Litigators get paid to see the other side’s next three moves. Which makes it funny, in a not-very-funny way, how often a firm that thinks that far ahead on a case has done zero thinking about itself. That was this firm. Great at the work. Running its own money on autopilot.
The situation
The work was contingency, so the money behaved like verdicts do. Unpredictable, and every so often huge. A quiet stretch, then a settlement lands and all three partners get shoved into the top tax bracket in a single year. Between the hits, cash just piled up in the operating account, because nobody had a plan for it. Retirement savings? A SEP that barely moved the needle against what they made.
And then the thing nobody wanted to say out loud. The founder wanted to retire in about seven years. What was his share of the firm worth? Who was going to buy it? With what money? The place didn’t really run without him, and there was nothing written down that said what happened when he left.
What I found
Three problems, and they were all tangled together.
- A tax problem. Big income in the good years, top bracket, and nothing set up to soften it. In a settlement year they were just writing the IRS a much bigger check than they had to.
- A succession problem. No buy-sell agreement, no money set aside to fund one, and a firm that leaned almost entirely on one person.
- A planning vacuum. Nobody had ever looked at the firm and the three partners’ households as one connected picture. A successful business, optimizing none of this, because no one was in charge of the whole.
What I did
Quick note on my role. I coordinate this with the firm’s CPA and an outside attorney. I don’t give the legal or tax advice myself. With that team, we got some real structure in place.
On taxes and retirement, we layered a cash balance plan on top of a 401(k) and profit-sharing plan. In a big year, that combination lets each partner shelter a large, deductible chunk of income. Depending on age and pay, that can run well into the six figures apiece, instead of going to the top bracket. We also set a simple reserve rule, so a windfall year actually covered the quiet ones it was supposed to.
On succession, we helped put a funded buy-sell in place, so the founder’s exit finally has a number attached and a source of cash behind it. The younger partners shouldn’t have to buy this firm twice. Once with years of sweat, and again with cash they don’t have.
A great year and a giant tax bill are the same event. You either decide ahead of time what to do with it, or you let April decide for you.
Where it stands
The good years pull double duty now. They fund the partners’ retirements and cut the tax bill at the same time. The founder has a real way out, not just a handshake and good intentions. And the firm finally runs its own finances with the same care it brings to a case file.
If your income looks nothing like a salary, lumpy, top bracket, tied to outcomes you don’t fully control, then it shouldn’t be planned like a salary either.