There is a lack of a common definition of a family business but it is generally considered to be a business with two or more family members who have financial control of the company and there is some intent to transfer the business to the next generation. Over 90% of family businesses in Canada are family businesses.

Family businesses employ approximately six million Canadians and an average family business employs approximately 18 employees.  The total annual sales of Canadian family businesses are estimated to be $1.3 trillion.

Family businesses are often reflected as a system of three intersecting circles: the business circle, the family circle and the ownership circle.

The most successful family businesses have a balance and clear boundaries between the three circles with professional business management, responsible ownership and a harmonious family culture.  Assisting families to successfully manage the three spheres presents difficult dilemmas.

How do you balance individual desires and differences with the interests of the family and the development of a shared vision?  Are the interests of the business or the family more important?  How do you celebrate tradition and successes of the past while focussing on the future and a rapidly evolving business climate?

What does it mean to be a successful business owner and how does that differ if you do or do not have a role in the family or business management circles?

How does the business successfully transition from the founding entrepreneur, to the sibling partnership to the cousin consortium stage?

Succession is the greatest long term challenge that most family businesses face.  Less than one third of family businesses make it to the second  generation and only approximately 13% make it to the  third generation.   The failure to plan and manage succession well is the greatest threat to the survival of a family business.  This not only has significant impacts on the hopes, dreams and wealth of individual family members but also on the greater economy as a whole given the pivotal role family businesses play.

The most successful succession plans involve careful planning over many years, and it is the CEO’s responsibility to initiate and manage the process in a timely manner.  The CEO must develop a strategic business plan, create a process to identify and choose successors and train potential successors.  The CEO must ensure that an adequate estate plan is put in place.  The CEO must prepare the family for succession, often through the development of a family mission statement that elucidates the family’s relationship with the business.  The CEO must ensure that the next generation of owners is educated on how to be effective owners and to function well as a co-ownership team.  The CEO also needs to focus on preparing for a financially secure and enjoyable retirement or second career.

Given how high the stakes are and its pivotal role in the future of the individuals involved and the business itself, the succession process can be filled with tension and conflict between individual and collective family, business and owner stakeholders.

One way to manage the complexities of the family business succession process is through professionally mediated family meetings.  A professional mediator can assist by convening the meeting including determining who will participate and obtaining buy in for the process from all the parties; assigning roles and responsibilities including setting the agenda and ground rules; facilitating group problem solving including involving appropriate experts; reaching and recording agreement; and holding parties to their commitments including monitoring changing circumstances and arranging to reconvene as necessary.

Whatever the purpose of convening a family meeting, the process of gathering as a family to communicate in a structured way can encourage members to act on important and shared values, with valuable results for both the business and the family alike.  Family meetings also often spark a desire to codify a family constitution or mission statement articulating the family’s values and the mechanism by which they are expressed in the business, the family and the community as a whole.

Succession may be the most difficult life cycle of a business, but it also has the highest rewards.  Why not start today.

The greatest hurdle to handing down a cottage successfully is poor estate planning.

There are two central issues to be aware of:

1. Capital Gains Taxes

Taxation issues lie at the root of many cottage bequest problems.  The biggest issue that that capital gains taxes must be paid when the cottage is sold or gifted, either during the parents lifetime or after their death.

Estimate the capital tax payable

a. What is the fair market value today?

Start by figuring out the present fair market value (FMV) of the cottage. Check recent sales in the area, ask a realtor for an opinion of value, or pay for an appraisal.
What is the cost base?

b. Find the cost base of the cottage. If you acquired the cottage after 1971, the value as of the date of acquisition is the cost base. If you acquired it before 1971, then the value as of December 31, 1971, is the relevant amount. If you cannot get this value by yourself, appraisers can research comparable sales.

c. How many capital improvements?

Next, add up the capital improvements made to the cottage or the property since you acquired it. This would include new docks or additions, replacing the roof or windows, installing a new well or pump. You can’t include simple repairs, maintenance or the value of your own hard work in improving the cottage, only the amount actually paid to others.

d. What is the adjusted cost base?

Now add the cost base and the capital improvements. This will produce the adjusted cost base (ACB). (If you made use of the capital gains tax exemption before it was taken away in 1994, then you can get the ACB from the tax return in 1994. The process above still applies, but from 1994 instead of from the date of acquisition.)

e. What is the total capital gain?

Subtract the Adjusted Cost Base from the Fair Market Value. This gives you the total capital gain.

f. What is the tax payable?

Divide the capital gain figure by half to get the taxable capital gain, then again by half to approximate the tax actually payable.

Take steps to reduce the capital gains tax payable

• Transfer it to children  in stages rather than all at once (i.e. 20% a year for five years) to reduce capital gains taxes payable  (and also prevent a possible clawback in OAS)

• Transferring it via your will may result a higher total amount of capital gains payable, but there may be more sources of payment available

• Use the principal residence exemption (you can choose to designate your cottage instead of your house as a principal residence for a specified period). You and your spouse are able to claim only one principal residence per tax year.  You don’t need to identify a principal residence until the residence is sold or ownership is otherwise transferred.  This means the designation can be applied in hindsight, by reviewing the history of the changes in the value of the principal residence and cottage and moving it between them for particular years to minimize the capital gains impact.  This can be done as part of settling an estate or when selling a property.

Determine how to fund the capital gains tax liability

• Savings and investments
• Life insurance (adult children can pay premiums)
• Have the beneficiary children pay the capital gains taxes triggered on inter vivos transfers
• Use the cottage itself to fund the capital gains tax (subdivide and sell a lot; register a mortgage that the children can pay off over time)

Ongoing Management: the Use, Operation and Expenses of the Cottage

How will the children use, operate and fund the expenses of the cottage?

Among the questions to be answered are:

• Can any child use the cottage any time, or will there be periods of exclusive use?
• Who will open and close the cottage?
• Who makes sure the bills are paid?
• Who is responsible to pay the bills, whether it’s replacing the septic system, paying the municipal taxes or repairing the roof.  How do you deal with differing financial resources of the children?
• Who decides if improvements or additions are to be made?
• If a child dies, does his or share of the cottage pass to the spouse and children, or does ownership continue with the surviving siblings only?
• What happens if a child divorces or goes bankrupt?
• What happens if one or more of the children wants to sell?
• What happens if the children stop getting along and/or reach an impass?

A Co-Ownership Agreement, negotiated while the parents are alive and able to assist, can be invaluable in retaining family harmony and enabling successful second- and third-generation ownership.

A Co-Ownership Agreement is essentially a business partnership agreement. Some issues addressed are identical, like decision-making procedures and disposition of interests by the partners. Other matters are unique to cottages and your own family’s needs and desires.

Vehicles to Transfer the Cottage to the Next Generation:

Retain Sole/Joint Ownership by Parents & Transfer Via Will

• Best for simple succession situations
• Pros: wills are simple and inexpensive to create; parents retain ownership and control during their lifetime
• Probate fees (approximately 1.4%) will be payable on the assessed or market value of the cottage
• Capital gains taxes will be payable on death
• How to deal differences in children’s incomes and financial resources: leave a certain sum of capital in trust in your wills to be used exclusively for cottage purposes ( referred to as a testamentary trust).   It enables all or a significant portion of the cottage operating costs to be paid from the trust, rather than from the childrens’ own pockets. Furthermore, if there is a need for a substantial expenditure, then the trust capital can be encroached upon for that purpose, avoiding a financial emergency. The use of a testamentary trust compensates for the differences in economic positions between the children, to the benefit of all.

Inter Vivos Gift or Sale to Children

• Best if parents are ready to give up ownership and control of their cottage now
• Pros: no probate fees are payable; children can assume ownership costs and responsibilities; additional capital gains deferred to recipients
• Gifting is simply transferring an interest in the cottage without requiring payment.
• You cannot save on capital gains taxes by gifting. For tax purposes, the property is deemed to pass at fair market value. You must report the gift transfer on your next income tax return as a taxable disposition using the fair market value (FMV), even though you actually received no money. This is one of the impediments to cottage succession – even though the parent may choose to give the cottage away, the tax costs are the same as a real sale, and the parent does not have sale proceeds to pay the tax.
• Property Transfer Tax may be payable (1% on the first $200,000 and 2% on the remainder) of the assessed value, whether gifted or sold

When a related individual transfers a recreational residence , you may be exempt from paying PTT.
The following people are considered to be a related individual:

• your spouse, child, grandchild, great-grandchild, parent, grandparent or great-grandparent,
• the spouse of your child, grandchild or great-grandchild, and
• the child, parent, grandparent or great-grandparent of your spouse.

Your spouse is:

• a person who you are married to, or
• a person who you are living and cohabitating with in a marriage-like relationship, provided that you have been living and cohabitating in that relationship for a continuous period of at least two years. This includes a marriage-like relationship between people of the same gender.

The following are examples of people who are not considered to be a related individual: your sister, brother, uncle, aunt, niece or nephew.

A property is considered to be a recreational residence if the following four criteria are met.
1. Before the transfer, the person transferring the property to you (the transferor) usually resided on the property on a seasonal basis for recreational purposes. Please note: When a trustee is involved in a transfer, the trustee becomes the transferor and this requirement applies instead to the settlor or the deceased.
2. The property is classified as residential by BC Assessment. The property includes the land and any improvements on the land (e.g. buildings).
3. The land is 5 hectares (12.36 acres) or smaller.
4. The property has a fair market value of $275,000 or less.

• Consider retaining a life interest in the cottage, whether gifted or sold (can be registered on title to the cottage in the Land Title Office)
• A  life interest provides several advantages to the parents. One is that it entitles them to use the cottage for their lifetime as of right, not rely upon the continued goodwill of the child who now owns the cottage. Another is for the parents to retain a measure of control. With a life interest, the child cannot “cash in” on the cottage by selling it or mortgaging it, without the involvement and consent of the parents. This would defeat the intention of keeping the cottage for family purposes. If and when the parents are no longer interested in using the cottage, or are no longer concerned that a child may cash in on it, then the life interest can be released.

Transfer to a Trust

• Best if parents wish to leave the cottage to children without the costs of probate for their estate, but do not want to relinquish control
• A possible solution to leaving a vacation property to more than one family member is to transfer it to a trust.  In addition, a trust affords benefits such as creditor protection, the ability to defer capital gains taxes on capital assets and centralized asset management.

Multiple Beneficiaries, Centralized Management and Creditor Protection

• The trust can be structured to govern who is entitled to benefit from the property, how it is managed and what to do if the trustees can’t agree.
• The trustees of the trust could be one or more individuals who would have the power to make certain decisions, and the beneficiaries could include not only children, but potentially grandchildren or other relatives.  An advantage to a discretionary trust is that none of the beneficiaries have any vested right to the property – they will only be entitled to use the property as the trustees allow and/or when the trustees decide to distribute the property to them.  In the meantime, if a beneficiary dies, there will be no tax liability resulting from their interest in the trust.  If a beneficiary suffers a marriage breakdown or experiences creditor issues, they will have a strong argument that they have no interest in the vacation property, and that it therefore should not be subject to asset division or seizure.

Tax Considerations

• When an asset is transferred into a trust, the transfer will trigger a deemed disposition of any unrealized capital gains (except in the case of a spousal, alter ego or joint partner trust).  Once the property is transferred into a trust, it can grow in value in the trust and the death of a beneficiary will not trigger any tax liability.
• There will be a “deemed disposition” of the property held in the trust every 21 years thereafter.  This means that any unrealized capital gain in the value of the recreational property will be triggered on the 21st anniversary of the trust and the tax will have to be paid (unless the trust property is distributed to a successor trust or Canadian resident beneficiaries prior to the 21st anniversary).
• The property in the trust will not be subject to probate fees, currently approximately 1.4% of the gross value of the estate.

Primary Residence Capital Gains Exemption Issue

The Income Tax Act allows a home owned by a “personal trust” to qualify as a principal residence if the recreational property was ordinarily inhabited in the calendar year ending in the relevant fiscal year of the trust by an individual beneficiary of the trust or a child, spouse or former spouse of such a beneficiary. A beneficiary who satisfies this test is referred to as a “specified beneficiary”.

A personal trust is defined by subsection 248(1). Generally, a personal trust is either a testamentary trust or an inter vivos trust where all of the beneficiaries received their interests as gifts. In order to limit the types of taxpayers who can benefit from the principal residence exemption in respect of a home held through a trust, a number of limitations are placed on the ability of a personal trust to claim the benefit of the exemption.
Pursuant to paragraph (c.1) of the definition of “principal residence” in section 54, a taxpayer that is a personal trust may designate a property as a principal residence if:

• the designation is made in the prescribed form and manner;
• each individual who in the calendar year ending in the taxation year, is beneficially interested in the trust and ordinarily inhabits the housing unit, or has a spouse, former spouse or child that ordinarily inhabits it, is listed in the designation;
• no corporation other than a registered charity or partnership is beneficially interested in the trust at any time in the year;
• no other property has been designated for the year as a principal residence by a specified beneficiary of the trust, by the beneficiary’s spouse (other than a spouse who was throughout the year living apart from and was separated pursuant to a judicial separation or written separation agreement from, the beneficiary), by a person who was the beneficiary’s child (other than a child who was during the year a married person or 18 years of age or over) or where the beneficiary was not during the year a married person or a person 18 years of age or over, by a person who was his or her mother or father, or his or her brother or sister who was not during the year a married person or a person 18 years of age or over.

The designation which must be filed by the trust must specify each individual who was a specified beneficiary of the trust in the calendar year ending in a relevant fiscal year of the trust. A designation by the trust is not valid if any of the following persons have designated any other property as their principal residence:

• a specified beneficiary of the trust;
• a spouse of a specified beneficiary unless the spouse is living apart from the specified beneficiary pursuant to a judicial separation or a written separation agreement;
• a child of the specified beneficiary unless the child is at least 18 years old or married;
• a parent of the specified beneficiary unless the specified beneficiary is either married or at least 18 years old; or
• a sibling of the specified beneficiary unless either the sibling or the specified beneficiary is either married or at least 18 years old.

**Note: A property which is validly designated as the principal residence of a trust is deemed to have been designated by every beneficiary of the trust as that person’s principal residence for the calendar year ending in the relevant fiscal year of the trust. This rule prevents the trust beneficiaries from designating any other property as their principal residence for the year.

Transfer to a Family held Non-Profit Organization

• Best for those with a large cottage property suitable to being shared by an extended family
• Enables successive generations of family to use the cottage without incurring capital gains tax or probate fees
• Initial transfer will likely trigger a capital gain which in the case of a large property could be massive
• Demographics can force the sale of such compounds: too many members and too little space
• Expense of ongoing accounting and legal fees

I recently attended the 2010 World Summit & Symposium on Elder Mediation and presented on the topics of ethics and planning for incapacity.

I enclose my presentation slides on both topics:

It is estimated that there are currently 3.7 million Canadians over the age of 65. With the leading edge of the “baby boomers” poised to hit retirement in 2011, seniors will soon make up close to a quarter of the population. This demographic shift will have a profound effect on our society socially and economically.

The potential for issues and disputes will increase as larger numbers of older adults face life transitions and issues of incapacity, health care, housing, finances, family and relationship concerns, possible abuse and neglect, estate planning, end of life decisions and other significant concerns. Elder mediation is a potential solution to assist seniors, their families and other stakeholders facing a maze of options and tough decisions.

What is Elder Mediation?

The Elder Mediation Canada web site defines elder mediation as follows:

Elder mediation is a cooperative process in which a professionally trained elder mediator helps facilitate discussions that assist people in addressing the myriad of changes and stresses that often occurs throughout the family life cycle. Elder mediation typically involves larger numbers of participants including older people, family members, friends and others who are willing to give support. Depending on the situation it is not uncommon to include paid caregivers, hospital staff, nursing home and or community care representatives, physicians and other professionals.

Over the past 20 years mediation with age-related issues has been emerging as a distinct specialty in the field. Elder Mediation is now being recognized internationally as an important step in the continuum of care – promoting wellness, developing prevention strategies and enhancing quality of life. The focus is on addressing concerns and issues while maintaining and strengthening the myriad of relationships critical to the well-being of the older person.

This is an article I wrote for the Law Practice magazine March/April 2010 issue in advance of the upcoming ABA Techshow.

Working Virtually: High-Productivity Tips for Traveling Lawyers

I will presenting on virtual law firms and technology for the travelling lawyer.  And I’m looking forward to visiting Chicago for the first time.  I will live tweet the conference at @ngartonjones.

Date: Friday, May 14, 2010
Time: 8:30 am to 1:30 pm

I am excited to be able to participate in this year’s CBA BC Branch Women Lawyers Forum Education Day event. Along with Elizabeth Watson and Stacey Handley, I will participate on a leadership panel which will be led by Marion McAdam of Fourth Wall Project Management & Consulting. Marion has worked extensively with women who are leaders already or who are aspiring to become one within their own context. In conjunction with this, she has also done a considerable amount of research on emerging and changing trends in women’s leadership.

I have been tentatively asked to speak to “defining success for yourself and making it happen.” My personal conception of what success is and my level of achievement in that regard are both rather fluid concepts, so this should be an interesting exercise.

I am particularly interested in the quotes contained in the draft discussion materials prepared by Marion McAdam, some of which I include here:

“Success has been defined by men all these years as movement high up the ladder. Women have to define success differently. It isn’t necessary to be the top person to be successful…Success is having work in your field that permits you to have a life as well. … A woman’s life is a horizontal journey rather than a vertical climb.”

“Women At Law: Lesson Learned Along the Pathways to Success” Phyllis Horn Epstein

Trying to act like men in the workplace creates a kind of dissonance. We can sense when people are not acting authentically and we don’t trust them. “Women bring a unique set of behaviours to the workplace that are needed, especially in today’s climate. Our tendencies to collaborate rather than compete, listen more than talk, and use relationships rather than muscle to influence are the very same behaviours I coach men to acquire. But it’s all about balance. Just as men can overuse their stereotypical characteristics, so can women.” (p. 62 Nice Girls Don’t Get the Corner Office)

“In order to be effective leaders, women need to be comfortable practicing law as women – in their own way. Women don’t need to practice law the same way that men do in order to be successful.”

It should be an interesting discussion!

Mediation is particularly well-suited for estate disputes because it provides for the consideration of factors outside the adversarial arena. Very often in estate disputes there is a multiplicity of interests and motivations.  Mediation provides a forum to not only identify those interests and motivations, but to respond to them.  When a dispute arises in the family context, mediation allows for consideration of the factors that might contribute to the dispute or interfere with its resolution.  For example, family dynamics, suspicion of abuse or undue influence, blended families with opposing views on testamentary entitlement, and interpretation of the testator’s, donor’s or settlor’s wishes can be more effectively considered in the mediation context than during the course of litigation.

Where family is involved, there is often a natural reticence towards litigation.  While the disputants want the opportunity to settle their disputes behind closed doors, they often need the assistance of a neutral third party to reach an appropriate resolution.  Mediation allows for the leveling of the playing field because each party has a voice and can participate in the process.  Each party has the right to have counsel present and the ability to influence the discussion and eventual outcome.  If there is a desire to repair relationships, mediation provides an opportunity for this reparation.  Parties can more readily move from a position-based stance to an interest-based stance.  It is possible that, once the discussion moves to one of interest, the parties will discover that they have common interests that can be brought to bear in resolving the dispute.

It is interesting to note that of the 31 millions people currently residing in Canada, 12.5% (3.9 million) are age 65 or older.  By 2040, it is predicted that 25% of Canadians will be over 65.  While there are currently only 150,000 people in Canada over 90 years of age, by 2026, there will be 400,000.  We are living longer and accumulating greater wealth.  This gives rise to the potential for even more disputes arising on either incapacity or death.  Mediation will be an important tool in resolving some of these disputes, including, but not limited to:

• challenges to the validity of a will (e.g. , preparation, execution or interpretation of a will, capacity to make a will, holograph wills, and will kits);
• personal injury claims (where the incapable or deceased person is injured or causes a third party injury);
• discrimination claims (including age and disability discrimination, and accessibility rights);
• elder abuse claims (including physical, psychological and financial claims, and civil and criminal remedies);
• dependants’ relief claims (where the deceased or incapable person is either the dependant or the provider);
• parental support claims (where the parent is in need and the child is capable of providing assistance);
• variation of trusts (the terms of any proposed variation, subject to court approval);
• grandparent access claims;
• long-term care issues (including consent to treatment and admission);
• power of attorney disputes (including capacity, and use and abuse issues);
• guardianship plans;
• access to health care issues; and
• housing issues (including tenancy issues, house-sharing arrangements and assisted living).

Find out more about our mediation services here.

A desk order divorce may be obtained where the only issue between spouses is the divorce itself or where the spouses have already settled all of the other issues, such as child custody and access, spousal support and division of family property, whether through a separation agreement or an agreement reached as to the terms of a court order. To obtain a desk order divorce, court proceedings are initiated but appearing in court before a judge is not usually required.

The following outlines the usual process to obtain a desk order divorce:

(a) Drafting of a Writ of Summons and Statement of Claim, which is filed with the court, together with an original certificate of marriage – we will ask you to review and approve this document before it is filed, but it can be signed by us on your behalf;

(b) Arranging service of the filed Writ of Summons and Statement of Claim on your spouse – please ensure that you provide us with a photograph of your spouse to give to the process server;

(c) Waiting for expiration of the time given to your spouse to file a response (an ‘Appearance’ and a Statement of Defence) – your spouse has 21 days to respond. If your spouse does not intend to defend or contest your claim for a divorce, he/she need not take any step whatsoever;

(d) Drafting of the final documents required to obtain your desk order divorce, including the divorce order and affidavit(s) – again, we will send you the final documents that you must sign for your review and approval. You will then be required to meet with us to sign those documents;

(e) Reporting to you – upon receiving the divorce order, we will send you a copy. You are also required by the Supreme Court Rules to mail a copy of the order to your spouse, which we will do on your behalf.

Your divorce will take effect on the 31st day from the date of the court order. Once the 31-day period has passed, we will request a Certificate of Divorce from the court and send that to you. At that point, our services will be at an end.

Fees:

Our fees will be fixed at $1,600.00 if there are no children and $1,800.00 if there are children, which includes all legal fees, out of pocket expenses, including court filing fees, postage, photocopies, G.S.T and P.S.T.

Our fee of $1,600.00/$1,800.00 does not include our out of pocket expense for service of the documents on your spouse, which generally costs in the range of $50.00 to $150.00.

The information and documents we require to commence the process on your behalf are:

• Your full legal name as on your marriage certificate;
• Your spouse’s full legal name as on your marriage certificate;
• Your address, date of birth and how long you have been resident in British Columbia for;
• Your spouse’s address, date of birth and how long she has been resident (or not) in British Columbia ;
• Your date of marriage and place of marriage (pleasure ensure that our office receives your original marriage certificate – this has to be filed with the court documents. If you do not have an original marriage certificate, then we can order one for you from the appropriate Vital Statistics office);
• When did you commence cohabitation (living together) with your spouse (month and year);
• When did you and your spouse cease to cohabitate together (exact date would be great);
• Please provide full legal names of any children involved including dates of birth and whom they are residing with;
• Please provide the same information if there are any step-children involved;
• Has there been any agreements made regarding support or division of property;
• Spouse’s surname prior to marriage AND at birth;
• Your surname prior to marriage AND at birth;
• Marital status of you and your spouse prior to your marriage i.e. never previously married, divorced etc.

Recently, I have had many calls and emails from other lawyers asking how we set up our IT systems.  It’s true that our current hardware, software, VOIP phones and web site enable us to practice very efficiently and also remotely.

What is also true is that it was expensive and time consuming to set up.  The costs of the hardware, software, consulting fees and time spent building our IT infrastructure were significant.  The fact that I am also married to a highly technical electrical engineer whose hobby it is to keep our systems running is also something people should know.  This is not an endeavour every solo or small firm lawyer should necessarily jump in and do.

If I was just starting out, I would seriously consider using a web-based SaaS application like Clio.  Clio can be accessed from Macs, PCs and iPhones.  It provides matter management, time tracking, billing, contact and document management, task scheduling and trust accounting. Clio is priced by monthly subscription. Pricing is US$49/month for lawyers and $25/month per support staff member. This cost includes all technical support, maintenance and upgrades.

Yes, it won’t be as customizable as our system is.  That said, the set up time is minimal and the price is pretty amazing.  In contrast, costs to build our systems approach 6 figures.  Particularly in this economic environment, I think it’s worth a serious look.

When people discuss virtual law firms, they are generally referring to two distinct concepts:

1. a law firm where there is centralized branding, administration and management, but individual lawyers work from satellite offices, often from client work sites or home; or
2. a law firm that exists online through a secure portal.

Virtual Firms: Centralized Administration and Contract Lawyers

In response to the global recession and a traditional business model under attack, many innovative law firms are emerging that employ lawyers who work largely at home, thereby saving on overhead and costing clients less in legal fees.

The traditional math used by large law firms is one-third of the revenue goes to salaries, one-third goes to overhead and one-third goes to profits. High associate salaries and the cost of prestigious offices have put pressure on billing rates, which often reach as high as $800 an hour.  Clients are increasingly looking for rate and fee reductions, and many expect that mindset will continue into the economic recovery and beyond.

To reduce costs, law firms are cutting or freezing compensation, cancelling summer programs and laying off associates.  Litigation departments are outsourcing document review and production, work that was formerly assigned to junior associates.  In transactional practices, large numbers of associates have been let go as it is increasingly uneconomic to retain unproductive staff for when the economy rebounds.

In addition to the business pressures on law firm management, large numbers of lawyers are choosing to leave the traditional law firm model.  A February 2007 cover story of California Lawyer magazine entitled, “We’re Outta Here: Why Women are Leaving Big Firms”  noted the serious issue of high attrition rates from the legal profession:

“The past few years have witnessed the highest levels of associate attrition ever documented, with an average annual attrition rate for both sexes of 19 percent, as recently reported by the NALP Foundation for Law Career Research and Education. Within five years of entering a firm, more than three-quarters of associates leave. Female associates were nearly twice as likely as males to depart to pursue a better work/life balance.”

Firms like Virtual Law Partners, Axiom Global Inc. and Keystone Law, have seized on a business opportunity.  For example, Virtual Law Partners is a virtual law firm consisting of experienced lawyers, most who have left big firms. According to its website, “We work primarily with in-house legal departments of large and mid-sized companies to provide general corporate, licensing, contract, IP protection, securities regulation, financing, real estate, employment, merger and acquisition and other legal services.”

The firm currently has over 40 lawyers, all of which are “partners” and work from home.  Some of the benefits for clients include lower billing rates and more experienced lawyers.  Client work is performed by senior lawyers and work typically assigned to junior associates is given to highly trained paralegals. The firm highlights that they don’t have an “up or out” promotional system, which enables lawyers to stay with the law firm, and their clients by extension, for a longer time.

The VLP website further notes that “our state-of-the-art technology platform allows us to operate virtually, eliminating expensive office space and minimizing personnel as well as other overhead expenses. We pass along the savings to our clients. VLP attorneys, with education and experience comparable or superior to attorneys at other top tier firms, practice law at more prudent rates. ”

Our firm Heritage Law is an example of a virtual law firm.  Heritage Law is currently five lawyers and six support staff, practices in the areas of wills and estates, family law and mediation and has offices in West Vancouver and Vancouver, BC.

Heritage Law is paperless and utilizes practice management software to centrally manage billing, time tracking, matter information, contacts, appointments, documents and document assembly.  All staff log into one remote, secure server over the Internet which is a repository for all firm data and software applications.  We have a VOIP phone system which allows eleven staff in different locations to use the same phone line and system.  We have a remote answering service which answers client calls during the business day if a staff member is out of the office and routes the message to the appropriate person to deal with.  All staff have a computer, high speed Internet, a VOIP phone and a scanner at their home offices.   The firm retains traditional offices for meeting with clients.

Other than the principal of the firm Nicole Garton-Jones, all lawyers and staff are on contract.  The lawyers earn a percentage of billed time and flat fees.  Paralegals are paid hourly by the firm and there are some administrative staff on salary. The firm is at full capacity, and the lawyers and staff determine the amount of their earnings by how much they choose to work.

In terms of schedule, each of the staff set general guidelines of the days and hours they are available to work so the firm can plan around accepting and allocating new client files.  The overriding concept is that everyone is a professional whose goal it is to provide excellent client service.  Provided that client work is completed in a timely and efficient manner and sufficient notice is given of absences and time off, lawyers and staff are welcome to structure their individual schedules as they see fit.  Lawyers bear final responsibility for client files and supervise staff to ensure that clients are served well.

The autonomy and flexibility of the work environment suits our staff, who have a self directed and pro-active work style.  The flexible work environment has enabled Heritage Law to have access to and hire highly skilled staff, to the benefit of both the firm and clients alike.

Virtual Firms: Practicing Law Over the Internet

The impact of the recession has not just been difficult for big law.  Many smaller firms and solos have felt enormous pressure as spending on consumer legal services has shrunk significantly.  In an effort to reduce costs, enhance flexibility and offer reduced fees, many smaller firms and solos have chosen to open web-based practices.

In this context, a virtual law office, also termed e-lawyering or online lawyering, is generally defined as a professional law practice that exists online through a secure portal and is accessible to the client and the lawyer anywhere the parties may access the internet.  These firms provide lawyers and clients with the ability to securely discuss matters online, download and upload documents for review and handle other business transactions in a secure digital environment.

Companies such as DirectLaw and VLO Tech have sprung up to enable solo practitioners and small law firms to service consumers and compete technologically with larger firms by using web-enabled software and also automated document assembly that can be bundled with legal advice. Clients are charged a fixed fee, rather than billed by the hour, and purchase legal services online using a credit card.

Heritage Law’s firm web site is www.bcheritagelaw.com.  In terms of e-lawyering, clients can currently fill out online questionnaires to open files and pay invoices online.  Heritage Law has signed an agreement with DirectLaw, a company based out of Florida, to assist with the launch of a companion firm site, www.heritagelawonline.com.

Heritage Law Online will be a branch of Heritage Law where simple estate planning legal services will be provided to clients, at least partly via the web and phone.  Pending regulatory approval from The Law Society of BC, clients will be able to potentially interact with the firm entirely online.  The fees will be relatively low and the intended client profile will be the approximately 50% of British Columbians who will die without a will.

For Heritage Law, the combination of a firm culture predicated on balance and flexibility with innovative technological solutions to facilitate it has enabled Heritage Law to access top talent and retain it.  In addition, other benefits of the technology have been our ability to efficiently handle a large volume of client files, provide excellent client service and generate a high quality work product.  Last but not least, the lawyers and staff of Heritage Law are happy to be part of the firm.

There are many interesting and innovative developments in the practice of law today, including virtual law firms.  These technologies and innovations offer benefits to law firm managers, lawyers and clients alike.  For many of us, these opportunities have enabled us to recapture the sense of excitement that made us enter the legal profession in the first place.

Why to Do It

Generally speaking, the benefits are:

• reduced file storage costs;
• the efficiency of having all firm information reside in once central digital repository.  Also, a firm is better positioned to take advantage of new technologies such as document automation if client information is already stored digitally;
• better risk management as client conflict checks are more comprehensive and automatic;
• the ability to work remotely, enhancing work life balance (which can be a human resources advantage);
• often enhanced client service through increased speed of delivery of legal services; and
• being paperless is green as thousands of documents are never printed out.

Issues to Be Aware Of

A firm has to be aware of potential issues of being paperless, including:

• the importance to regular and secure data back-up;
• security concerns; and
• potential staff resistance.

How to Do It

At the outset, a firm needs to be dedicated to the paperless goal and implement a well organized plan. It is important to get buy in from all staff, put firm policies in place and ensure adequate time and resources are allotted to planning, implementation and training.

Second, a firm must ensure its hardware is up to the demands of the increased amount of scanning, processing and storage.  Network servers need the ability to store up to 5 GB per lawyer per year. Having a reliable backup system and testing it often is critical.  A firm should consider installing scanners at every desk and have a central printer/scanner for larger scanning projects.

Third, a firm needs to put the required software in place. Adobe Acrobat is the standard for document exchange and is a good means for converting paper documents to legal files.  A document management software program needs to be selected, which serves as an electronic filing cabinet.  Finally, a firm may want to consider legal practice management software as well.  Practice management software allows a law firm to centrally organize client information digitally, including accounting, contact and case data.  Practice management programs often have document management capabilities built in, or you can link a third party document management program such as Worldox.  Two popular examples of practice management programs are Amicus Attorney and Time Matters.

Example in Practice

Heritage Law is an example of a  “paperless” law firm and utilizes practice management software to centrally manage billing, time tracking, matter information, contacts, appointments, documents and document assembly.  All staff log into one remote, secure server over the internet which is a repository for all firm data and software applications.  We have a VOIP phone system which allows ten staff in ten different locations to use the same phone line and system.  We have a remote answering service which answers client calls during the business day if a staff member is out of the office and routes the message to the appropriate person to deal with.  All staff have a computer, high speed internet, a VOIP phone and a scanner at their home offices.

With respect to software, we use PCLawPro for billing and time keeping.

We use Time Matters Enterprise for matter management and tracking contacts and appointments.  Time Matters has been customized for Heritage Law as follows.  There are tabs for matters in the categories of: Corporate, Litigation, Estate Admin, Estate Planning, Family Law, Mediation and by responsible lawyer so every open matter in the firm is categorized and viewable from one central location.  Each matter has an electronic client intake sheet so the user can see information including the date the file was opened, the responsible lawyer, the referral source, bring forward dates, relevant limitation dates, conflict check info, retainer letter info, any special billing info and a current status field where a short update is typed as the file progresses.

We use Worldox for document management.  No paper is kept except for original client documents.  Every document is saved or scanned into the system and saved according to client and matter.  Every document saved in Worldox is searchable by client, matter, description and text.

We use HotDocs 2008 Professional Edition for document assembly.  All our standard firm documents (memo, fax cover sheet, retainer letters, non-engagement letters, reporting letters and demand letters) are automated.  We are currently working on a project to automate our estate planning practice (wills, powers of attorney and representation agreements).  Document automation, in addition to the other programs, enables staff to generate client documents in an efficient and high quality manner.

PCLaw, Time Matters, Worldox and HotDocs are all linked together to work as a cohesive whole.

Each member of the firm shares a Microsoft Windows desktop running on a shared server in the Heritage Law IT infrastructure, and every desktop offers all of the core productivity applications previously described. Because all of the desktops reside on the same server, rather than on individually configured and field deployed desktop PCs, all that is required for a staff member to access and begin work for Heritage each day is a Windows PC and an internet connection. The Windows PC does not have to have any special applications installed on it, and might be a home PC, a borrowed PC, a laptop on the road or any other PC to which the staff member has access throughout their work day.

Each staff member has a Polycom SoundPoint IP 560 desk phone with HD Voice technology. Each phone has an ordinary 3 digit extension registered through Iristel, a Canadian internet telephony service provider. The power of the phone system is derived from the fact that the phones can be connected to any ordinary internet connection in any of the staff member’s home offices, and yet all remain reachable through simple 3 digit extensions. Calls to other phones in North America are toll free, and calls within the firm have HD voice quality. There is an automated attendant to greet callers and provides a directory for them to reach the appropriate staff member’s extension.

As the staff all wish to have flexible schedules, we employ a call answering service based in Abbotsford, BC called Re: Messaging Solutions Inc.  If a staff member does not pick up a client call directed to their local on our phone system, the call is then automatically forwarded to the answering service.  The answering service can then call the staff member directly on their cell phone, email the message to them or forward the message to another staff member, depending on the circumstances.  This allows us to be able to maintain a high level of client service while staff are out of the office during regular business hours.

Clients can fill out questionnaire forms online which are emailed to the firm prior to a file being opened.  The goal in the future is to populate this information into an answer file in our document automation program for enhanced efficiency.

Heritage Law is currently working on www.heritagelawonline.com, where clients will be able to potentially interact with the firm entirely online.