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Chapter 6: Malpractice in estate planning.

"You have a malpractice case if there is no reasonable explanation for a terrible result." (1)

More technically stated, when a professional breaches the duty owed to another party and the other party is injured as a result of that breach, there is malpractice. (2)

Errors in estate planning and estate tax constitute the third most common type of legal malpractice. (3)

Reducing the risk of a malpractice suit and enhancing available defenses is the subject of this discussion.


Those professionals wise enough to know that malpractice is a disease that may attack anyone will not ask the question, "Why me?" Instead, they will ask, "When?" Malpractice claims are made uncomfortably often against those who--out of ignorance, arrogance, or incompetence--thought it could not happen to them. Suits are also brought against those estate planners with fine reputations who honestly thought they had done everything right. It is a dangerous misconception to think that only those who are clearly sloppy and unethical encounter malpractice claims. (4)

Mere good faith and honest intent will not protect the practitioner who has caused a client loss. It may be true that an estate planner will not be held liable for the failure to foresee the ultimate resolution of a debatable point of law or for an error in judgment if he acts in good faith and in an honest belief that his advice and acts are well founded and in the best interest of his client. (5) But such an estate planner can still be sued and still incur most of the costs of someone who in fact is guilty of malpractice.

Who are likely "targets of opportunity"?

DEEP POCKETS. When clients sue, they sue everyone in sight. But the bulk of the litigation effort is understandably against those from whom recovery is most likely. Your firm's prestige and appearance of success is a litigation magnet. Furthermore, "judges and juries alike may be inclined to assess the loss of the poor helpless individual against the large, seemingly impersonal institution that manages billions of dollars every day." (6) This problem is particularly evident where the defendant is a trust, insurance company, or large law firm.

INSURANCE. Certainly one contributing factor is the common knowledge that professionals carry insurance for malpractice. Almost all professionals in the financial services field carry one or more high limit insurance coverages. Some plaintiffs feel they are not suing the professional; they are suing the insurer.


In general, professionals who obtain or retain clients by holding themselves out in their marketing brochures or newspaper or magazine or radio advertisements as possessing a higher level of skill or greater experience in a field than other practitioners will be held to that higher level. If an advisor's business card says, "Estate Planner" or "Tax Specialist" or he has an advanced degree or a CFP, CLU, ChFC or otherwise advertises greater expertise or skill than an ordinary practitioner, he is expected to exercise that expertise or skill. (7)

IMPERSONAL. It is far easier to sue a party perceived as a "giant institution guided by computers rather than people" than to sue a long time advisor who has served with warmth, openness, compassion and has provided substantial personal attention in a respectful manner. This public image of banks, insurance companies, large law firms, and other institutions as impersonal money machines can best be changed from the top down by an insistence on courtesy and attention to the client from everyone in the firm--and is particularly helped by responding to phone calls and e-mails quickly and politely

BIG GUY vs LITTLE GUY. There is a feeling in this country, right or wrong, that the "Big Guys" are using their weight to beat up on the "Little Guys." So when the little guy gets into the judicial system, a jury may feel sympathetic and tend to punish the big guy with an angry vengeance.

FRUSTRATION WITH THE LAW(S). The potential for malpractice increases in proportion to both the complexity, speed of change, and labyrinthine interrelationship of various federal and state corporate, tax, probate, and securities laws--and clients' confusion and frustration. From the estate planner's point of view, the combination is a nightmare. If the planner feels this way, think of how angry clients must be when told that last year's law is now out and all the time, money, and emotional energy must be invested all over again. (8) Consider how a client feels when wrestling with Medicaid rules that continually change, with tax laws that are hair-pullingly complex, and with paperwork that is in fact never-ending.


One author who both sues and defends members of estate planning teams said, "There are basically two types of malpractice liability: Simple and Compound (may be read "expensive" and "grossly expensive)." (9)

Simple liability is for simple errors in judgment or simple negligence. These mistakes are expensive but are part of the (reducible) costs of doing business. Missing a tax deadline or miscomputing a liquidity need would be examples of simple liability.

Compound liability is for gross breach of fiduciary duty, self-dealing, active concealment, fraud, oppression, and gross negligence. The author stated that "Gross negligence is usually accompanied by a fatal dose of institutional arrogance, an always fatal disease for which there is no known cure." (10) Lack of respect and common courtesy often turn what could otherwise have been a minor incident into a major, expensive legal battle.


This question is not always as easy to answer as it sounds. The simple answer is one is liable to those who employ you. The general rule is that a duty is only to the person with whom contracted, your client.

But one may also be liable to others as well. (11) For example, an insurance agent may have created an agency relationship with the purchaser of a life insurance policy. This would make him or her the agent of the insurance company for some purposes and agent of the client for others.

An advisor is not liable--even for an act of negligence--to someone to whom he owes no duty. (12) The legal term is "privity." But the defense that there is no privity, no duty to an injured party, can easily be forfeited and is currently being eroded in the courts. (13) For instance, if you advise the president of a family-owned corporation improperly about the appropriateness of a stock redemption plan and one is established because of reliance on your advice, unexpected dividend taxes upon the purchase by the corporation of its stock could be claimed by another family member shareholder.

This six-pronged test may be used to determine privity (14):

1. To what extent is the transaction intended to benefit the third person?

2. Can harm to that third person be foreseen?

3. How likely is it that the third person will suffer real injury?

4. How close is the connection between the advisor's conduct and the injury that the third party could suffer?

5. How "morally wrong" is the advisor's action?

6. Would future harm to this or some other client be served by finding privity here?

At least one state will grant "standing" (the right to sue) to a narrow class of third party beneficiaries where it is clear that the client intended to benefit that party and the client is unable to enforce the contract. (15) Generally, for a third party to collect, written evidence must show that the client's intent was frustrated and the beneficiary's loss was a direct result of the planner's negligence.


IF ONE SAYS HE KNOWS, HE'D BETTER. Estate planning is too complex to be a sideline or part time hobby. Failure to exercise reasonable care and skill in performing duties for a person induced to rely on an advisor because of his professed skills, knowledge, or experience ("John Jones, Estate Planner") can result in liability for loss incurred. (16) Failure to exercise the degree of expertise that one professes to possess coupled with inducing reliance on that assertion to achieve a sale or sell a service creates a duty to act properly. (17) If one holds himself out as an expert and directly or indirectly promises to provide a product or service to serve a specific purpose or accomplish a particular objective, he assumes the liability for the achievement of that purpose or objective. (18) The skill, knowledge, diligence, and care used must equal or exceed that standard ordinarily exercised by others in the same profession. (19) In short, if one calls himself a professional (or by action or inaction allow others to rely on him as such), he must assume the responsibilities and duties generally associated with such a status--or be held liable for the client's loss.

NOT KNOWING WHO THE CLIENT IS. Interview both spouses (separately if appropriate). If there is marital discord or if this is a second marriage, consider recommending separate counsel. If "the couple" is perceived as the client, both should be treated accordingly. Do not talk down to or ignore the younger, or female, or less wealthy spouse--or child--or to some other member of the family. Develop and maintain good relationships with all the members of the client's family to the extent appropriate.

There are all too many cases where the planner never or seldom meets with the client. For instance, assume a will was prepared for a husband and wife on the instructions of the husband. If the planner never met the wife, how can it be argued that she has been properly represented by counsel or that she understood what she signed? The situation is a "lack of informed consent" case in the making.

When a spouse chooses not to read documentation or does not want to listen to complicated tax law, that same problem exists even though caused by his or her own inaction. The solution is to commit both parties--in the engagement letter--to read documents prepared for them within a specified time and to encourage them to seek independent counsel of their choice should either feel that is appropriate. Short written summaries are helpful.

IF ONE SAYS HE WILL, HE'D BETTER. An advisor should never create false expectations by making promises he has no intention of keeping or by promising results he does not know he can deliver. He may be held liable to the beneficiaries of an estate if he promises to keep them informed of significant developments and then does not. (20) He has an obligation to substantially finish the task he has begun for a client, decline the appointment, or with the client's consent, accept the employment and associate a lawyer who is competent. He must also prepare adequately for, and give appropriate attention to, the work he has accepted.

OVERNIGHT EXPRESS. Clients often want insurance issued and wills drawn almost overnight--at the very time when they are about to leave on an extended vacation or business trip. This means there is insufficient time to collect, analyze, and act upon complete asset information. Deathbed planning is more of the same only worse. One should refuse to be rushed (but be prepared to work quickly).


HIRING--AND FIRING--THE CLIENT. The advisor should ask why the client has chosen him. It is flattering to think that one has been selected because of one's expertise or reputation, but the reason may be because one or more other practitioners decided not to represent the client. One should obtain as much information about the client's background with other professionals as possible before agreeing to work with the client. The first interview should be considered a primary opportunity to screen and qualify the client. Perhaps the potential client should be discarded if he seems to be a perfectionist, unrealistic, hurried, angry, overly optimistic, overly fee-conscious, or if he wants services the advisor is not positive he/she can provide cost effectively. (21) One should beware of clients who are wealthy but in constant cash flow difficulty, seem immature, refuse to accept responsibility for their own actions, or appear constantly ambivalent. (22) These personality types are likely to present a future litigation problem.

Trust your instincts. One should turn down a client who exhibits questionable ethics or requests something that is not quite right. If a client has outgrown the advisor's capacity, either recommend another firm or bring a specialist in to work with the client. If the advisor feels the client cannot be trusted, refuse to work with the client.

RISK-TAKING PROPENSITY. One of the biggest causes of claims is that the professional misjudges or never considers or does not re-evaluate the risk-taking propensity of the client and the client's beneficiaries as their circumstances change. The solution is constant communication and obtaining updated feedback on where the client is "now" on risk taking.

EXPERTISE BOUNDARIES. The advisor should do only those things he is competent (and licensed) to do--and do those things competently and in a timely manner. Should a life insurance agent review a will or trust? Should an attorney or accountant judge the adequacy or appropriateness of a client's life insurance portfolio? Should a trust company review documents? Should a financial planner serve as trustee? (23)

Document examination exposure is real. Should one disclaim any liability for review of document viability or efficacy? Incompetent, inconsistent, and informal review is a formula for disaster. If the task is undertaken, it should be done by a person with the appropriate training, expertise, and time to do the job competently and enthusiastically. "You assume an obligation to your client to undertake reasonable research in an effort to ascertain relevant legal principles and to make an informed decision as to a course of action based on an intelligent assessment of the problem." (24)

Furthermore, the estate planner has a duty to either avoid involving a client in "murky" areas of the law if there are viable alternative tools or techniques that are available or to inform the client of the risks and let the client make the decision. (25)

Lack of specialized investment knowledge on the part of the planner or fiduciary often results in investment problems. Numerous trust funds are managed by individuals who adopt a passive and simplistic approach. The need for professional investment management and the complexity of modern portfolio theory is ignored or overlooked and too little time is spent in making investment decisions or addressing overall investment policy and asset allocation. (26)

RESOURCE LIMITS. The advisor should not accept engagements that will require resources beyond what he can cost effectively deliver. For example, if his operation does not have the backup personnel to properly service a high number of clients, he should not agree to do estate conservation for a firm's top 100 executives.

OUTSIDE EXPERTS. An advisor should seek help before it is needed. When appropriate, recommend that another professional be used, either in his place or together with him. If the advisor makes a specific recommendation, he may be held liable for the actions of that other professional. One way to protect himself is by giving out the names of at least three qualified professionals (make sure the criteria for "qualified" extends beyond mere reputation), or stay involved with the representation.

KEEPING CURRENT. An advisor must stay up-to-date, not only with tax, ERISA, asset protection planning, and Medicaid law developments (preferably on a day-by-day basis through a service such as LISI (Leimberg Information Services, Inc.) but also on events that can have an impact on the client's personal and business life.


The engagement letter is the first and primary step in insulating oneself from a successful malpractice suit. An engagement letter should be obtained in every client relationship at the first possible time. The letter spells out the extent and limits of the services to be performed. The following are critical elements of such a letter:

* Scope of services and description of work product;

* Period of time covered;

* Responsibilities undertaken;

* Responsibilities the client is expected to assume;

* Fee arrangements--amount, terms, and frequency of billing;

* Arrangements for update and extension of service;

* List of parties represented--and exclusion of those not represented;

* Intended use and potential distribution (or restriction) of the advisor's work product27; and

* Client's acceptance signature and date.


Protecting one's self means meticulous record keeping starting at the onset of the relationship. Changes in risk-taking propensity or attitude of the client or his family, comments at meetings, phone conversations, and other special instructions should be noted. The advisor's files should clearly reflect and support his recollection of events and should be dictated and transcribed as soon as possible after the occurrence (or preferably contemporaneous with the events). The more complete and organized the files, the more likely the judge, jury, or board of arbitrators will consider the advisor's word persuasive (assuming, of course, the files corroborate what he is now saying).

Whenever possible, quote the client's exact words.28 This is particularly important whenever a client--or one of his other advisors--decides to pursue an aggressive tax policy or take an investment risk (and doubly important if one has advised against that course of action). For instance, if an attorney tells a client that the business does not need all of the life insurance the agent is suggesting, the agent should attempt to take down as accurately as possible the exact words of the attorney. The attorney should do the same.

Contemporaneous and near verbatim notes should also be taken if the client asks that the advisor not do a service (or anything) he would normally do or if the client asks him to attempt a service that he ordinarily would not do. For instance, if the client asks a trust officer not to review a will and trust that the bank will be handling, the trust officer should memorialize the request (and probably treat the request with suspicion). One attorney dictates, in front of the client, what he hears the client is saying, and asks the client to confirm it. Detailed notes are particularly important if the client seems uncooperative or unwilling to provide the information or documents (or access to personally interview a family member) that are necessary to do the job properly.

FEES. Fees should not be set at levels that will require cutting corners or operating at a loss for a particular engagement. The fee must be large enough to justify internally the time that should be invested in a case--or the case should be turned down. Fees should include the costs that will be incurred to meet high ethical standards and avoid malpractice by implementation of systematic quality control and other appropriate courses of action.

A fee dispute that results in litigation with a client may trigger a malpractice case. The solution is to secure a written agreement as to fees and billing procedures at the onset of the relationship with the client. One should think carefully about the wisdom of suing the client and the likelihood and expense of a malpractice lawsuit by the client. It is wise to communicate the basis or rate of fee or other method of compensation to a new client in writing before or as soon as possible after the relationship begins. The client should be billed periodically and provided detailed information of the services rendered and the time invested.

DATA FORMS. Many times the error or omission of the estate planner is due to an incomplete or incorrect understanding of the facts. The advisor should obtain comprehensive and accurate data by developing a data gathering system. Some planners feel they can gather data without forms or checklists but inevitably forget to ask questions such as, "Are both you and your spouse U.S. citizens?" or "Have you named yourself the custodian of a Uniform Transfers to Minors Account for gifts you made to your children?" One must be sure to confirm with the client the facts gathered--before acting upon them.

The advisor should verify property ownership and dispositive arrangements from the documents themselves. It is astounding how often otherwise competent attorneys draft wills and trusts that do not match the way property is owned. The forms should match the facts. It is necessary to check wills, divorce agreements, and retirement and employee benefit documents rather than rely on the client's memory. Current life insurance policy information should be confirmed by writing to the insurer.

REPRESENTATION AS TO PRODUCTS. When the planner is recommending investments or insurance and, particularly if the planner is receiving a commission based on the sale, there must be a clear writing, acknowledged by the client signing, to the effect of avoiding any basis for unreasonable reliance.

With the sale of mutual funds, the warning language in the typical prospectus is worth adding to the writing to be signed by the client (e.g., that past performance is not recognized as a basis for future results, etc.).

With insurance products, there should be written recognition that all pages of the proposal have been read and understood. It would be very helpful to have the client sign the part that shows the guaranteed figures.

A significant potential problem is the rate of variable life insurance products where the return based on past performance is quite high. When or if the market turns down and the earnings evaporate, the client will only recall the high returns and will be looking for someone to blame for the disappointing results of increased premiums or lower cash value or face amount of coverage.

Some planners are reluctant to risk the possibility that the client may not go forward with the recommended action if the planner makes a point of the possible negative aspects of the transaction. However, the planner's long term reputation and success, as well as freedom from future claims, argue strongly for "getting it in writing" at the time of the decision of the client to go forward.

Label assumptions you make as such and mark them in a way that is unmistakable. Be sure assumptions (e.g. potential growth) are appropriate for the length of time under consideration. For instance, a net after-tax assumption much beyond 5 or 6 percent is aggressive--if the time frame spans many years. Mark aggressive assumptions as such and show a conservative and moderate assumption in addition to any assumption considered aggressive. Don't make conclusions (e.g. "You don't need more insurance!") you haven't quantified in writing.


The client's instructions must be followed--correctly. This entails first truly understanding what those instructions are. Then it requires a written memorandum (preferably signed by the client). Meticulous records of all conversations should be made. If investments are or will be involved in the relationship, an investment policy should document agreed-upon investment objectives, risk parameters, return targets, volatility tolerance, and asset allocation ranges.

A written consent should be obtained for actions outside the scope of the relationship as contained in the engagement letter.


THE RIGHT WRITE STUFF. The advisor should keep research documents that indicate decisions were made in a methodical and logical manner and that a deliberate investigation preceded and supported each suggestion. Documents that illustrate the tax law as it existed at the time tax decisions were made should be retained.29 Memos to the file, prepared contemporaneously with conversations with a client and decision making, are highly useful in establishing the background and intent at the time an action was taken. Controversial decisions should be made only with the informed knowledge and written consent of the client. Any oral advice or telephone conversations should also be documented immediately. (Refrain from giving advice at social events).

The advisor needs to develop and use a presentation system that will prove that regular discussions occurred covering all of the important areas of estate planning. (30) A checklist should be incorporated into that system in order to demonstrate that these issues have been discussed with the client and reflect the client's circumstances and objectives.

A retrieval system should be established to locate documents or plans that need updating for specific changes. For example, all estate planning clients should have been contacted to review wills and trusts drawn prior to September 13, 1981 because of the change to the unlimited marital deduction. Yet each year dozens of cases and rulings occur because the documents were never updated. Were the clients ever informed by their advisors of the need for a document review? Is there an automatic document review triggered no less often than every three years?

TRIGGER SYSTEM. A checklist of follow-up procedures should be developed so time-sensitive responsibilities will be met by the appropriate parties and unreasonable delays in the preparation and implementation of the plan can be avoided. Set deadlines, establish priorities, and specify responsibilities. Create a "tickler file (docketing system) and matrix to assign specific responsibilities to specific people and to assure that all deadlines, statutes of limitations, and filing and payment deadlines will be met. Set up a centralized follow-up system to personally remind the party responsible for action and review at given times or events. Incorporate into the system a series of client reminders (e.g., "It's been three years since your will was reviewed..." or "Major new tax law changes suggest we should review your estate plan as soon as possible").


An advisor is responsible for the errors or omissions of his partners, associates, and employees. Quality control is therefore not a luxury. It is a business necessity.

UNDERSTANDING OF ETHICAL ISSUES. According to an article on malpractice, written by a Commissioner of the Texas Board of Legal Specialization, almost half the candidates who sat for the certification in Texas in Estate Planning and Probate Law demonstrated "a profound lack of knowledge of ethical problems that often lead to professional liability claims."31 Knowledge of facts and laws is not enough! One should discuss with colleagues the danger when a breach of ethics is coupled with an angry or disgruntled client or family member.

WHO IS THE QUARTERBACK? In any operation larger than a one-person firm, it is essential that the activities of the entire staff are coordinated by a "quarterback" who accepts responsibility. This person must be sure that all staff members are kept informed and that there is a logical and automatic flow of necessary information, that no tasks have been overlooked, and that no efforts are duplicated. He must also be sure that information received by staff members is properly recorded and relayed to him and to the central file on each client. For instance, consider the lawsuit potential if the beneficiary of an estate dies within nine months of the original decedent and the same trust company serves as executor of both estates. If significant taxes could be saved by a timely disclaimer but two separate individuals are assigned to the two estates and they do not communicate with each other, the lost opportunity when the timely disclaimer period expires could turn into a lawsuit.

There should also be a quarterback for the estate planning team. All members of that team are negligent if they do not come to an agreement as to who is to do what and when each task is to be done. Liability occurs when essential tasks fall through the cracks.

INDEPENDENT REVIEW. An effective method of quality control is to have final products be reviewed by a well-qualified associate before it is shared with a client.

REVIEW OF STAFF COMPETENCE, EXPERIENCE, QUALIFICATION. Estate planning, almost by definition, requires the input of many professionals. Most planners not only must cooperate with other planners outside their offices but must also rely on paralegal and associates within their offices. Few full-blown estate plans contain no issues other than federal or estate death taxes and quite often the planner seeks advice from others on his staff. Staff members must be currently competent, and they must be well trained in and conform to standardized office procedures, policies, and proper file management techniques. Appropriate supervision for all levels of staff should be built in. Continuing education should be part of any firm's ongoing business plan.


Almost every authority who speaks and every article that is written on malpractice states that many lawsuits could probably have been avoided by a simple solution: "Communicate, Communicate, Communicate!" (32)

Many, or even most, of the grievance complaints and malpractice actions can be headed off if the advisor will:
   MAKE IT CLEAR AND MAKE IT CLEAR OFTEN. The estate planner should
   avoid technical jargon. He should not assume lay persons understand
   what he means by such terms as "a marital trust," a "durable power
   of attorney," or "applicable estate tax exemption. Use word
   pictures, graphs, flow charts, or diagrams to illustrate
   points--and give the clients copies to take home. (33)

   Continually inform clients of all actions taken (or not taken);
   forward to clients copies of documents sent to other professionals;
   provide the client with periodic written reports even (or
   especially) if a particular report merely explains why no progress
   has been made since the last report; and confirm in writing all
   transactions, expenses, fees, income, or other events of

   Inform the client of any changes in the relationship or
   responsibilities of the parties; make sure reports are
   understandable; and use graphs, charts, and checklists to show the
   progress made.

   Confirm through a series of scheduled meetings among the client and
   other advisors objectives, responsibilities, and timetables.

   A newsletter is a good way to keep in touch with clients on a
   regular basis. E-mails, tailored to specific groups of clients, is
   an even more cost-effective communications tool.

   Schedule regular reviews. Give special emphasis to contacting
   clients that have not been heard from in a given period of time;
   and document attempts to contact those who do not respond.

   Keep copies of all correspondence and conversations with other
   members of the estate planning team working with the client.

   Study the client's verbal and body language to be sure he/she is
   understood and encourage the client to call or write or e-mail
   after the meeting to ask questions if "I have not made myself

   AVOID CASUAL OR INFORMAL ADVICE. Don't give advice at cocktail
   parties or other social events. (34) Liability can be imposed even
   though you have not charged a fee for your services if a client
   relies on information you have provided.

   CALLING BACK--PROMPTLY. A careful advisor will return telephone
   calls promptly. If this is impossible, a secretary or an associate
   should follow up so the client does not feel ignored.

   AVOIDING "HEEL COOLING." A planner should not keep clients waiting
   on the phone or in his/her office. He should be sure he receives
   messages promptly--and accurately. He should not allow a phone call
   to interrupt a meeting with a client. It is a good idea to reward
   staff members for being extra polite. In short, give the client
   respect and common courtesy. Be sure, when on vacation, to arrange
   for adequate coverage of phones and e-mails.


CONFLICTS WITH EXISTING CLIENTS. (35) The duty of loyalty requires any estate planner to be extremely cautious about serving a client in more than one capacity. For instance, the client of an attorney or CPA may want that person to serve as an executor or trustee--while at the same time desiring that person to continue to provide planning advice and other services to various family members. Should an attorney or CPA sell life insurance to their estate planning or business clients? Can the advice be disinterested and objective? Can the professional ethically charge fees or accept commissions for both services? Can those fees honestly be set at "arm's length"?

Corporate fiduciaries are particularly susceptible. For instance, could the banking side of an institution, as a lender, acquire and share non-public information about a borrower company with the trust department that, as an investor for its trust accounts, is considering making investments in the same company? (36) (Use of non-public information to make investment decisions might subject a corporate fiduciary to a violation of the SEC's Rule 10b-5. (37))

Although there is no legal prohibition against representing more than one client in a single transaction, estate planners should be particularly alert for situations in which there is an obvious or potential difference in their interests. For instance, in establishing a buy-sell agreement, a stock redemption plan may favor younger shareholders with lower percentages of ownership at the expense of older shareholders who own a larger percentage of the company's stock. Likewise, a defined benefit plan typically favors older, long service employees while profit-sharing and defined contribution pension plans usually are to the benefit of younger employees.

Another conflict of interest problem that often occurs where more than one person is represented is the disclosure of confidential information. Can an estate planner freely tell a wife what her husband has disclosed? (Does it provide so in the engagement letter clients have read and signed?) Can a planner share information from one shareholder with others? The planner needs to inform all parties that information may not be privileged or confidential as to other members of the group unless specific direction is given.

Some conflicts of interest are unavoidable but must be recognized. For instance, consider the family that requests estate planning advice as a unit but who, as individuals, have different needs and desires. What should be done in a marital situation where a husband calls and requests a QTIP trust as opposed to the classic general power of appointment marital trust? What happens when there are children of a prior marriage and the client wants to make lifetime gifts to them? What if a client is ill or infirm in some way and is or becomes dependent on someone else for basic needs? How will the "undue influence issue" be handled? What are the planner's responsibilities and duties when a child, a charitable development officer, or another professional brings the case to him? What if that person also pays his fee?

Any possible conflicts of interest should be disclosed--in writing--to the client as quickly as possible or the planner should withdraw without disclosure if confidential information is involved. Recognition of disclosure and acceptance of its consequent risks should be acknowledged in any instrument signed by the client.

The planner should avoid or treat extremely carefully any financial involvement in a client's business or in a business venture.

CONFLICTS WITH FUTURE CLIENTS. Will acceptance of this client create a conflict for more desirable work with another client in the future? (38)

RED FLAG PROCEDURES. It is important for the planner to train himself and his staff to recognize "red flags." A procedure for identifying problems and quickly dealing with them is essential.

DEALING WITH PROBLEMS. The planner must routinely review and deal with problems promptly. If a problem occurs, it is essential to call or write or e-mail the client immediately and explain the problem and the potential consequences and alternatives. If a client is angry or dissatisfied, take immediate action--talk to the client and resolve the problem. Do not assume the problem will go away or that the client will forget it.

THE PROBLEM TEAM. A good idea is to create a "Problem Team" in the firm that meets immediately every time the potential for a dissatisfied client is recognized. That team should not only review the file in the case in point but also any other procedures, activities, omissions, or oversights that may trigger future problems that could develop into litigation. Use that team to develop procedures and checklists that will minimize or eliminate such problems.

EARLY ACTIVE REMEDIAL CONCILIATORY EFFORTS. The quicker an attempt is made to resolve the problem to the client's satisfaction, the less likely there will be litigation. Providing a large apology might avoid writing a small check. Writing a small check might avoid defending a large lawsuit. One litigation attorney put it this way: "The good will that can be generated by such an act and accompanying attitudes might be much cheaper and better in the long run than paying expensive attorneys for years of litigation with an uncertain outcome." (39) Sometimes, assigning a new person to speak to the client will serve to quell the objection.


SUFFICIENT LEVELS OF COVERAGE. The first step in evaluating your current insurance is to see if you have enough insurance to cover any likely risk. But this is only a first step.

"CLAIMS MADE" POLICIES. Most malpractice coverage is sold on a "claims made" basis. This means the policy only covers claims that are first asserted and reported to the insurer within the policy year.

"PRIOR ACTS" COVERAGE. The cause of action alleging estate planning malpractice typically does not occur until years after the estate planning documents are signed. If the policy has a "prior acts" coverage, it covers a claim asserted during a policy year in which the negligence giving rise to the claim occurred in some prior year. (40) If a policy lacks or excludes prior acts or limits prior acts coverage, it is likely that there will be a "coverage gap." There will be no coverage under the policy in effect when the alleged negligence occurred because the claim was not made in that policy year. The current policy will not cover the alleged negligence because negligence alleged to have occurred before the present policy year is excluded or omitted from the coverage.

THE "TAIL." A tail is an extended reporting option somewhat related to prior acts coverage. If one purchases a tail, he is permitted (usually at the end of each policy year or earlier if the policy is canceled during the term) to convert "claims made" coverage to "occurrence" coverage for any negligence allegedly committed--but not yet reported--up to the end of that policy year. The extended reporting of claims option available through a tail is expensive. The premium is a multiple of the regular annual premium. Tails should be considered by retiring planners who will no longer keep their full malpractice coverage in force or by attorneys who are forced to switch malpractice insurance carriers because of a cancellation or a refusal of a carrier to renew coverage (typically due to claims made) if the new carrier refuses to provide prior acts coverage. Tails are "cut off" after some period of time unless the tail is unlimited. Under an unlimited tail, the insurer remains liable for negligence occurring before the policy period expires regardless of when the claim is asserted.

THE DEDUCTIBLE. Most estate planners opt for a higher deductible in order to reduce the premium outlay. But one should check to see if the legal costs he would incur in a malpractice suit apply against his share of the deductible. Does the deductible apply "per claim" or "per policy year"? Where there is more than one claim in a given policy year, a per claim deductible becomes a hidden cost: a second deductible must be satisfied in the event of a second claim within a year. A per year deductible means the deductible amount need be paid only once in a given year regardless of the number of claims. Because when it rains, it pours, a per claim provision might prove quite costly.

SETTLEMENT. Some policies give the insurer the right to limit its exposure through a provision entitled, "Settlement." This means the insurer can force a settlement with the plaintiff (regardless of the insured's wishes) because of the cost. Some settlement provisions state that if one does not wish to settle under specified terms, the insurer will limit its payment to the amount specified in a settlement agreement at which point all other exposure (including defense cost) becomes the insured's obligation. Why might an insured not want to settle--even though economically it might make sense? The psychological cost of admitting wrongdoing or malpractice--coupled with the loss in reputation--are strong reasons why he may want to maintain the right to say "NO" to a settlement. One should be sure that right does not expose him to a loss of coverage above the limits in the proposed settlement.

DUTY TO DEFEND vs. DUTY TO INDEMNIFY. A "duty to defend" policy requires the insurer to appoint defense counsel and pay that attorney's fees as billed. An "indemnification" policy allows the insured to select counsel but he must fund his defense unless he can reach an interim fee agreement. (41) The insured will not be reimbursed for defense costs until the case is concluded. Obviously, interim funding can be a problem.

DEFINITION OF "DAMAGES." The way covered damages is defined is crucial. One may be exposed to fines, penalties, punitive, or even treble, damages. Check with the insurance agent to clarify how broadly or narrowly the policy construes the term "damages."

INNOCENT PARTNER COVERAGE. Does the policy provide coverage for the defalcations of another member of the firm? One is liable for his partner's embezzlement even if he has not benefited by it. The insurer will deny a claim based on your partner's fraud and/or criminal activity unless there is "innocent partner" coverage.

OTHER KEY PROVISIONS. A malpractice policy ideally will provide coverage for the defense costs if it is claimed the insured is guilty of intentional conduct (even though the policy does not indemnify the costs of the intentional conduct). Does the policy cover libel or slander or defense of RICO claims?

INSURER'S STABILITY. It is important to check the financial stability of the insurer and to be sure the insurer has a solid reputation for integrity and responsiveness. It is worth finding out if the insurer itself has been involved in litigation with its own insureds. The lowest premium will not compensate you for the aggravation and other costs of suing the carrier to get it to defend properly a malpractice case.

HANDLING A CLAIM. A detailed discussion of malpractice claims procedures is beyond the scope of this chapter. However, the following steps will help in the defense of a malpractice suit:

1. Notify the insurer immediately no matter how small the suit is.

2. Once the insured has been notified formally that he is being sued, say as little as necessary to the suing client.

3. Secure all work product immediately.

4. Inform the entire staff of the problem and the action game plan.

5. Do whatever is necessary to assist in the defense of the case.


The frequency of malpractice actions can be expected to increase. No profession in the estate planning team will escape unscathed. (42)

DIRECT COSTS. Malpractice premiums are in the highest classification--along with corporate securities work--for a very good reason. The dollars at risk are big.

LOSS OF REPUTATION. The cost of a malpractice suit cannot be measured merely in terms of the court judgment or out-of-court settlement or the cost of attorneys. The cost to a professional's reputation (win or loose) may be staggering. For instance, it would be difficult to attract new partners or new associates if one has been successfully sued for malpractice. A suit, win or lose (just or unjust), is always damaging.

LOSS OF STANDING WITH PEERS. Estate planning is a process based partially on knowledge and largely on trust. A malpractice suit calls into question competence that in turn destroys confidence, not only of current and potentially future clients but also the confidence of other members of the planning team with whom one must deal. It may also shake the confidence of other planners in your office.

THE PSYCHOLOGICAL TRAUMA. An estate planner who becomes a defendant in a lawsuit must deal with the incredible pressure and emotional trauma of being sued. (43) Often, the planner (and perhaps office associates, partners, and friends) will see the action taken by the client as an attack on his professional ability, integrity, or judgment. This cannot help the practitioner's morale and will probably result in adverse fallout on other projects. This psychological strain is compounded by time; the legal process is typically long and drawn out over a period of years even if the claim is unfounded and ultimately unsuccessful.

HIDDEN ECONOMIC COSTS. Colleagues from whom the practitioner received referrals and the general public may hear about the lawsuit. This will cause almost certain financial damage. The planner is required to participate in his own defense whether or not he is adequately insured. This, in turn, translates into dozens or sometimes hundreds of unbillable hours gathering facts and records and recreating the facts, giving depositions, briefing defense attorneys, and testifying at trial.

CUT AND RUN? If it appears a matter cannot be resolved by the procedures discussed above, consider "discharging the client." Obviously, this is a last resort but it should not be overlooked in a "heads they win--tails we lose situation."


Creating and maintaining a successful estate planning practice requires a methodical systematic approach to risk management. Planners are vulnerable to litigation no matter how careful they are. But the risk of a claim and the potential for a successful claim can be substantially reduced through continuing a vigorous and systematized policy of internal and external positive communication, common sense courtesy, quality control, and a strong emphasis on high quality continuing education of every member of the firm.

A planner should check that he has:

* Established and improved client relationships.

* Controlled the management of client relationships.

* Improved office practices.

* Identified problem areas.

* Corrected problems before they occur. Looking at everything in this discussion positively,

the "action suggestions" described here can also be thought of not only as defensive but as the blueprint for a vigorous office quality-control organizing and client market-building campaign.


(1.) Attorney Jack Olendar of Washington, D.C. quoted in "Avoiding Malpractice Suits: Some Sound Advice," Trusts and Estates, April 1990, p. 18. Another good rule of thumb mentioned in this same well written article is that "we have a true and grievous malpractice claim" where the facts and results would "surprise and dismay the average trust and estate lawyer."

(2.) Legal malpractice consists of three elements: (a) a duty, (b) a breach of duty, and (c) resulting damages.

(3.) "How Estate Planners Can Cope with the Increasing Risk of Malpractice Claims," Estate Planning, May 1985.

(4.) See "Avoiding Malpractice Suits: Some Sound Advice," Trusts and Estates, April 1990, p. 12.

(5.) This is called the "best judgment" or "good faith" defense.

(6.) "Corporate Fiduciaries Face Special Liability Problems," Trusts and Estates, December 1988, p. 29.

(7.) Killey Trust, 457 Pa. 474 (1974). Large corporate planners such as banks and trust companies will likely be held to a higher level of competence than others because of their access to information and expertise.

On the other hand, the sophistication, education, and expertise of the client is not a defense. See Blankenheim v. E.F. Hutton and Co. Inc., HOO4920 (Calif. Ct. App. 2/15/90), which held that the relationship between a stockbroker and his customer is fiduciary in nature, imposing on the former the duty to act in the highest good faith toward his customer. The court held that the plaintiff's concession that they were experts in the accounting and taxation area and any experience the plaintiff may have acquired following his investment was irrelevant to reliance on the broker's representations at the time of the sale.

(8.) Consider, for example, that the estate planner must consider the provisions of federal (and perhaps state) securities laws if the client holds more than 10 percent of a covered class of equity securities. Did you know that a malpractice claim might be converted into an unfair trade practice claim in order to gain the advantage of a longer statute of limitations? In one case the attorney drafted a trust that failed to qualify for the marital deduction. This action was barred by a 3-year statute of limitations. So the plaintiff also sued for a violation of the state's Unfair Trade Practice Act which had a much longer statute of limitations and allowed a suit by "any person who purchases or leases goods, services, or property." The estate successfully alleged that the draftsman had engaged in an unfair and deceptive act and practice by holding himself out as an attorney reasonably skilled in the preparation and drafting of last wills and testaments and in his ability to comply with the decedent's wishes and to minimize the tax obligations of her estate.

(9.) "Protecting the Corporate Fiduciary's Tender Backside," Trusts and Estates, February 1988, p. 63.

(10.) Adjectives which might characterize "institutional arrogance" include unreasonable, unknowledgeable, intransigent, implacable, belligerent, and rude.

(11.) See "Court Decisions Reinforce the Idea that an Insurance Agent Who Holds Himself Out to Have Great Expertise will be Bound to the Exercise of It," Trusts and Estates, October 1988, p. 55.

(12.) See Bell v. Manning, 613 S. W.2d 335.

(13.) Lucas v. Hamm, 15 Cal. Rptr. 821 (1961).

(14.) The California Supreme Court used this test in Biakanja v. Irving, 320 P.2d 16 (1958).

Although there is a trend toward relaxing the requirement of privity, New York and Texas are staunch supporters of the rule. See Victor v. Goldman, 344 N.Y.S.2d 672 (1973) and Dickey v. Jansen, 731 S.W.2d 581 (1987).

(15.) Pennsylvania Supreme Court in Guy v. Liederbach, 459 A.2d 744 (1983).

(16.) See Bogley v. Middletown Tavern, Inc., 421 A.2d 444 (1984). Of course, the knee jerk defense is, "The insurance was purchased in an arm's length transaction involving no confidential or fiduciary relationship between the insured and the agent." This tact might work if the agent never professed to be anything other than a salesperson. See Lazovick v. Sun Life Ins. Co. of America, 586 F. Supp. 918 (E.D. Pa. 1984).

(17.) See Anderson v. Knox, 297 F.2d 702 (9th Cir. 1961), cert. den., 370 U.S. 915 (1962); Gediman v. Anheuser Busch, Inc., 299 F.2d 537 (2d Cir. 1962).

(18.) See Wright Body Works v. Columbus Interstate Insurance, 210 S.E. 2d 801 (1974).

(19.) State Farm Life v. Fort Wayne National Bank, 474 N.E. 2d 524 (Ind. 1985).

(20.) Morales v. Field, DeGoff, Huppert and MacGown, 99 Cal. Appl 3d 307.

(21.) See "Does This Prospect Mean Trouble?" Practical Financial Planning, October/November 1988, p. 23.

(22.) See "Reducing the Risk of Estate Planning Malpractice," BNA, Tax Management Estates, Gifts, and Trusts Journal, March/April 1984, p. 36.

(23.) See "How Not to be a Trustee," Financial Planning, May 1990, p. 69.

(24.) Horne v. Peckham, 97 Cal. App. 3d 404 (1979).

(25.) Where there is reasonable doubt among well informed practitioners, there should be no liability. But this assumes a diligent quest for answers was made. Failure to research an issue or fully understand the facts will result in a denial of the "unsettled law" defense. See Martin v. Burns, 429 P.2d 660 (1967).

(26.) See "Steps to Protect the Fiduciary from Liability for Investment Decisions," Estate Planning, July/August, 1989, p. 228.

(27.) In "Taming the Liability Monster," L&H Perspective, V. 15, No. 1/1989, p. 38, the author states that "A nightmare for the professional is reliance by unknown third parties on their work product." Where might this nightmare be more real than in estate planning where a great deal of it is done specifically for others? (Of course, it is the planner's responsibility to know who those third party beneficiaries are and what circumstances and needs and desires they may have).

(28.) As one attorney was interviewing a couple, he would pause from time to time to "capsulize" their thoughts into a dictaphone. Before he did, he would remind them each time, "Be sure to stop me if this isn't exactly what you want or if I've misunderstood what you've just said."

(29.) You may have to prove that, at the time you were making the decision, the available information was much different than it is at the time litigation occurs. See "How to Manage a Growing Tax Practice," The Practical Accountant, May 1990, p. 27.

(30.) See "Avoiding and Handling Malpractice Claims against Estate Planners," Estate Planning, September/October 1989, p. 267.

(31.) See "Avoiding Malpractice Suits: Some Sound Advice," Trusts and Estates, April 1990, p. 12.

(32.) See "Coping with Administrative Problems: There's More to Life and Death than Taxes," 21 U. of Miami Institute on Estate Planning, Chapter 17 (1987).

(33.) Some attorneys use commercially written brochures to make their points or to give clients something to take home that will help them understand more complex concepts.

(34.) See Newton Estate, TC Memo 1990-208, for an example of the damage a well intended but offhand remark can do. The executor's reliance on the statement of an attorney as to the filing deadline did not constitute reasonable cause for the filing delay where the attorney admittedly had not been retained to render advice on federal estate tax matters, was not paid any fee for the advice, did not normally practice in that area of the law, and had advised the executor to verify any information with a tax practitioner. The "offhand remark" may not result in a malpractice case for this attorney--but it certainly would not result in a love affair with the client either.

(35.) Consider an index which includes data on clients and other parties to transactions with which the firm is involved. Include a procedure through which the system automatically updates the files to add the names of new family members, business associates, or others related to the client.

(36.) "Corporate Fiduciaries Face Special Liability Problems," Trusts and Estates, December 1988, p. 29.

(37.) The classic solution is a corporate policy that restricts or limits the information flow between the banking and the trust departments.

(38.) Obtain a "Waiver of Conflict" letter with respect to one-time consulting arrangements. Obtain advance written consent to future simultaneous adverse representation on any matter not substantially related to the matter undertaken for a new client.

(39.) "Protecting the Corporate Fiduciary's Tender Backside," Trusts and Estates, February 1988, p. 72.

(40.) See "About Your Malpractice," Lawyer's Digest, May 1988, p. 11.

(41.) "How the Accountant/Financial Planner can Reduce Exposure to Liability Claims," The Practical Accountant, February 1990, p. 15.

(42.) See "Taming the Liability Monster," L&H Perspective, Vol. 15/No. 1, 1989, p. 37.

(43.) See "Strategies to Avoid Malpractice," Practical Financial Planning, April/May 1989, p. 29.
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Title Annotation:Part 1: The Purpose and Practice of Estate Planning
Publication:Tools & Techniques of Estate Planning, 14th ed.
Date:Jan 1, 2006
Previous Article:Chapter 5: Ethics.
Next Article:Chapter 7: Ownership and transfer of property.

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