August 2018 Ethically Speaking - Avoiding Trouble by Handling Difficult Conflicts of Interest
by Kristin L. Yokomoto
Two fundamental questions that lawyers must answer in all matters are: “Who is the client?” and “What is the scope of representation?” The answers are crucial because of a lawyer’s ethical duties to keep his client’s confidences inviolate and avoid representing a party who has interests that are adverse to one of his current or former clients or to himself. Cal. Bus. & Prof. Code § 6068(e); Cal. Rule of Prof’l Conduct 3-310(B)-(C), (E). If an actual or potential conflict of interest exists, the lawyer may proceed with the proposed engagement only if he obtains informed written consent from all parties. Cal. Rule of Prof’l Conduct 3-310(B)-(C), (E).
In the practice of trusts and estates, conflicts of interest are abundant, some of which occur regularly and are obvious, and others of which are fact-specific and tricky, even hidden. As stated by the California Lawyer Association Trusts & Estates Section:
Hypothetically, the California Rules [of Professional Conduct] would ethically require an endless number of disclosures and waivers, as well as clear examples of potential conflicts of interest for the many different interests involved in the estate plan. In practice, few practitioners comply with the waiver rules in all respects, and while some conduct can clearly be defined as “unethical” in all cases, more frequently, a lawyer’s conduct can be evaluated only after looking at all the facts and circumstances of the particular situation.
Guide to the California Rules of Professional Conduct for Estate Planning, Trusts, and Probate Counsel, State Bar of California, Trusts & Estates Section (3d ed. 2013) at 2.
AVOIDING CONFLICTS AMONG CLIENTS Dual and Family Conflicts
To illustrate, take a basic joint living trust for a husband and wife who will be the co-trustors making the trust and transferring assets into it. Commonly, both of them will act as the current co-trustees who would manage the affairs of the trust during their lifetimes. A third party, who may be a family member, would be named as the successor trustee to act upon the trustors’ incapacity or deaths. And current and future beneficiaries would be named.
Suppose that the husband initially contacted the drafting lawyer because the lawyer previously prepared an estate plan for his parents and they referred him to the lawyer. The husband has significant separate property and a son from a former marriage who will be his beneficiary, and the wife has a daughter from a previous marriage who will be her beneficiary. In order to move forward with the engagement, the lawyer would need to explain to the husband and wife the potential conflicts that can arise between the two of them as joint clients with different beneficiaries and separate and community property, and explain that there will not be any confidentiality between them. If the husband is a named beneficiary in the parents’ trust, the lawyer may also need to explain the potential conflicts to the husband and his parents. If the lawyer determines that conflicts exist, he should obtain informed written consents from all parties.
Assume thereafter that the husband’s parents schedule a meeting with the lawyer and tell him that they want to change their trust distributions. In their original trust, they had named their son as their sole beneficiary and had told the son about it. Now, they want to amend their trust to have their entire estate distributed to a charity because their son has become independently wealthy, as well as distant from them. The parents do not want the son to know about this change. The lawyer may be faced with a difficult situation that requires conflict analysis. Part of the analysis may turn upon whether the lawyer terminated his services with the son and his wife. The lawyer may decide that he neither has a potential conflict, nor any duty to inform the son of such change. However, if the plan that the lawyer suggested to the son relied upon the inheritance from his parents, the lawyer may decide there is a conflict such that he may not be able to amend the parents’ plan.
The parents will likely not be pleased to hear that they may have to start over with a new trusts and estates lawyer. This and similar situations are common because of the multigenerational aspect of trusts and estates. Early identification of such potential family conflicts may help guide a lawyer to make decisions which could save all involved time and money. For example, if the parents had a history of amending their distributions to include and disinherit their son, the lawyer may have been better off declining the second engagement by the son.
Additional Family Conflict
The joint living trust contemplates various periods of time including the present and future points in time, such as upon the incapacity or death of one grantor and the incapacity and death of the second grantor. Additional potential family conflicts could be triggered if the lawyer’s representation continues, or is reengaged, when these future events occur. For example, assume that the parents in the above hypothetical had different beneficiaries from each other because the above-referenced son was the natural child of only the mother. The mother named her son as her beneficiary, while the stepfather named a charity as his beneficiary. After the mother dies, the stepfather is the sole trustee and engages the drafting lawyer to help him to allocate the trust assets as required by the trust: (a) one-half of the community property assets to a revocable sub-trust for the unrestricted use by the stepfather, with a charity as his future beneficiary, and (b) one-half of the community property assets to an irrevocable family sub-trust for the restricted use by the stepfather during his lifetime, with the son as the future beneficiary.
The stepfather’s statutory trustee duties provided in California Probate Code § 16003 requiring him to act impartially and not to act in a manner that gives preferences to his own interests as a beneficiary over the interests of other beneficiaries will curtail obvious abuses. However, the stepfather may want to take certain action which, while permissible, could have an adverse effect on the son’s inheritance. For example, if the stepfather wants to allocate a high income-producing and highly appreciating asset, such as a commercial building, into his survivor’s sub-trust and a non-income producing and non-appreciating asset, such as vacant undeveloped land, into the family sub-trust, such may create a conflict for the lawyer between the stepfather and son.
At this moment, the lawyer should analyze whether he is representing the stepfather only as a fiduciary or also as a beneficiary, in which case there may be an inherent conflict. And, the lawyer would need to determine if he still owes any duties to the son. Even if helping the stepfather would not breach any duties to the son, the lawyer may want to consider what may happen when the son later finds out that the lawyer drafted the agreement which allocated the vacant undeveloped land to the son’s sub-trust.
As an aside, with any trust administration, the lawyer should consider what, if any, ethical duties are owed to the beneficiaries of the trustor’s estate and should consider informing the beneficiaries that the lawyer does not represent them and that they may want to seek separate independent counsel. This will prevent the lawyer from having duties to unintended beneficiaries who may claim that they thought the lawyer was their lawyer.
Entity Conflict
Often a lawyer who is engaged by a client for estate planning purposes will form an entity as part of the recommended estate planning. Then, the lawyer will prepare documents which transfer all or a portion of the client’s ownership interests in the entity to a trust or beneficiaries. In such instances, the lawyer will need to determine whether, and at what point, the entity is also his client.
Some lawyers think that simply forming the entity for a client does not make the entity his client, which may be correct in some situations. However, once the lawyer helps to transfer interests in the entity to a trust or beneficiary, he may want to re-consider whether he is representing the entity and whether his client would expect or reasonably believe that the lawyer is representing the entity. California Rule of Professional Conduct 3-600(A) provides that the client is the organization itself, not the owners. If the lawyer is also representing the entity, he will need to disclose the potential conflicts and obtain informed written consent from the clients having interests in the entity. Cal. Rules of Prof’l Conduct 3-600(A).
AVOIDING INTERESTS POTENTIALLY ADVERSE TO A CLIENT Lawyer as Fiduciary
It is not uncommon for a client to ask the trusts and estates lawyer if he will serve as the client’s trustee. In this situation, the lawyer, who would as trustee have fiduciary duties to the beneficiaries, should consider whether he: (a) will be able to maintain client confidences, (b) is entering into a business transaction with the client for which he needs to obtain informed written consent, (c) will be subject to the prohibition of dual compensation for acting as the lawyer and trustee without approval by court order or by all interested parties pursuant to California Probate Code § 15687, and (d) will be subject to removal by a beneficiary as provided in California Probate Code § 15642(b)(6).
When deciding whether to accept to serve as trustee, the lawyer would want to be sure he possesses the requisite knowledge, skill, and experience to act; inquire whether his malpractice policy will cover his acts; and be able to show that he did not suggest or solicit the client to name him as the trustee.
Lawyer as Trust Protector
A trust protector is a relatively new role in a trust. The purpose of the trust protector is to, among other things, watch over the trustee, remove and replace the trustee, or possibly change beneficial interests. While there is no statutory authority yet in California, the general view is that a trust protector is not a fiduciary because of the limited role that such trust protector plays. However, because it is still unclear, it would be in the trust protector’s interest if the trust specifically provides that the protector is not a fiduciary.
As clients have enough difficulty naming a trustee, they often will turn to the lawyer to serve as the trust protector. Because the trust protector is generally not a fiduciary, the risk of potential conflicts may be low. Similar to the above, when deciding whether to accept to serve as the trust protector, the lawyer would want to be sure he possesses the requisite knowledge, skill, and experience to act, inquire whether his malpractice policy will cover his acts, and be able to show that he did not suggest or solicit the client to name him as the trust protector.
Client Gifts to Lawyer
In general, a lawyer is prohibited from inducing a client into making a substantial gift to the lawyer. Cal. Rules Prof’l Conduct 4-300. Also, if a provision of a will or trust makes a donative transfer to the drafting lawyer, such provision will be presumed to be the product of fraud or undue influence. Cal. Prob. Code §§ 21370, 21374, and 21380. The burden of proof is on the lawyer to rebut this presumption by clear and convincing evidence. Alternatively, a donative transfer would not be subject to this presumption if the will or trust is reviewed by an independent lawyer who counsels with the client and provides a Certificate of Independent Review stating that the proposed transfer is not subject to fraud or undue influence. Cal. Prob. Code § 21384. As an aside, certifying lawyers should clearly limit their engagement with the client to only reviewing the donative gift, not the validity of the plan, and providing the Certificate.
Conclusion
Today, trust and estate lawyers are subject to more legal malpractice claims than ever before and perhaps more than any other single area of practice. In light of this recent upsurge, trust and estate lawyers need to, among other things, increase their awareness of potential conflicts and properly address them in writing. Lawyers may also consider declining engagements where the facts are likely to end up in litigation with the lawyer spending time and money to defend an estate plan, which will likely cost the lawyer multiples of the fee that was charged for such plan.
Kristin L. Yokomoto is a partner at Albrecht & Barney in Irvine, where she practices estate and business planning, trust administration, and probate. She is the Chair of STEP Orange County, a member of STEP Special Interest Group Committee—Mental Capacity, and a member of the OCBA Professionalism & Ethics Committee. Kristin may be reached at ky@albrechtbarney.com.