At the 2016 Legal Malpractice Risk Management (LMRM) Conference considerable comment was made about the dramatic shift of Trust and Estate practice replacing Real Estate as the leading practice area for legal malpractice claims. This conclusion is based on a 2015 survey by insurance broker Ames and Gough. The primary reasons given for the change are the speculation that baby boomers are in increasing numbers seeking estate planning advice; and that real estate claims have decreased from the flood of claims resulting from the “Great Recession.”
Adding to the seriousness of this development is that Trust and Estate practice has significant exposure to nonclient claims. Kentucky is in line with a majority of other jurisdictions by recognizing both a negligent misrepresentation theory and “intended to be benefited” malpractice theory for nonclient liability (see, Seigle v. Jasper, Ky. App., 867 S.W. 2d 476 (1993)).
This article identifies some of the more common trust and estate errors. It offers risk management guidance based on the 2016 LMRM Conference program “Death, Taxes and Malpractice: Grappling with Estates, Trusts & Probate Lawyers’ Liability” that included citation of several outstanding articles on this developing problem.
Case Management Errors
- Failure to gather sufficient information; e.g., failure to investigate heirs and assets.
- Believing client without independent verification.
- Neglecting communications with client.
- Undue influence on the client by potential beneficiaries.
- Not reviewing an entire document – relying on office standard forms.
- Using imprecise terms: Lawyers err when they use imprecise terms to identify a class of beneficiaries or when they use more than one term to mean the same thing. “Children,” “issue,” “descendants,” and “heirs” all have different meanings and should not be intermingled in the same will unless that is the intent of the client.
- Not discussing contingencies: It is incumbent on lawyers to discuss back up beneficiaries and what will happen if all the named beneficiaries predecease the client. Although [state] statutes provide for what happens in such situations this may not be what some clients want.
- Omitting provisions in a client’s old will that the client may wish to retain but did not mention to you when you drafted a new will using your standard form.
- Neglecting to consider the possibility that your clients may move to another state. If the clients have second homes in other states or know where they might retire, review the laws in those states, especially regarding the proper execution of a will, who can be a witness, and the number of witnesses needed.
- Neglecting to consider the needs of unmarried couples for special provisions such as directing that each other has the authority to make funeral arrangements, that they jointly and equally own certain property, and that they acknowledge their intent not to leave property to family members.
- Failing to conform nonprobate documents to the client’s will and estate plan and failing to coordinate the tax implications of the will with nonprobate documents.
- Failing to consider the ramifications of certain drafting, such as the problems with leaving personal property to minors, leaving real estate to numerous married individuals, and the differences between leaving real estate to the estate to sell versus leaving it directly to heirs. In effect, failure to accomplish testator goals or effectuate testator intent.
Error in Will Execution
- Omitting execution ceremony; i.e., “mail it in.”
- Allowing execution when the testator lacked testamentary capacity.
- Testators’ signature omitted.
- Insufficient or unauthorized witnesses.
- Flawed execution of duplicate originals.
Error of Law
- E.g.; Failure to update an estate plan based on new laws or facts.
Conflicts of Interest
- E.g.; representing both husband and wife with differing interest.
Fraud, Fiduciary Breach, Overreaching, Self-dealing Tax Errors (from “Estate Planning Traps,” Risk Management Handouts of Lawyers Mutual of North Carolina):
- Failure to fully utilize the tax exemption amounts for both spouses by equalizing their ownership of assets and creating tax savings trusts before the death of the first spouse.
- Failure to realize that the filing of an extension of time for completion of the federal estate tax return (Form 706) does not extend the time in which the taxes must be paid.
- Failure to elect to claim a deduction for qualified terminable interest property (QTIP) on Schedule M of the federal estate tax return.
- Failure to utilize the special use valuation election which permits “current” use values rather than “highest and best” use or not utilizing the alternate valuation method which permits property to be valued as of six months after the decedent’s death, rather than using date of death values, on the federal estate tax return.
- Failure to know the rules regarding deferral of the federal estate taxes on a closely held business and how to elect such a deferral.
- Failure to understand how to take certain administration expenses as deductions on either the estate tax return or the fiduciary tax return, and not knowing which method is best for a particular estate.
- Failure to know what the requirements are in order for a trust to be a valid S Corporation shareholder.
- Failure to follow up on changes in tax laws.
- Failure to meet deadlines that incur penalties and interest for the estate.
Risk Managing Trust and Estates Practice
There are few areas of practice more complicated to risk manage than Trusts and Estates. It is well recognized as an area of law requiring special skill and knowledge. For example, the Trust and Estate lawyer, in addition to all the standard risk management practices such as calendaring deadlines must:
- Be competent in substantive law on wills, property, future interest, trusts, probate, and taxation.
- Have a thorough understanding of the complex statutes that regulate the inheritance process.
- Be a skilled and articulate drafter.
- Know how to institute probate proceedings.
- Be competent in litigation to defend against frequent malpractice claims.
What follows are some of the key risk management considerations for Trust and Estates lawyers.
Do Not Dabble in Trust and Estates Matters
No matter how enticing a trust or estate representation may be, you must be competent before you may accept it. Do not underestimate the complexity. Even a simple will has tax implications that must be discussed with the client. Associating with an experienced trust and estate lawyer is one way to assure a competent representation. Going it alone invites disaster. Matter screening is one of the most effective ways of avoiding trust and estates malpractice claims. Refer the prospective client to a specialist.
Letters of Engagement Are Never More Important Than in a Trust and Estate Matter
Rule 1: Be specific about who is your client and who is not.
- Name each and every client for whom estate planning advice will be given. Be equally specific about naming individuals, entities, and any third parties you are not advising.
Rule 2: Define the scope of representation.
- Describe in detail what the client’s intent is and what you are retained to do and not to do to accomplish this intent. Include in the scope statement that you are providing only estate planning advice and not other legal services.
- If the representation is a joint representation, cover conflict of interest issues to include whether recommending separate counsel or conflict waiver letters are appropriate
Rule 3: The lawyer and client must sign the letter of engagement before any work is done.
Rule 4: Carefully describe who will implement the estate plan.
Rule 5: Do not deviate from the terms of the letter of engagement. If new work is required, supplement the letter of engagement to cover it.
Gather Sufficient Information to Competently Perform the Work and to Show, if Necessary, that It Was Done Without Error or Miscommunication.
- Use checklists – any good Trust and Estate practice guide will offer useful checklists.
- As part of client intake procedures, use a client questionnaire that covers assets, identity of heirs, conflicts of interest, and other useful background information for performing the work. The questionnaire is also Exhibit A for any challenge to the accuracy of your work.
Document the File Extensively
- Document analysis and advice.
- Who are we protecting?
- Reasons why plan was implemented.
- Document strategies rejected by the client.
- Document all instructions and especially unusual instructions or bequests (e.g., disinheriting a child).
- Document with memos to file and protective letters to client.
Address Any Continuing Duties Owed the Client After Completion of an Estate Plan or Will.
Some lawyers prefer to offer continuing maintenance services for an estate plan or will. While the repeat business is desirable, experience shows that frequent changes in tax and other laws and the length of time an estate or trust may stay active creates a major risk of missing a change that is simply not worth it. One prominent Kentucky trust and estate lawyer addresses this quandary by inserting this paragraph in the letter of engagement:
After we complete the estate planning process, and your estate planning documents are signed, it is important that in the future you review all of these matters to determine if the decisions you are making today remain appropriate in light of future developments, such as, increases or decreases in the size of your estate, marital rights, changes in the law and the needs of your family. Please understand that I am not able to undertake a responsibility to keep you advised of future changes in the law, but that I would be pleased to work with you to consider any changes or the status of your matters when called upon by you to do so. Until such time as that may occur we will consider your matters “dormant” pending your future contact with us.
The intent of this article is to alert you to the types of Trust and Estate malpractice a lawyer may face and to provide several of the risk management considerations in avoiding such claims. There is a great deal more to it than can be covered in a newsletter.
In the Wisconsin Bar Magazine article “Estate Planning Work – Not for the Timid,” the author concluded with this succinct risk management advice:
When doing this work, keep the following in mind:
- Families are changing. Be prepared to deal with fractured families, stepchildren, second and third spouses, and unhappy, disenfranchised beneficiaries.
- A malpractice claim can be brought by someone who was not your client. Third-party claims are becoming more frequent in this area of practice.
- Clearly identify who your client is. Make sure everything is in writing and ask yourself if there are any potential competency issues.
- Spell out the scope of your retainer, and understand your client’s intent.
- Proofread, especially if a staff member helps with document drafting.
- Do not succumb to pressure from beneficiaries who want their money quickly.
- Make sure you have expertise when dealing with special needs trusts, tax consequences, land contracts, and charitable gifts.