The wind down

What if you’ve decided it’s been a great career but the time has arrived to take your name off the shingle and move on? What will your retirement income be and what becomes of your firm and your clients in your absence?

The question takes on more weight in an economy that has proven a challenge and as that big sweep of the baby boom generation heads in the same direction. A lawyer without a plan, says Doug Hartkorn, is not doing himself, his clients, or anyone involved in his practice any favours. “If you want to have a succession plan, you have to build up a practice that will out-survive you. A sole practitioner generally doesn’t have a great succession plan,” Hartkorn observes through his work as a senior partner with accounting and business advisory firm Shimmerman Penn LLP.

His is not simply an anecdotal comment. The Law Society of British Columbia was so concerned it launched a year-long campaign to encourage lawyers to develop a succession plan, including the assigning of a winding-up caretaker to ensure the files are all taken care of. The numbers pointed to the need for action, particularly in solo practices. According to the LSBC, 69 per cent of sole practitioners in 2011 were 50 or older. Further, it found only 13 per cent of those over 50 indicated they had lined up another lawyer on their trust reports. The law society’s campaign helped boost that number to 17 per cent.

Ultimately, it’s the law societies left holding the bag, having to appoint a custodian to take care of the files in the event the lawyer is in a position where he can no longer do that and hasn’t designated someone else to that role. In Ontario in 2010, the law society found 32 per cent of lawyers were between 50 and 60 years old and 10 per cent were 65 or older. In Alberta, in 2009, about 58 per cent of its lawyers were between 41 and 70 while 25 per cent fell into the 31 to 40 age range and less than 10 per cent were under 30. “There have always been examples where lawyers have failed to make adequate retirement plans; there is a regulatory process in place to deal with that situation. We are encouraging all lawyers to think about succession planning and to do so when they still have time to plan adequately,” says the Law Society of Alberta’s current president Carsten Jensen.

While the priority is the client, succession planning is just as much about a lawyer’s success in retirement as it is about success in practice, relying largely upon relationships. Succession planning essentially trusts the junior partners with the relationship of the client, the billing of the client, and ensuring the outgoing senior partner is compensated. Hartkorn describes it as a selling of the accounts to produce an annuity in retirement, or a percentage of annual billing.

A more formal scenario, typical in larger firms, sees the pension being developed from a formula based on average earnings. Some firms also opt for an overall average, allowing for a uniform pension for all retiring senior partners. While traditionally larger firms have provided for their senior legal partners in retirement, some are now moving away from that with the next generation not as willing to cover pensions in an uncertain economic environment where clients are no longer so committed to a relationship with one lawyer or firm. Some have also prorated down the pensions in a bad year.

There are firms that offer an option of a guaranteed pension income at a lower level or a fixed-term pension at a higher level. Larger firm pensions may also include a section that voids the agreeement if the retiring lawyer joins another law firm and continues working. The tax advantage for the firm is to have that pension paid to retired partners as a share of the firm’s profits, instead of an outright purchase of the partner’s capital in the firm. “These types of agreements are sort of like snowflakes, no two are alike,” says Paul Coleman, a partner at Grant Thornton LLP. He generally finds larger firms with more at stake develop formal exit plans for retiring partners. “When you get right down to it, in terms of the financial aspects. . . . It will come down to negotiations.”

Generally, however, succession planning in law firms is more informal than it is formal and the expectations of senior partners are not necessarily views shared by junior partners. It’s not an insurmountable roadblock, but it could cause friction, so the natural tendency is to ignore it. The key is to ensure the profitability of the practice so the junior partners don’t feel they’re losing out in a succession plan. Coleman suggests the issues be addressed in the partnership agreement.

The idea is to build a sustainable firm and by adding value, leave the younger partners a viable, profitable business. But there are two aspects — capital interest and goodwill interest — and it is the latter that accounts for the fluctuation in succession agreements. While mergers do occur, Coleman describes that as more of a bailout than a successful exit strategy.

But there’s another strategy developing: no pensions at all. Hartkorn worked with one firm that eliminated its pension. The firm grandfathered in existing plans but would commit to no future plans. With baby boomers representing such a large proportion of the profession, inching their way out the door, the writing is on the wall, suggests Paul Coxworthy of Stewart McKelvey. “There’s a growing trend within firms to say when you leave, you leave with whatever you put aside personally. Don’t expect a golden handshake,” says Coxworthy, who practises administrative law and estate planning in St. John’s, Nfld. Currently, this approach is just developing and may mean the elimination of pensions is the future in law practice management.

In traditional arrangements, Coxworthy sees several different models. Most are variations of a buyout or continuing compensation, sometimes based on the files the lawyer has brought to the firm. He suggests larger firms are becoming more proactive about discussing retirement planning with their lawyers.

Sole practitioners are more reliant upon themselves for everything, so if they don’t take the initiative, there will be no plan in place for themselves and their clients. “We have a whole cohort of lawyers who are approaching retirement,” says Coxworthy. “That’s going to be more of a live issue. The next five to 10 years, again, will tell the tale.”

In the interim, Coxworthy sees an increasing role for law societies and the Canadian Bar Association to play in encouraging lawyers to think about how they’re going to retire and how they will wind down their practices. He says as many lawyers see a decline in their practice and their income during their last few years, planning for these changes should ideally start early.

As CEO of the Law Society of Manitoba, Allan Fineblit sees the retirement of lawyers ­— and succession planning overall — as a very significant issue. Lawyers don’t typically retire at what is otherwise considered the normal retirement age. Some don’t want to: the work defines them and gives them purpose. Others simply can’t afford to, having lost investments during the recent economic meltdown. Others, often sole practitioners, have no pension plan or any kind of a retirement income, so they keep at it. “The result is retirement has become a financial challenge for many people,” says Fineblit. “We push very hard for sole practitioners to enter into arrangements with others.”

When a lawyer who hasn’t assigned a caretaker to his files suddenly can’t take care of his practice, the law society appoints a team to take care of the files. Sometimes they are orderly, and sometimes they are not, resulting in grief for the clients and expense for the law society. Most law societies run CLE programs on winding down your practice and have loads of information available online. That’s a good place to start.

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