February 09, 2021
Succession Planning for (Dearly) Departed Partners
In today’s rapidly changing legal marketplace, law firms must prepare for potential partner departures before they happen, with detailed plans for reacting if a partner or group of attorneys leaves the firm for another firm. But partners or groups leaving voluntarily for greener pastures is not the only way for a lawyer to leave the firm. Succession planning for your law practice — planning for a partner’s death, illness, or incapacity — is another critical component of risk management for partner departures.
Expect the Unexpected. Just like personal estate planning, it can be uncomfortable to consider situations where law practice succession planning may be required. On the other hand, as lawyers, we know that the most critical aspect of prudent planning is to prepare for the unlikely or the unexpected. Law school casebooks are full of unexpected occurrences that happened: accidents, illness, disability, unplanned retirement, and untimely death. Insurance plays a critical role in preparing for these possibilities. But detailed planning is also required.
Legal Ethics Rules Require Succession Planning. Succession planning for your law practice is more than just prudent preparation. While no specific California rule requires that a California lawyer adopt a succession plan, existing rules can be interpreted as imposing a duty on lawyers and law firms to take reasonable steps to protect the clients’ interests during the course of the representation, including in the event of a lawyer’s sudden inability to continue to practice law.
For example, Rule 1.3 requires that a lawyer act with “reasonable diligence” in representing clients, including making sure that client interests are protected if an unexpected event occurs. Failure to do so may be viewed as reckless or gross negligence. Rule 1.1 imposes a duty of competence on lawyers, which can be read to include anticipating events or circumstances that may adversely affect client representation. Rule 1.4 requires California lawyers to keep clients informed of significant changes in employment, including imminent retirement, unavailability to practice law, death, or incapacity. Rule 1.16(d) requires attorneys to take reasonable steps to avoid reasonably foreseeable prejudice to clients in situations where they will no longer be able to represent the client. Finally, Rule 5.1 requires law firm managers to make reasonable efforts to ensure the law firm has measures in place for all lawyers to comply with these rules.
Succession Planning is Good Business. Beyond these ethical duties, there are compelling practical reasons to create a succession plan. For law firms where certain partners practice in highly specialized or individualized practices, the process of succession planning can help the firm to identify who could handle certain matters if a key partner were not available. If you have one partner who handles estate planning, for example, and no one else knows anything about it, if something happens to make that partner unexpectedly unavailable, you will need a plan for how to get those matters to someone who can protect the clients’ rights, and fast.
Protect the Value of Your Practice Even if the Worst Happens. From the partner’s perspective, a succession plan can also help you or your estate realize the value of your law practice in the event something unexpected happens to you. In an ideal retirement at a law firm (if your firm has a plan in place), your ownership interests would be purchased by the firm over time, and your clients would make an orderly transition to other responsible partners over time. You can achieve a similar result with proper succession planning, even in the face of unexpected events. And often, retirement planning and succession planning go hand-in-hand: the value of the income from your law practice may be one of the most significant assets in your estate. Without a succession or retirement plan, your client matters will find new homes, but it may take time, and you may not realize any value from the law practice that you dedicated the better part of your life to building.
The Succession Planning Process is a Healthy Exercise. The process of law firm succession planning can also help managing attorneys to identify and correct latent problems in the firm’s partnership ranks. If you find during the process, for example, that the firm has one or more practices with only one qualified partner who knows anything about it, it may be time to consider whether some other partners should consider training in that practice. Similarly, if during your succession planning you discover that one or more partners have client files in places that are accessible only to them, consider remedying that situation. It’s unlikely that your law partners are hiding client files in locked cabinets, hopefully, but they might have password-protected documents or unique data storage systems they use when working remotely. That may be quite secure, but if no one else has the password, it’s going to be a problem if the partner gets hit by a bus.
Practical Questions are the Starting Point. For law firms, the starting point for succession planning is to ask some basic planning questions. If one or more partners become unable to continue practicing law: (1) could someone else at the firm handle the clients and matters that partner was handling? (2) could a successor partner access the entirety of that partner’s client files and other needed data? (3) how would you communicate these events, and the law firm’s plan for handling matters, to clients as soon as possible? (4) does the firm have a retirement plan that incorporates the need for succession planning? From these starting questions, the firm can prepare a detailed succession plan for each partner and practice. Hopefully, it will never be needed.
From the individual partner’s perspective, you can also start by asking some basic questions: (1) if you died tomorrow, or were incapacitated and never returned to your law office, what would happen to your clients and their matters? (2) would you or your estate realize any value from the income stream of the law practice you left behind, or would the client matters simply be transitioned to other lawyers? (3) would anyone in your firm, or outside your firm, know enough about how your practice operates to step in and operate the practice, even on an interim basis, in the event of your absence?
Avoiding these questions could result in needless and potentially serious risks to your clients and your family, if the worst happens to you or a partner at your firm. The good news is that a law practice succession plan can significantly minimize these risks.
Dena M. Roche
O’Rielly & Roche LLP