Risk Managing Estate Planning More Complex Than Ever

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The Legal Malpractice Risk Management Conference held in March in Chicago included a panel* presentation on the subject: Estate Planning – Being Sued By Persons You Never Met for Things Your Client Did Not Ask You to Do. The presentation began with interesting observations on the anomalies of representing wealthy clients in estate planning matters. People with a lot of money can act irrationally, e.g., giving millions to a cat. When something bizarre crops up in an estate plan the tendency of frustrated beneficiaries is to say that there had to be malpractice because nobody would have done that. Not so say the panelists – but the estate planning lawyer better be extra careful in documenting the advice given and the client’s instructions on unusual arrangements.

The panelists then covered three estate planning risk management considerations:

  • Who is your client – fiduciary, beneficiaries, or both?
  • Common estate planning malpractice errors.
  • Responsibility for investment losses in an estate or trust.

What follows is a gloss of the issues reviewed by the panelists. They are offered here as an alert for current risk management issues in estate planning. Your own independent research is required to apply them to your practice.

Who is your client – fiduciary, beneficiaries, or both?
Standing to sue a lawyer for malpractice typically involves a showing that an attorney-client relationship existed. In risk managing estate planning and follow-on legal services an estate planner must be sure to avoid an attorney-client relationship when none is intended. The primary risk centers on interaction with beneficiaries of estates and trusts when the lawyer is representing the fiduciary. The estate planner must be clear on:

  • Who are your clients for estate planning?
  • Who are your clients when somebody dies?
  • Have you assumed a duty to beneficiaries to advise them of tax planning, tax effects, tax results of estate and trust distributions?
  • Do you have a duty when representing the executor or trustee to notify beneficiaries they have rights that may or may not be detrimental to the estate?

The panelists suggested that lawyers take these actions to reduce risk exposure:

  • Express in a letter of engagement to the fiduciary that you represent only the fiduciary in his fiduciary capacity …. The letter should cover what you are doing – your scope of engagement – and who you are doing it for. Then stick to the it and don’t digress. Finally, document the file.
  • Advise beneficiaries to retain third party advice on tax results in estate matters.
  • Act as if the fiduciary obligation extends to the executor and beneficiaries – provide as much tax notice to beneficiaries as possible.
  • Research case law in the applicable jurisdiction to determine how far fiduciary obligations extend.

Garden Variety Estate Planning Malpractice Errors:
The panelists offered the following examples of common estate planning malpractice:

  • Missing residuary clause.
  • Ambiguously identified beneficiaries.
  • Failure to achieve the tax savings intended.
  • Conflicting documents – two living trusts.
  • Failure to fund a credit shelter trust.
  • Failure to change beneficiaries.

They then made these malpractice prevention recommendations:

  • An estate planning lawyer must be well versed in estate tax laws.
  • Clients should not be accepted who want basic wills, quick wills, or “wills because we are going on vacation and will update them later.” Just say ‘no’ to many engagements.
  • Don’t use estate planning as a loss leader.
  • You must do due diligence on all assets -- have clients sign off on a client asset list as ‘genuine and correct.’

Responsibility for investment losses in an estate or trust:
The panelists discussed the general rule that during a client’s lifetime the estate planner has minimal responsibility, if any, to be concerned about investment issues in the client’s portfolio – that is the client’s domain. The problem for lawyers arises post mortem when investments decline in value. What role does the lawyer have in advising fiduciaries and beneficiaries of investment risks?

Citing the Michigan unpublished case of Brian M. Kelly Trust v Adkison, Need, Green & Allen, PLLC ( #134101, 10/17/07), the panelists discussed the situation when a law firm advised a fiduciary and beneficiaries on the transfer of an IRA post mortem. The firm took seven months to make the transfer in which time the IRA decreased from $700,000 to $400,000. The firm was sued for malpractice for their delay resulting in a claimed loss of $470,000. The court held that:

In the absence of specific evidence that the trustees delegated their investment and management duties … [the] respondents owed no duty to prudently invest or manage the assets of the IRA. Respondents' sole duty was to exercise due care in the rendering of legal services, by acting “as would an attorney of ordinary learning, judgment, or skill under the same or similar circumstances.” …. The duty to prudently invest and manage the trust assets was separate from the duty to provide legal services, and it belonged to the trustees alone rather than to respondents.

To risk manage this exposure the panelists recommended:

  • Always advise fiduciaries in writing about investment standards post mortem.
  • As soon as possible vest control to make investment decisions in fiduciaries or others.
  • If a choice exists between risk free investments (that generate lower returns) and risky investments (that could generate higher returns or erode principal), err on the side of caution.
  • Always leave investment decisions to fiduciaries or beneficiaries.

KBA Ethics Opinion E-401 is the place to start researching your responsibilities when representing a fiduciary of an estate or trust in Kentucky. It includes this helpful guidance:

  1. In representing a fiduciary the lawyer’s client is the fiduciary and not with the trust or estate, or with the beneficiaries of a trust or estate.
  2. The fact that a fiduciary has obligations to the beneficiaries of the trust or estate does not in itself either expand or limit the lawyer’s obligations to the fiduciary under the Rules of Professional Conduct, nor impose on the lawyer obligations toward the beneficiaries that the lawyer would not have toward other third parties.
  3. The lawyer’s obligation to preserve client’s confidences under Rule 1.6 is not altered by the circumstance that the client is a fiduciary.
  4. A lawyer has a duty to advise multiple parties who are involved with a decedent’s estate or trust regarding the identity of the lawyer’s client, and the lawyer’s obligations to that client. A lawyer should not imply that the lawyer represents the estate or trust or the beneficiaries of the estate or trust because of the probability of confusion. Further, in order to avoid such confusion, a lawyer should not use the term “lawyer for the estate” or the term “lawyer for the trust” on documents or correspondence or in other dealings with the fiduciary or the beneficiaries.
  5. A lawyer may represent the fiduciary of a decedent’s estate or a trust and the beneficiaries of an estate or trust if the lawyer obtains the consent of the multiple clients, and explains the limitations on the lawyer’s actions in the event a conflict arises, and the consequences to the clients if a conflict occurs. Further, a lawyer may obtain the consent of multiple clients only after appropriate consultation with the multiple clients at the time of the commencement of the representation.

* Panelists were Frances M. O’Meara, Partner, Hinshaw & Culbertson LLP, Matthew W. Breetz, Member, Stites & Harbison, PLLC, and Louis S. Harrison, Partner, Harrison & Held, LLP.

 


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