Planning Ahead for Partner Retirement

Table of Contents

1. Introduction
2. Developing a Transition Plan
   1. Consider an Agreed Retirement Age
   2. Introduce a "Phase-Down" Period
   3. Be Sensitive to Adjustment Issues
3. Compensating Retiring Partners
   1. Reduce Compensation During Phase-Down Period
   2. Provide a Retirement Benefit
   3. Encourage Maximum RRSP Contributions
4. Transitioning Clients
   1. Understand Your Client Base
   2. Designate the Successor Lawyers(s)
   3. Solicit Client Feedback
   4. Foster Open Communication
5. Transitioning Firm Management
   1. Integrate Younger Lawyers
   2. Support Managing Partners
6. Participating in the Firm After Retirement
   1. Be Open to Different Arrangements
   2. Invite Retirees to Events
7. Summary
8. Sample Retirement Provisions

1. Introduction

Perhaps no issue leaves firms as directionless as lawyer retirement. Much has been written on practically all other firm management issues. But when it comes to lawyer retirement, there is very little guidance.

Yet planning ahead for the inevitable departure of senior partners is crucial for the future of your law firm — especially when the retiring partner is a rainmaker or founding member of the firm. Without such planning, your firm stands to lose the clients your senior lawyers have helped over the years. Your firm also risks a leadership crisis if younger lawyers haven't been groomed to assume management positions vacated by retired partners.

To assist you, we've spoken to numerous people in the legal community — law firm consultants in Canada and the U.S., managing partners, firm administrators, senior lawyers in firms both big and small, and retiring partners. The information presented here is distilled from their advice and suggestions, as well as from the (little) available literature on the subject.

Smaller firms (under ten lawyers) are less likely to have a written retirement policy in place, but all firms should have one. A retirement policy benefits both the firm and the retiring partner, providing certainty and averting the discomfort that can arise with individual negotiations. Of course, exceptions can always be custom-tailored to suit individual circumstances.

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2. Developing a Transition Plan

1. Consider an Agreed Retirement Age

   The question of whether firms should require or even ask partners to retire at a certain age isn't easy to answer. Many firms don't deal ahead of time with the subject of retirement at all, preferring to let matters take their course and addressing cases as they arise on an ad hoc basis. Smaller firms are even less likely to deal with the subject. Part of the problem is that it can be a sensitive issue and it's often difficult to obtain consensus among partners, so the matter is simply dropped.

   Having said that, in principle, the accepted wisdom is that older partners should be encouraged to scale back with a view to retiring at a certain age.

   Why is a retirement age recommended?

   Arguments in favour of adopting a retirement age include concerns about decreased productivity in later years plus a need to make room for younger lawyers to climb up the ladder.

   In terms of client relationships, aging litigators may fare better than solicitors. Experienced trial advocates are often still sought after in their 60s. But older solicitors may find it difficult maintaining relationships with banking institutions, in particular, where senior people tend to retire early and younger people — who are naturally inclined to want to retain solicitors who are their peers — occupy senior managerial positions.

   Adopting a retirement age allows both the lawyer and the firm to plan for the lawyer's retirement. It means there's a point beyond which the lawyer generally no longer delivers legal services or serves in an official management capacity.

   If you don't have a retirement age, the firm may find itself in the awkward position of asking an aging partner to retire — and giving reasons why — when the partner isn't open to this suggestion. With a retirement policy, you avoid this kind of uncomfortable discussion.

   If you do adopt a retirement age in your partnership agreement, phase in the policy to come into effect over five to ten years to protect older partners from unanticipated changes.

   What age?

   Firms with retirement policies usually set the retirement age at between 67 to 75, with 70 as a majority choice.

   The most important factor in choosing the age is the compensation or buy-out paid upon leaving. The higher the age, the less significant an issue such compensation becomes. The lower the age, the more partners will care about financial considerations — if you set the retirement age at 60, many lawyers will be concerned that they cannot afford to retire.

   Accommodating exceptions

   While a retirement age that applies generally to all partners is recommended, your policy should still be flexible and allow for exceptions.

   But the decision to permit the retiree to work beyond the retirement age should rest with your firm, not the lawyer. It's unlikely your firm will make an irrational decision. You could, for example, require the unanimous approval of the other partners if a lawyer wants to continue working beyond the "official" retirement age. (Options for different arrangements are discussed under "6. Participating in the Firm after Retirement".)

   What about early retirement?

   Your firm should also be flexible in allowing for early retirement.

   But retirement at too early an age should be discouraged. Lawyers in their 50s are in their most productive years. It can be a great loss to the firm to lose a senior lawyer too early, especially if you expect the lawyer to remain until well into his or her 60s.

2. Introduce a "Phase-Down" Period

   In general, it can take three to five years to fully transition a partner's practice. With an institutional client — a major company or bank, for example, where the work comes from many internal sources — it can take five to ten years or more. A planned, orderly transition is therefore crucial to keeping the partner's clients within the firm after the partner leaves.

   During this transition, institute a "phase-down" plan involving a gradual reduction in the partner's workload (and related decrease in profit sharing, discussed under "3. Compensating Retiring Partners"). This should be coupled with the partner's responsibility to pass on clients to younger lawyers (discussed under "4. Transitioning Clients").

   Notice of retirement

   Ideally, senior partners who plan to retire should let the firm know well in advance, so the firm and partner can agree on a transition plan. Failing that, the managing partner should ask senior partners at the appropriate age (perhaps 60) what their retirement plans are. At the very least, you may want your partnership agreement to require that partners must give notice of their intention to retire (subject to exceptions, for example, appointments to the bench). Maximum notice, such as six months or even one year, is recommended.

   Scaling back on hours

   With or without a retirement policy, many partners want to reduce their hours as they grow older, so there is usually little resistance to scaling back at work as they approach retirement.

   Phase-down periods typically range from two to five years. If your compensation scheme is fairly generous during this time, your firm will want a shorter term.

   An example of a five-year plan might be for the retiree to reduce his or her work load by 20% per year beginning at age 65. By 69 (the last year of work), the retiree would do virtually no billable work — just client promotion and overseeing other lawyers.

   Another option is for the retiree to scale back by 25% or more during the entire phase-down period. If 1,600 billable hours is the normal target, the retiree would cut back to 1,200 or 1,000 hours after age 65.

   If you don't have a formal phase-down plan, make sure you have yearly meetings with older partners to discuss their goals for the coming year.

3. Be Sensitive to Adjustment Issues

   After practising for many years, some lawyers are ready to move on, and either enjoy their new-found freedom or embrace new challenges. But for others, retirement can be a traumatic proposition. It can be especially hard for the lawyer in a smaller firm who has devoted his or her life to building up the firm. He or she may identify so closely with the firm that it's almost impossible to separate the person from the firm.

   Firms can help those future retirees finding it difficult to leave by being supportive during this time. Encourage conversations about life after retirement. Talk about the partner's future plans. Let the partner know you care about his or her future. It will be much easier and fulfilling for all concerned if the lawyer looks forward to his or her retirement and life after law.

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3. Compensating Retiring Partners

1. Reduce Compensation During Phase-Down Period

   During the phase-down period, the retiring partner's compensation should be reduced. But rather than being proportional to the reduction in billings, it should be based on rewarding efforts to involve younger lawyers in the client relationship. Otherwise, there is little incentive to transfer files and pass down the practice to succeeding lawyers.

   For example, the partner's compensation might be reduced 15% in the fifth year before retiring, 20% in the fourth year, and so on. Some firms guarantee that the retiree will receive 50% of what he or she was earning as a full partner in the last year before retirement, even though the retiree will perform very little billable work.

   The key is to ensure that your firm's compensation scheme encourages practice transfer.

2. Provide a Retirement Benefit

   Most law firms provide for some sort of capital buy-out upon a partner's retirement. Some also offer residual profit sharing. Indeed, one argument for paying greater retirement benefits is to protect against the retiree having to find other work out of financial necessity and competing with the firm.

   An increasing number of firms are also tying retirement payouts to the successful transition of clients and files (stipulated in the partnership agreement).

   Capital buy-out

   Partnership agreements typically provide for the return of the partner's equity in the firm upon retirement. The value is determined at the retirement date, and may include the partner's capital account plus a share of undistributed earnings, accounts receivable and sometimes work in progress. If the partner's capital buy-in was $100,000, the exit payment may range from between $150,000 to $200,000.

   Many firms pay this out over time, for example, over five years in quarterly installments (without interest). You don't want your firm to suffer a cash flow shortage if you pay the partner's capital contribution in full immediately.

   Retirement allowance

   Depending on the custom among firms in your community, you may also want to consider paying a retirement allowance or "pension".

   A generous example is to pay retirees a fixed income for life, based on a percentage of their draw for the last one or two years. A more feasible option might be to pay out up to one year's draw over a ten-year period.

   Make sure you consider the qualifications for eligibility, for example, a minimum of five years in the partnership.

   Usually, a cap is set on the amount of annual payments to former partners, for example, no more than 5% of the firm's net income for the year. If the firm has a bad year, the obligation to make up the shortfall carries over to the following year.

   A less popular way of providing a retirement allowance is to set up a pre-funded pension plan, where the firm buys into a tax-sheltered life insurance scheme. Your firm would pay into the plan, matching each lawyer's contribution. However, funded arrangements are quite complex, and firms that have investigated these arrangements generally conclude that they don't offer sufficient benefits and that there are better ways of ensuring financial security on retirement.

3. Encourage Maximum RRSP Contributions

   Inevitably, whatever retirement benefits are offered are likely to be insufficient to fully take care of the lawyer's financial needs on retirement. It's therefore essential that all lawyers make their maximum allowable RRSP contributions each year. Your firm should help with this planning.

   Enforced RRSP payments?

   Some firms make it a requirement that associates and partners contribute the maximum allowed to their RRSPs. To ensure compliance, each lawyer must provide the managing partner with a copy of the tax certificate showing his or her contribution and demonstrate that no withdrawals have been made.

   Alternatively, you might have your office administrator make the monthly payments on behalf of each partner (to their own specified plans) before the partners' monthly draws are issued.

   Provide expert financial advice

   If that seems too paternalistic, you can encourage prudent RRSP saving by paying for the accounting services for your partners. As a perk, your firm could offer the services of your accountants to prepare the partners' individual tax returns each year, at which time individual financial planning would also be done. Or, you could offer to pay a fixed sum toward the cost of the first or series of meetings with the accountant of the partner's choice.

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4. Transitioning Clients

The successful transfer of clients from the retiring partner to the firm is a key priority. With some practices, such as a small business practice, clients may age with the lawyer, so transition planning becomes less relevant. But with institutional clients — where it can take five years or more to effect a change-over — transitioning is a significant concern. It's also an important issue when a key senior or founding partner retires. That person may have a very visible presence in the community and represent the firm. When they leave, what is the firm?

1. Understand Your Client Base

   Clearly, the first step is to know who the firm's clients are. Your firm should review its client rosters on a regular basis, perhaps every one or two years, along with the lawyer primarily responsible for performing the work for that client. Many firms also pass out monthly or quarterly print-outs of new clients and the responsible lawyer. This will help enable all lawyers within your firm to be familiar with your client base and to identify those clients needing representation as a lawyer approaches retirement.

2. Designate the Successor Lawyer(s)

   The retiring partner should work with the firm in selecting successor partners or associates to assume responsibility for transferred files. Professional conduct rules typically permit withdrawal from a file so long as the client isn't prejudiced.

   It's important that the client feel comfortable with the new lawyer, so consider who has the right personality as well as the substantive knowledge to best serve that client when deciding which lawyer should take over a particular file. You may want to have two lawyers involved — a responsible "managing" lawyer who is perhaps better suited to client relations and a second lawyer to do more of the legal work.

   The exiting partner should introduce the client to the successor lawyer. The successor should then begin to attend client meetings with the retiring partner and handle day-to-day communications, gradually taking over primary client responsibility, with the retiring partner serving as advisor. Make sure to stress to the client that they won't be double-billed.

   The retiree's clients should be introduced to other lawyers within the firm too. Exposing clients to other partners and associates — professionally and socially — will help the client to become a firm client as opposed to a client of the successor lawyer.

   The retiring partner should also report on the progress made to the managing partner or firm.

3. Solicit Client Feedback

   Remember to solicit client feedback. This will help to strengthen the relationship between your firm and the client. The client is also likely to remember this when reassessing their relationship with your firm after the retiring partner ultimately leaves.

4. Foster Open Communication

   Keep the lines of communication between the firm and senior partners open. The retiring lawyer must buy into the succession plan and feel supported by the firm for the successful transition of clients to take place.

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5. Transitioning Firm Management

1. Integrate Younger Lawyers

   Planning for management transition is not a one-time occurrence. To ensure that your firm is always guided by capable hands, you should have a program in place for the ongoing training and mentoring of younger lawyers, so a replacement will be ready and able to step into the managing partner role when needed.

   Integrate junior lawyers in management activities early in their careers, by inviting them to sit in on budget meetings, coordinate the work of paralegals, and the like. Identifying those younger lawyers who have the necessary skills to become effective firm managers will also be an integral part of your management succession plan.

2. Support Managing Partners

   Managing partners need to be able to step down from their position well before they actually retire from the firm. However, they may have little or no client base to revert to. For the smooth turn-over in management, your firm must be prepared to financially support ex-managing partners while they move back into practice and build up their client base. You may also want to put an age limit (65 or less) in your partnership agreement on service as the managing partner or executive committee member.

   Some smaller firms find they can avoid this problem altogether by hiring a legal administrator to handle most management issues.

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6. Participating in the Firm After Retirement

A partner is unlikely to want to cut off firm ties after retirement; similiarly, the firm is likely to want to maintain a warm relationship with that person. One of the side benefits for the firm is that the retired partner will probably keep referring their friends and contacts to the firm.

1. Be Open to Different Arrangements

   Maintaining an office

   If space is available, most firms are happy to allow retired partners to keep their office, have access to a secretary and sit in on partnership meetings (as a spectator). This gives the retired partner a place to conduct his or her personal business transactions and makes the partner continue to feel welcome in the firm.

   "Chair of the firm"

   In the U.S., retired founding or senior partners who want to stay involved in their firms are commonly given the ceremonial position of "chair of the firm". Even though the retiree no longer provides legal services, he or she can still participate in the firm in a leadership role by maintaining client relationships, grooming a younger lawyer to become managing partner, or training and mentoring junior partners.

   Consultant, "partner emeritus" or associate counsel

   Some firms permit retired partners to perform legal work on an ad hoc arrangement as a consultant or "partner emeritus". Another option for the lawyer who wants to continue working is to create the position of "associate counsel" and invite the retiree to work part-time, perhaps two or three days a week.

   If the retired partner consults with clients or potential clients, make sure the appropriate practice fees and insurance costs are still paid.

   Compensation for post-retirement legal work and activities

   If you want the retired partner to play an active role in the firm — even if only to maintain client relationships — your firm must be prepared to pay for that. For rainmaking activities, it may be a percentage of the fees of the business the partner continues to generate. For training or mentoring, it may be a fixed sum.

   For legal services, compensation is usually tied to the amount of work performed. Other factors (such as rainmaking activities) normally used in assessing partners' incomes aren't considered. Another approach is to use a formula for compensation, such as a percentage of the average partner income.

2. Invite Retirees to Events

   Virtually all firms continue to invite retired partners to business seminars and social events, such as the firm Christmas party. Inviting the retired partner to client events also helps the client feel that the service provided by the firm hasn't changed.

   Also consider whether you want to pay for the retiree's club membership and professional association dues. Some firms consider it good firm marketing when retirees participate in social and other activities.

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7. Summary

Developing a retirement policy is sure to generate debate among partners in your firm. Different partners will likely have different views — especially on the subject of an appropriate age and compensation afterward. But addressing the subject of retirement is necessary if your firm is to survive, evolve and grow after the inevitable departure of founding and/or key senior partners. An agreed retirement policy also provides certainty for all partners within the firm, so partners can make appropriate arrangements as their legal careers wind down. Planning now for the future will benefit both your firm and the individual members.

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8. Sample Retirement Provisions

The following are some sample provisions dealing with retirement that can be adapted to form part of your firm's partnership agreement:

Retirement

A Partner shall retire from the Partnership:

1. at the end of the Partnership year in which his or her 70th birthday occurs, or
2. at any other later date with the unanimous approval of the Partnership.

Payment of Capital to Retiring Partner

A retiring Partner shall be paid the balance in his or her capital account over a period of five years in quarterly installments without interest, provided that the retiring Partner agrees in writing not to continue to practise law in the Province (except as an employee of or independent contractor to the Partnership, for which employment or contract work he or she shall be separately remunerated at a rate to be agreed upon annually by Special Resolution).

If the retiring Partner has a loan with a financial institution, which is secured by the said Partner's capital account, the firm shall pay the quarterly installments on the capital account to the financial institution, until otherwise directed by the financial institution.

Retirement Allowance

If a retiring Partner has been a Partner for a full five years at the beginning of the fiscal year in which the Partner retires, such Partner shall be paid a retirement allowance (in addition to the balance of his or her capital account referred to above), calculated as follows:

1. take each year that the Partner was a Partner before the year in which the retirement occurred, to a maximum of 15 years,
2. take the Partner's share of earnings for each of the years under (a) above,
3. add all entitlements under (b) above, and
4. divide the sum referred to in (c) above by 15 — this is the retirement allowance.

The retirement allowance shall be paid in 20 equal semi-annual installments, starting at the end of the fiscal year in which the Partner retired.

Payment of Capital to Partner Taking Early Retirement

A Partner may withdraw from the Partnership before age 70 either:

1. for any reason, on six months' written notice to the other Partners, in which case the retirement shall be effective upon such date or at any earlier time during the six months as may be determined by a Special Resolution, or
2. without notice, if he or she is appointed a Judge or to an administrative tribunal or is elected to a political office.

Such Partner shall be paid the balance in his or her capital account over a period of five years in quarterly installments without interest.

Medical Examination

Each Partner agrees that he or she will consent, upon the request of a majority of the other Partners, to undergo a medical examination regarding his or her physical or mental health, and the report shall be promptly made available for inspection by other Partners.

Mandatory Withdrawal

A Partner may be required to withdraw from the firm by Special Resolution of all other Partners of the firm. In the event of the mandatory withdrawal of a Partner, the firm shall pay the Partner an amount equal to the balance in his or her capital account over a period of five years in quarterly installments without interest.

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By Janice Mucalov