SC Lawyer, November 2009, #1. When You Can't Do It All: Small Practice Short-Term Disability Planning.

• Author: By Linda Farron Knapp and Thomas A. Gore

South Carolina Lawyer

2009.

SC Lawyer, November 2009, #1.

When You Can't Do It All: Small Practice Short-Term Disability Planning

South Carolina Lawyer November 2009 When You Can't Do It All: Small Practice Short-Term Disability Planning By Linda Farron Knapp and Thomas A. Gore She started her own firm with 13 years of legal experience, a solid reputation, a multitude of law books, several thousand dollars and a very supportive spouse. Slowly and surely, she built a thriving practice-hiring a qualified staff, relocating to a larger space, and diligently implementing contingency plans for everything from cash flow shortages to computer server crashes. She was ready for anything, except an unexpected medical diagnosis: lumbar disc disease-a back and nerve disorder that required strong pain medications and months of physical therapy. After notifying clients, scaling back hours, enlisting the help of fellow attorneys and relying on her staff to streamline operations, she was eventually able to return to a full-time schedule after tapping a fortuitous line of credit. However, the message was clear for this previously infallible, work-around-the-clock attorney (who happens to be one of your co-authors): life is tenuous, and disability planning is essential.

Solo practitioners and small firm attorneys are notorious workhorses who value their independence and take pride in their dedication to clients. Comprising approximately 60 percent of the South Carolina Bar and 74 percent of the national private legal sector, these dedicated entrepreneurs are often more likely to plan for their own deaths than a serious disability. What would happen if you, as a solo practitioner, had a major accident or a prolonged illness that led to temporary or long-term disability? It's also common to underestimate the implications of losing a loved one or suddenly having to divert time and energy toward caring for a close family member due to advance age or disability. See Richard E. Meyers, Death Comes to the Attorney, NAELA Journal Vol. 2 2007 No.7 and Wallace, Richard H. Rules, Rules, Rules, SC Solo and Small Firm Section Electronic Newsletter May 2008. It all comes back to protecting the two facets that ultimately influence most aspects of life and law as a business-your income and your clients' interests.

It's never easy to accept that the worst can happen to you, and disabilities are insidious by nature. It's not always the archetypal car crash-more common causes are medical in nature, such as cancer, diabetes, blood disorders and physical disabilities such as back problems and chronic pain. Depression and other nervous problems can also impair basic functionality. For the purposes of this article, we will primarily focus on short-term disabilities lasting up to a year, the time period when you have the best chance of returning to a valuable, viable practice.

Why plan for a disability?

First and foremost, there is an ethical duty to plan to protect the interests of clients. The Official Comment to RPC 1.3 states, "Cf. Rule 31 of the South Carolina Rules for Lawyer Disciplinary Enforcement provides for court appointment of a lawyer to inventory files and take other protective action in absence of a plan providing for another lawyer to protect the interests of clients of a deceased or disabled lawyer" (emphasis added). An RPC disciplinary involvement where attorney competency is at issue starts with a petition by the disciplinary board; a public appointment by the S.C. Supreme Court, granting the appointed attorney(s) control over the firm's files and business accounts for up to nine months; notice in a paper of general circulation in all counties in which the attorney practices for three consecutive weeks; and written notice to all your clients and malpractice insurance carrier. (For a more complete discussion on disciplinary matters, see Guignard, James S., Slowdown, Retirement and Exit Plans: Professional Responsibility When Competency is in Doubt, S.C. Bar CLE Senior Lawyer Division, Jan. 26, 2007.) Regardless of the eventual outcome, that kind of production-inhibiting scrutiny and unwanted publicity is likely to have long-term implications for any law practice.

While a contingency plan does not have to be in writing and a solo practitioner is not subject to disciplinary action merely for not having yet prepared a plan, it behooves every small firm attorney to be mindful of the effects a disability would have on his or her reputation, business and client interests. That doesn't mean every solo practitioner has to plan to add a partner, hire an associate, send away business or close the doors when a crisis strikes, but it does mean you have an affirmative duty to consider the potential problems and determine a likely solution within your financial means, after due consideration to the area(s) of law and location in which you practice. See Ethics Advisory Committee Opinions, http://www.scbar.org/member/ethics/asp.

What's more, a solid disability plan is in the best interests of both you and your clients. Your ability to earn an income from your practice supports your livelihood and provides needed resources to your family; simultaneously, clients rely on your expertise and continuity to solve their ongoing legal problems. Though your small practice will ultimately need you at the helm to thrive, diligent planning in the realms of insurance, savings and everyday business practices and procedures can ensure daily operations continue in your temporary absence.

Protecting your income through insurance

Planning for disability is a challenge. Unlike planning for unforeseen death, a disability cannot provide a large lump sum of cash like a life insurance policy. What's more, you will still be here, steadily accumulating living and medical expenses.

Attorneys who are sole income earners should plan to protect as much of their income as possible; those who have joint income with a spouse should carefully calculate what is needed to contribute to the family earnings. Though it sounds fairly straightforward, many attorneys make the mistake of 1) calculating their income protection needs based on total insurance coverage, which usually falls between 60 to 66 percent of earned income, and 2) using their disability premiums as a business owner income tax deduction, which causes the insurance benefit to be taxable as income when it is received. After taxes, this method only insures between 48 to 52 percent of earned income (based on earning $150,000 annually and filing taxes jointly as a married couple).

The way you structure insurance coverage can be just as important as understanding how it will be taxed. The first step toward securing maximum income is often to put a personal disability policy in place before you add any group disability insurance through your firm. Insurance companies underwrite their disability policies based on earned income and insurance coverage currently in place. For example, an insurance company underwriting a policy for an individual based on 66 percent of earned income may actually only cover the difference of one to six percent if group coverage is already in place for the first 60 percent.

Contrastingly, if the personal policy is placed first, then the company will underwrite the coverage based on the individual's full income without any group coverage in place. Once the personal policy is in place, you can purchase group coverage for your practice to increase your coverage. Group disability insurance can be underwritten without reducing the benefit based on existing coverage, thus allowing you to insure more than 60 to 66 percent of your earned income tax-free, if you don't deduct the insurance premiums. These benefits will vary based on the underwriting insurance company and the benefit features that you select.

Another feature to review in a disability insurance policy is the definition of your own occupation. This feature may allow you to qualify for benefits if you cannot perform the material duties of your own job. For instance, if you are a trial attorney and cannot stand the rigors of the courtroom because of panic attacks or pain, then you may qualify to receive a disability benefit even if you are still working in another less physically demanding and vocal area of your practice. This benefit would supplement any lost income from your trial work. Protection against inflation is another important policy feature to consider. Inflation protection prevents benefits from losing value over time as expenses increase. A residual benefit is also worth considering because it supplements your income as you start back to work. For example, if you go back to work and are only producing 70 percent of your income because you have to rebuild your client base, the policy will supplement the difference until your earned income is back to normal.

Separate from disability coverage, a good business overhead insurance policy can also help cover most overhead expenses-including employee salaries-in the event of the business owner's disability. Though it doesn't cover business owner income, this type of policy can help keep the lights on at your office. These policies have a waiting period before they begin to pay so you need have some sort of cash reserves, a line of credit with a bank or even credit cards available to cover interim expenses.

Regardless of how you structure your insurance coverage, don't plan on supplementing your benefits with Social Security insurance. Social Security pays only for permanent, total disability, not for temporary, partial disability. More than 80 percent of all claims filed with Social Security are initially denied, and even legitimate claims take months to process. See Social Security Forum, Vol. 21, No. 5.

Building your cash reserves

The average income for South Carolinians ages 21 to 64 with disabilities is a meager $33,600, making three to six months of cash reserves vital for disability planning. See 2007 Cornell University Disability Status Report South Carolina. This cash will protect short-term income loss when disability policies may not pay because of a waiting period. (Note: Most short-term disability policies should pay almost immediately, but the more common long-term disability policies usually have a 90-day waiting period.)

A complete, defined personal and professional budget is essential for planning the amount of cash reserves you need. A good outline of expenses minimizes the need to make major decisions in haste. One common mistake in budgeting is forgetting to include the increased costs of having the disability. Not only will you bear most of your normal expenses; you will now have the added cost of medical attention and potentially the need for a contract attorney or other professional to oversee work you traditionally did without compensation, such as billing and bookkeeping.

Delegation and direction

The best approach to disability planning involves devising an informed, written plan and discussing it with those involved in its execution.

If your office manager will handle the bulk of your business affairs, those expectations should be communicated and addressed ahead of time. Standard needs to address include overhead expenses, client notification and retention, working case files, and employee retention. Despite the minutiae, it's up to you to provide an overarching outline and the vision to ensure that you have something to return to after the disability.

Office system manuals are imperative. Unlike employee manuals, system manuals define office procedures and list the manner in which they are to be carried out. System manuals are time-consuming to create, but the benefit greatly outweighs the time investment. By including an alternate process to follow if you are unable to work, these manuals can go a long way toward implementing your guiding principles and keeping your practice in order.

Associate advantages

Adding an associate is a monumental business decision for a solo practitioner, but having another attorney's expertise to help with your caseload in the event of a disability should certainly be factored into your planning. Contract attorneys may be a solution if you are still mentally able to direct work. Associate arrangements tend to work extremely well in terms of revenue continuity and client retention. If you decide to recruit an associate, be sure to discuss advancement opportunities, ownership possibilities and general expectations-the worst case scenario would be having an overwhelmed new associate leave in the middle of a disability, just when you need him or her most. Keep in mind that if you do become disabled for a longer period, an associate will probably want some type of reassurance as to what will happen to him or her. You will want to address a buy/sell agreement that will, at some point in your disability (for instance, after 18 months), allow the associate to begin buying in to your practice. This will serve two purposes: 1) provide needed income to you and 2) provide security to your clients and employees. You would pace this buyout to be fair to both you and your associate, ensuring that you have a continued stake in the business in case you can return.

Planning for disability is a large task. However, it can help to approach short-term disability planning like any other business process and begin with the end in mind. Below is a checklist to help you handle specifics in addition to the broad planning concepts we've discussed.

Short-term planning checklist

1. Have a PC folder and hard binder labeled "Emergency." 2. In the folder/binder, make a list of where your important papers (including insurance documents) can be found and your computer passwords. A safe deposit box is fine, but only if someone else is authorized to use the key and knows where it is. 3. Weigh insurance options with a professional to protect your income, considering tax obligations and policy purchase order. 4. Have several signed non-specific motions for a continuance, motions for extensions, motions and consent orders to be relieved as counsel, notices of substitution of counsel and orders of protection. Then you or someone else only needs to add a cover letter and follow up. Slip in the address and phone numbers for key judges and add a sample letter or two. 5. Prepare an outline of how to follow up on motions and orders of protection with a focus on where to file, service to opposing parties and notice to clients. 6. Create and use file checklists whenever possible so a knowledgeable person can tell at a glance the status of the casework in open files. Maintain strict rules for file organization. 7. Use engagement and closing letters and mark when a file is open and closed on the file cover. 8. Keep a court calendar on your computer and a hard copy in a day planner. 9. Train your staff on ethical duties regarding the lawyer's duty to communicate, due diligence and conflict of interest with opposing counsel, etc., but also have a written plan for procedures if you have to be hospitalized or the practice needs to be suddenly shut down. Keep a copy of written training materials in a binder as a reference book for staff on dealing with specific office problems. 10. Create an office systems manual. 11. Consider creating a limited power of attorney for someone you trust to sign checks, and consider naming an alternate. If you operate as an S corporation or LLC, you may need a second corporate limited power of attorney with a resolution properly recorded in your entity record book. 12. Pay special attention to your client trust account and billing practices. For instance, the attorney co-author uses refundable retainers and time/billing software so fees are not drawn down until earned. This practice means the firm could stop at any point in time and be able to turn over unearned fees and trust balances to clients. 13. Have an undated client letter signed and ready explaining your office policy and ethical duties in the event of an emergency (even if this is part of your engagement letter). Staff can always add a cover letter with more details if needed. 14. Consider someone you know who could walk in and direct the movement of cases or close the firm down, if need be. If possible, reduce your understanding with the other attorney to a written agreement. 15. Have a list of attorneys you trust and respect who can handle specialized casework; update this at least once a year. Talk to those attorneys to whom you might send a significant amount of cases and follow up with a letter. Keep a copy of the letter in the emergency binder so it can be faxed as a reminder of their willingness to help out in your time of need. Be sure to bold your instructions that clients must first be notified in writing of any change in a professional relationship, have the right to move their legal matters to another firm of their choice and should be given a complete copy of the contents of their file. Once the client gives consent, then be sure staff knows to do conflict checks on every case before it is discussed in detail or directed to another law firm/lawyer. 16. Don't keep originals in clients' files, including estate documents. 17. Clients who need to move files to another firm should sign a release, and your business should retain the release and original file information. 18. Business interruption insurance or sufficient cash reserves may be the only way to keep your business running in your absence over several months or a year. Plan, purchase and budget accordingly. 19. Have information about your bookkeeper, if not in-house, and tax preparer in your emergency binder. Payroll, bills and periodic payments may need to be addressed in your temporary absence. W2s, 1099s and firm taxes may need to be handled. 20. Set aside funds for long-term storage of closed client files, computer records and the firm's financial records in case the firm location must be closed down and lease space surrendered. For additional emergency contingency plan resources, consult the South Carolina Bar Lending Library or arrange for a consultation through the Practice Management Assistance Program.

Linda Farron Knapp is principal of The Knapp Law Firm, PC in Barnwell. Thomas Gore is the president of Core Advisors in Chapin.