10,000, 15,000, 20,000. But if earning 500,000, $1 million a year, that is really going to have a major impact in terms of their lifestyle.

So there are ways where you can just carve out partners only by class. You can have two or three classes where they can ensure all of their income and they can do it in such a way, taking the buying power of the practice. Here's the practice pocketbook example at use versus the partners trying to do this on their own. The advantage would be they can get large discounts versus buying the same coverage on their own upwards of 25, 30%. They would have guaranteed issue, meaning no health questions or exams. This sometimes is difficult to qualify for depending on your health history. So we look at opportunities of how do you ensure and protect the incomes of the people. Personal financial planning. Most Fortune 500 companies for its top executives and maybe second and third tier are paying independent firms to do financial planning at the firm's expense.

So the concept there is most attorneys are working hard for their clients, building a practice. It's making sure that they're taking care of themselves. It's putting a pause button where they would have some time dedicated where they maybe a partner spouse, significant other would meet with at the firm expense to making sure that they're maximizing all the benefits of the firm, that they're taking advantage, 529s, health savings accounts, other types of programs where they just may not have the time because of their commitment to their firm, the energy, the knowledge to do so. So it's creating a platform and the general theme that we hear a lot is making it a better place to work that's offering not just compensation but great benefits, but providing a platform where they can do good for themselves and their families as well. With some of these offerings, long-term care insurance, it pays for expenses.

If someone can't do activities of daily living at some point in their life, especially when they age, bathing, dressing, feeding, walking, transferring, or if they have some type of cognitive impairment, those expenses are typically only paid by Medicaid, but you have to be below the poverty line to qualify or they're going to be paid by your assets or your income, or you can ensure to mitigate some of that risk and firms can sponsor a plan again where there's opportunity of potentially getting discounts or maybe some concessions to qualify for the coverage that they may not be able to do on their own. I'm going to add a tax advantage as well. If it is a C corp, this would not apply to pass through entities for the partners, but if it is a C corp, this is a unique provision in the code. The firm can actually pay for long-term care insurance premiums.

They can be selective of who they choose, so it doesn't have to be for everybody. They can get a tax deduction for that premium and if that partner and/or his or her spouse actually receives benefits in the future, the benefits obtained through the insurance would still remain income tax rate. It's a very unique program, again, using the firm to leverage its buying power in the structure to take care of its partners. And then last but not least, some other personal protections, things like personal umbrella insurance. I'll close with just some highlights and some questions really to touch upon to ask yourself is have you considered the employee retention credit? Look at the states that you're doing business in, where you're filing, making sure that your house is in order. Again, most firms are focusing on growth. This is an opportunity to take a step back and look at where's the business today and where do we want to move going forward?

Do you have a succession plan? Is it in writing? Does it address the triggering events in terms of a buy sell agreement and how it affects all the parties and how are you going to keep your promises in terms of funding a retirement or if somebody gets sick or if somebody passes away and building that as a part of your overall business plan and budget so that we're not really missing those opportunities to protect and grow the firm key employees. Be mindful mentoring, growing, incentivizing. And last but not least, when looking at the partner's financial retirement and estate plan, doing a firm study to see some of the topics that Larry touched upon before is conduct a firm feasibility study. It wasn't mentioned, but doing a feasibility this study to determine do you have the retirement, right, retirement plan design or adding a layer, like a cash balance plan on top of it, who you include, who you exclude.

Those firm studies typically cost very little or some firms don't charge to do those studies at all. It's their kind of cost of doing business, and we kind of help coordinate that process once understanding the demographics, goals, and objectives of the firm. With that, I will close and pass it back to Carolyn for just some closing comments. Thank you for your time. I hope you found some value in this.

Carolyn Dolci:Great. Thank you for joining us today. If there are some questions, we're not going to obviously get to those in our timeframe, but we will follow up with you at a later point on those when you get the evaluation form. If you have other subjects you would like to hear about, please let us know. We'd be happy to do another session on those particular topics. Just want to thank our team and Onofrio, Larry for doing this and for our production team, Astrid, Nikki, and Maggie and all of you for being here with us. Thank you. And pass it back to Astrid, I think.

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