Asked and Answered

By John W. Olmstead, MBA, Ph.D, CMC

Q. I am the senior partner in a six attorney firm in Los Angeles. I am 68 years old and thought that it was  about time I begin thinking about retirement and begin discussions with my other partners. We have no partnership agreement and no plans in place to effect the transition of partners. What are some of the methods being used by law firms effect the retirement of partners?

A. There are almost as many approaches as there are law firms - ranging from partners that just leave and give their practices to the others partners to various methods for buying out the departing partner's interest in the partnership. In the final analysis the optimal approach is what makes everyone happy and a solution that everyone can live with. Here are a few illustrations:

 Fully Funded Retirement

• Partner gets capital account
• Share of current year earnings
• Benefits from the partner’s personal retirement plan
• No payment for share of WIP or AR

50 Percent Wind Down Option – Then Retirement Payments For Live

• Five year step-down plan in lieu of payoff
• Partner get capital accounts
• Share of accounts receivable
• No share of WIP
• Five year stepped pay down to 50%, then for life one-half of 5th year payout.

Pension For Live

• Partner gets capital account
• No share of AR or WIP
• Annual pension for live equal to 20% of the average of such partner’s annual earnings (excluding windfalls) during such partner’s best five consecutive years as an active partner payable in equal monthly installments.

Mandatory Wind Down

• Provides for mandatory five-year step-down (wind down) retirement
• Wind down can begin at 60 – mandatory at 65
• Capital account plus accounts receivable and WIP (75% AR/50% WIP)
• Five year stepped payout to 0. Draw reduced by proportionate amount each year as well as well as time commitment

Five Year Retirement Benefit Payout Based On Earnings

• Provides for benefits after 65
• Partner gets capital account
• Share of current year earnings
• A full retirement benefit paid out over five years.

More and more firms are avoiding payouts for life and even moving toward funded buyouts.

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John W. Olmstead, MBA, Ph.D, CMC, (www.olmsteadassoc.com) is a past chair and member of the ISBA Standing Committee on Law Office Management and Economics. For more information on law office management please direct questions to the ISBA listserver, which John and other committee members review, or view archived copies of The Bottom Line Newsletters. Contact John at jolmstead@olmsteadassoc.com.