Lawyers make great referral sources for planners. But dealing with them as clients is anything but simple. Estate planning for lawyers, for those planners brave enough to attempt it, presents a number of challenges, not least of which is dealing with oversize egos. For lawyers used to giving advice, taking it from a planner can prove a difficult role reversal.
Don't be discouraged, though: Lawyers need planners as much as anyone. While the lawyer-client might be expert at drafting legal documents, the time demands of his or her practice, along with a natural reluctance to seek help in an area in which the lawyer believes he or she is skilled, will often lead to many planning loose ends. An advisor can step in and - tactfully - point out the gaps. As planners well know, the objectivity an outsider can provide is invaluable to the planning process.
Getting Over The Hurdles
How can a planner address these potential hurdles? Try to arrange meetings in the planner's office to avoid the inevitable disruptions a meeting in the lawyer's office will likely have. If travel time during the business day is too hard for a client to manage, meeting at a restaurant might prove to be a reasonable compromise. Meeting at off-hours might be necessary in some instances. If the client lacks motivation, don't hesitate to get into specifics - lawyers are trained to pay attention to details, after all.
Reminding a lawyer who owns insurance outside of a trust that direct ownership of life insurance subjects the policy value and proceeds to the reach of malpractice claimants and estate tax should persuade him or her of the need to commit to the planning process. Don't assume they already know this - lawyers who are not estate specialists may not be familiar with a number of important planning implications.
For most lawyers, their personal estate and related planning must be integrated with their law practice planning to achieve optimal results. The level and scope of the safety net the practice provides will vary dramatically among lawyers and the gaps may best be filled at the practice level for some, and at the individual level for others. For most, their practice may be their primary or even sole source of income, but in contrast to other business-owner clients the lawyer's practice may have little or no value in the event of disability or for estate purposes.
Large Firm Considerations
For lawyers who are members of larger firms, the governing documentation is likely to be comprehensive. A key planning issue may be to determine the status of your lawyer-client in the firm. Firm structures have grown increasingly complex from the original days of having only associates and partners. There are a variety of arrangements that may include a wide variety of of-counsel arrangements, contract partner (perhaps not equity sharing), and a multitude of tiers of partnerships.
The determination of what your lawyer-client will be entitled to in the event of a range of life events (retirement, disability and death) will probably be clearly delineated for each class of partner, or at least reasonably estimated. In very large firms, there is likely a managing partner or human resources partner who can explain the range of benefits. An important risk to consider, however, is the future viability of a law firm if that is a prerequisite to the lawyer-client realizing a buyout payment or unfunded retirement or severance agreement. This risk can be difficult, or even impossible, to measure.
Firms do break up, merge or disintegrate. For successful lawyers, having a large book of portable business may be a valid offset to the risk of firm breakup, but not if a lawyer is disabled or dies during a period of uncertainty. Even for partners in old-line firms, it is always advisable to at least assess a backstop plan.
In smaller law firms, and especially for solo practice lawyers, documentation may be outdated and haphazard - if it even exists - due to the time demands of the typical lawyer's practice. There may be succession and other planning steps that are vital to the lawyer-client's overall planning, but without the haranguing of a proactive planner, these may never get to the top of the in-box.
If planning has not been addressed with sufficient vigor, a lawyer, or his or her estate, could find that instead of reaping economic value from the practice, he or she will actually incur costs to properly transition a practice following a death or permanent disability. For example, legal ethics practices may mandate returning all client files.
For a practitioner with no succession plan incorporating file closure and document return, and especially at a firm that has not fully embraced scanning and other technology, these costs could be significant. Ask a solo practice lawyer how many boxes of client files are in his or her office and offsite storage that someone will have to be paid to review and possibly return to clients and what the cost of that massive project may be.
Additionally, liability exposure of a practice is essential to address because it may have an important impact on how investment assets should be titled. Some solos and small firms maintain inadequate malpractice coverage, or cannot obtain adequate coverage. Also inquire whether there are loans or other debts associated with a practice and whether there are any personal guarantees.
Retirement benefits may consist of a firm retirement plan, or a mere contractual obligation in a partnership agreement for the firm to make certain payments when a partner retires and certain criteria are met. Before relying on mere contractual retirement benefits, assess with the lawyer the risks that might undermine the receipt of those contractual promises.
Regarding insurance planning for lawyers, planners should take a very broad view of coverage and needs. While a lawyer may assume that a good business buy-sell policy addresses any insurance needs, that is but one step.
Life insurance is a key part of many plans, but must be assessed for lawyers in the context of their practice and ancillary endeavors. If a lawyer has significant debt used to purchase a practice, make a large required capital contribution on becoming partner, or buy the building the practice operates from, insurance needs might be greater. If the practice has a buy-sell arrangement, a planner should evaluate the security that agreement will likely afford when assessing insurance needs.
For solo practices and small firms, a business continuation policy may be vital. Many firms never consider such coverage. Likewise, asset protection should be a concern for a majority of lawyer-clients. While many have pursued this, many have not. Planners should not assume that, just because a lawyer has significant technical expertise on these matters, appropriate planning steps have been taken.
In determining the title to assets, need for an irrevocable life insurance trust (and the type of policy), funding of 529 plans for heirs and even the use of a nondeductible IRA, asset protection risks should be evaluated.
If all these concerns seem challenging, indeed they are. But the time it takes to address these concerns is time well spent. Lawyers not only can refer other clients, they can make great clients themselves. FP
Martin M. Shenkman, CPA, PFS, J.D., is an estate planner in Paramus, N.J. He runs laweasy.com, a free legal website.