As with any article written by a lawyer, let’s start with a disclaimer: This article is only intended to provide legal information and is not intended to provide specific legal advice. If the contents of this article pique your interest or you have any concerns regarding the succession plan of your law practice or professional corporation (PC), you should speak to an estate and trust practitioner with regard to your specific circumstances and the structure of your business or PC.
With the legal liability stuff out of the way, let’s talk about the law, how you are practising law, and what is going to happen when you can no longer practise law. As a young estates and trusts lawyer, I focused my practice on having blunt conversations with my clients about all of the terrible things that can happen in their lives (and after) and what their contingency plans will be for their important healthcare and financial decisions. There were a few things that I learned in my short time practising law after speaking with clients, my colleagues, and mentors:
- Most people are troubled by the idea of their own incapacitation or death;
- Most people don’t like to think about the possibility of incapacity and (inevitable) death, let alone talk about it and plan for it; and
- Lawyers are also included in the people referenced in numbers 1 and 2 (contrary to the perception some members of the public may hold of the members of our profession).
As lawyers, our job is to provide the best possible service to our clients and an untimely illness, or even death, can severely impact, and possibly prejudice, our clients and the firm’s ongoing files. This could become a significant issue for sole practitioners who do not have a succession plan in place. If you are looking for empirical evidence (or a long list of cautionary tales) that some lawyers fail to consider their own mortality, you do not need to look too far beyond the Law Society of Ontario’s Trustee Services.
The Solo, Small Firm, and General Practice section hosted Dan Abrahams, Manager of Trustee Services, on March 8, 2018 (the Powerpoint presentation is available at this link http://www.cbapd.org/papers_en.aspx?id=ON_18GEN0308T). Mr. Abrahams discussed the ways in which the LSO has been required to take a law firm under trusteeship to protect client files, funds, and property and ensure an orderly windup of the law practice. During the presentation, Mr. Abrahams mentioned there are thousands of client files lodged with the LSO (including original Last Wills and Testaments), that have arrived from lawyers that he refers to as the "7 Ds” (deceased, diseased, deranged, demented, disappeared, departed, and disbarred). However, the biggest point Mr. Abrahams made was that the LSO is not a law firm and does not carry any active files forward.
My intention for this article is that it will serve as a reminder to you to ensure there is a contingency plan in place because you can’t take care of the client if you don’t take care of yourself. Succession planning isn’t as big of an issue for larger firms or partnerships since there are other lawyers available to attend to the file and make sure the client is made aware of incapacity or death of the lawyer originally handling the file. I’d like to proceed by taking a brief look at the sole proprietorships and professional corporations with only a single shareholder and point out a thing or two that have stuck out to me during my practice.
Sole proprietorships are quite common. As a business structure, there are many positive aspects of a sole proprietorship that attract new lawyers hanging their own shingle, including the regulatory simplicity, the low start-up cost compared to a corporation, and the tax benefits of using the business losses on a personal level (disclaimer number two: this is where you want to speak to your qualified tax advisor).
But what happens with a sole proprietorship if the proprietor becomes incapacitated or deceased? Who is there to pick up the slack?
The worst case scenario would be a situation in which the incapacitated or deceased lawyer never prepared a Last Will or a Power of Attorney for Property. There will need to be someone available to make an application to be appointed as a Guardian of Property (in the case of incapacity) or as an Estate Trustee without a Will. If the Guardian of Property or Estate Trustee is a licensee, they may be able to assume carriage of the files or act as succeeding trustee of any trusts that the deceased lawyer was a trustee. In cases of non-licensees being appointed as Guardian of Property or Estate Trustee, they will be able to assist the LSO in transferring the files into Trusteeship. In either case, this will add significant delays (not to mention additional costs) to the administration and succession of a lawyer’s practice which can have serious impacts on the clients.
In order to avoid the uncertainty (and the possibility of litigation if there are competing interests vying for control over a lawyer’s estate), a mentally competent lawyer can (and should!) plan ahead by having a Last Will (“Will”) and Powers of Attorney (POA) completed. Similar to the family heirlooms, a law practice is an asset that needs to be given due consideration within the greater estate plan. A POA or a Will can include provisions for a lawyer to appoint another lawyer as their attorney or Estate Trustee (or as a joint Estate Trustee amongst non-licensees) and as a continuing Trustee if they were operating a trust account. A simple POA or Will may not necessarily include provisions for the succession of your practice, so this where consulting with an experienced estates and trusts lawyer can have a significant impact on the effectiveness of your estate plan.
As the firm grows and becomes more profitable, there are many reasons to incorporate the practice and obtain a certificate of authorization for a PC. As mentioned before, corporations are generally more regulated than sole proprietorships, and professional corporations are even more tightly regulated. PCs active in Ontario fall under the specific requirements set out in the Business Corporations Act (BCA) and the Law Society Act (LSA). (A specific review of all of the corporate legislation affecting PCs is beyond the scope of this article, but I will point to a few key sections from these Acts that are relevant to this discussion.) These regulations add an extra layer of complexity when it comes to appointing attorneys and Estate Trustees in POAs and Wills.
I don’t want to get bogged down in the legislation, but a quick review would provide a little bit of context, so bear with me… Sections 3.1-3.4 of the BCA provide some guidelines and the LSA makes specific reference to these sections of the BCA with the small modification of expanding the definition of “member” under the BCA to include “one or more persons who are licensed to practice law in Ontario.” Section 3.1(2)(b) of the BCA allows for lawyers to operate as a PC. Section 3.2 goes on to place some limitations on the structure of the business, most significantly that all outstanding shares issued must be held by licensees (3.2(2)(1)) and all officers and directors of the PC must be shareholders of the PC (3.2(2)(2)). This is in stark contrast to the exemption carved out for PCs owned by medical practitioners that may issue non-voting shares to non-members of the profession (3.2(6)). The BCA goes on to further limit the control of a lawyer’s PC by restricting agreements or proxies that vest in a person other than a shareholder of the PC the right to vote the rights attached to a share of the corporation (3.2(4)). Lastly, and most importantly for this article, s. 3.3(1) of the BCA notes that a PC does not cease to be a PC because of the death of a shareholder.
This is significant because if there is a sole practitioner operating under a PC (which is a very common business structure), the PC will continue on after his death and must operate under the requirements set out in s. 3.2. Therefore, for anyone to step into the shoes as a director they will need to be a licensee and upon the death of the shareholder they will divest the shares of the PC to a fellow licensee. Given the propensity for passive investment within a corporation and possibility of a PC’s shares making up a significant portion of a lawyer’s net worth, this may add an extra element of complexity when trying to plan for the succession of accumulated wealth to a spouse or children and a smooth transition for one’s clients.
I’ve really only touched the surface of this issue in this article. There seems to be a lack of information available for members of the profession and that is why there needs to be more awareness and discussion on this very important topic. Many sole proprietors put in far more hours than their billables would suggest to build a successful business and provide a valuable service for the community that they serve. It would be a huge disservice to let all of that hard work go waste by not putting your mind toward preparing a plan for what would happen if the unexpected happens.