December 2023 Ethically Speaking - Navigating the Endless Ethical Issues for Estate Planners When Preparing Trusts

by Kristin L. Yokomoto

One of the main services that estate planning lawyers provide to clients is the preparation of estate plans which generally include revocable and/or irrevocable trusts or amendments or restatements thereto that will govern the private transfer of their wealth to family members, other individuals, charities, and organizations upon their death without a public probate proceeding. While trusts have many complex provisions, one of the trickiest aspects of estate planning can be navigating the ethical minefields that arise with identifying the client and scope of services, attorney competence, conflicts of interest, confidentiality, and client capacity. Below is a brief summary of some of the ethical considerations that estate planners face, which are more fully described in the Guide to the California Rules of Professional Conduct for Estate Planning, Trust and Probate Counsel: Fourth Edition (2020) by the Executive Committee of the Trusts and Estates section of the California Lawyers Association.

Defining the client and scope of services is a must in estate planning. The client is the one to whom the lawyer primarily owes professional duties, including an undivided duty of loyalty. Chang v. Lederman, 172 Cal. App. 4th 67, 80 (2009). If an issue with a client or beneficiary arises, the first document that will be sought for review is the attorney’s client engagement letter. It is not only important to describe the services that will be performed but also any related services that will not be performed. Assistants often prepare engagement letters using a form or prior sample that can lead to inadvertent errors. Lawyers need to carefully review each engagement letter and tailor it as necessary.

Rule 1.1(a) of the California Rules of Professional Conduct requires that estate planning lawyers prepare estate plans with competence. In order to do so, the lawyer needs to have the required education, training, and experience. Estate planning can involve complex tax laws such as gift, estate, and generation-skipping transfer taxes. The complexity of these laws under the 2017 Tax Cuts and Jobs Act are even greater given that the relevant laws will sunset on December 31, 2025, which will reduce the current estate, gift, and generation-skipping transfer tax exemption amounts from $12,920,000 for an individual and $25,840,000 for a married couple (which is expected to increase for inflation on January 1, 2024, and again on January 1, 2025) down to an anticipated amount of $6,000,000 for an individual and $12,000,000 for a married couple ($5,000,000 adjusted for inflation from 2017 through December 31, 2025). For this reason, coupled with the fact that there is uncertainty as to whether Congress will pass other relevant laws, lawyers need to know how to best prepare trusts that provide flexibility.

When preparing a trust for a client, lawyers need to understand income tax laws and the available step-up in the basis of property required from a deceased person under Internal Revenue Code § 1014 to be able to explain the pros and cons of distributing assets in trust for a beneficiary or outright. Lawyers also need to understand the purpose and use of special, general, and contingent powers of appointment. If a beneficiary has special needs, then the lawyer must be able to properly prepare a special needs trust. In addition, for advanced planning with sales or gifts to irrevocable trusts, lawyers need to be able to counsel their clients on the need to obtain reliable appraisals and timely prepare gift tax returns.

While the American College of Trust and Estate Counsel (ACTEC) Foundation March 2023 Commentaries, Sixth Edition, provides that a mistake in judgment by a lawyer does not necessarily mean incompetence especially if all relevant facts were not provided to the lawyer (page 15), it is still of utmost importance that lawyers obtain full financial and family information from the client. Due to the often significant monetary exposure a lawyer could face if preparing estate plans without the required knowledge and experience, a lawyer may be better off declining the engagement. Or, alternatively, California Rules of Professional Conduct Rule 1.1(c) allows a lawyer who is uncertain of these issues to associate with an experienced lawyer, learn the subject matter, or refer the prospective client to an experienced lawyer.

As of March 22, 2021, Comment [1] to the California Rules of Professional Conduct Rule 1.1 expressly articulates a lawyer’s duty to keep abreast of the risks and benefits of changing technology. Lawyers who use technology to transmit information and software to prepare trusts and other documents must be aware of the risks of using technology such as data breaches and take reasonable steps to protect against it by, among other things, properly vetting third party vendors and could purchase appropriate riders to their malpractice policies.

Competence and Rule 1.3 also require an attorney to exercise diligence. After a trust is created for the client, for example, the estate planning attorney should help the client timely transfer certain assets to the trust. If certain types of assets, such as real property, are not transferred to the trust, a Heggstad petition or probate will be required to transfer the assets upon the client’s death and it may not be distributed to whom the client had intended. See Garcia v. Borelli, 129 Cal. App. 3d 24 (1982). Other diligence issues can arise if a client’s death is imminent. If the lawyer decides to take on the engagement, the lawyer should prepare the trust with an explanatory letter for the client’s review and signature in an expeditious manner.

Preparing a joint trust for a husband and wife can present many challenges. Such representation is governed by Rule 1.7, which provides that a lawyer shall not without informed written consent from each client represent a client if the representation is directly adverse to another client or there is a significant risk that the duties owed to each client will materially limit the lawyer’s joint representation of them. Comment [2] to Rule 1.7 provides that such applies to the preparation of joint or reciprocal wills for a husband and wife. Even when informed written consent can be obtained from the prospective clients, a lawyer may decline one or both representations to avoid having to defend a future claim, especially if the clients have separate property and wish to give their money and assets to different beneficiaries or if the lawyer becomes aware that one of the prospective clients has a litigious background or high conflict personality.

Potential conflicts can arise when one or both spouses have significant separate property and/or when one or both spouses have children from a relationship other than their marriage. In Yale v. Bowne, 9 Cal. App. 5th 649, 652-53 (2017), the husband and wife had a premarital agreement for her separate property but the lawyer listed “none” for the separate property even though there was nothing in the file purporting to transfer the wife’s separate property into community property. In a subsequent divorce, husband argued that wife had transmuted her property and wife settled the divorce by agreeing to give husband a substantial part of her separate property assets. On the note of family law, while some estate planning lawyers may have experience in it, it would behoove most estate planners to instruct a client who wants to transmute separate property or a prenuptial or postnuptial agreement to consult with a family law lawyer.

Many times, estate planning is all about planning for the family. Throughout the process, lawyers build rapport and trust with clients who share intimate details about their wealth and family dynamics. It is common for clients to ask their lawyer to prepare an estate plan for one or more of their children. Family planning is common in estate planning and generally encouraged by ACTEC. However, unless the parent wishes to share such information, the lawyer cannot tell the child about the parents’ planning, which could create a conflict because the lawyer may not use that information to maximize tax planning for the child’s estate.

There are times in estate planning when it is unclear if a client is a current client or former client. This can occur if the estate planning lawyer does not terminate the relationship with the client after the estate plan has been executed. Because clients may need a future update to their estate plans, it is common for estate planning attorneys to keep a matter open rather than terminating the relationship. Not only does this make conflict analysis harder but it also can subject the lawyer to a malpractice claim for not updating the client on important tax and other law changes. For this reason, lawyers should terminate their services with the final invoice to the client.

Without an express client instruction to the contrary, lawyers can share confidential information with members of the lawyer’s office. However, Rule 5.3 requires the lawyer to assure that staff members respect the confidentiality of clients’ affairs. Lawyers are responsible to supervise their staff and should give them appropriate instructions on their obligation not to disclose client information. Before releasing confidential information to another professional, such as a client’s accountant, the lawyer should obtain informed consent from the client. In a joint representation, the lawyer owes duties of loyalty and confidentiality to all clients. As such, when representing joint clients, the lawyer’s engagement letter should spell out what will occur if one client shares confidential information with the lawyer, especially if such information presents a conflict of interest.

Dealing with a prospective or current client’s diminished mental capacity has been, and will continue to be, an increasing issue for estate planners. To prepare a simple will or trust, clients must have “testamentary capacity,” which includes the ability to understand (1) the nature of the testamentary act, (2) the nature of the property, and (3) the relations to the persons who have claims upon the clients’ bounty and whose interests are affected by the instrument. Cal. Prob. Code § 6100.5(a)(1) (Deering 2017). To prepare a more complex document, the client must also be able to understand (1) the rights, duties, and responsibilities created or affected by the client’s decision, (2) the probable consequences of the decision, and (3) the significant risks of, benefits of, and reasonable alternatives to the decision. Cal. Prob. Code § 812 (Deering 2017). It is important for a lawyer to be able to spot cognitive decline or other mental conditions and only take direction from the client. On the note of capacity, it has been established that a lawyer does not have a duty to the intended beneficiaries to investigate, evaluate, ascertain, or maintain a client’s testamentary capacity (Moore v. Anderson Zeigler Disharoon Gallagher & Gray, P.C., 109 Cal. App. 4th 1287 (2003)) because imposing such a duty to beneficiaries could compromise the lawyer’s duty of loyalty to a client.

There has been a significant growth in the number of undue duress or elder abuse claims, which can turn into a claim against the drafting lawyer. The Welfare and Institutions Code § 15610.70 and Probate Code § 86 define “undue influence” as the use of “excessive persuasion that causes another person to act or refrain from acting by overcoming that person’s free will and results in inequity.” It is important that a lawyer spot potential red flags such as an incoming call from someone other than the prospective client describing what the client wants.

In addition, California Probate Code § 21380 presumes that gifts in trust to certain individuals, known as “disqualified persons,” who have a close relationship of trust or intimacy with the client are the result of undue influence, including, but not limited to and under certain circumstances, the drafting attorney or a client’s caretaker. The presumption may be rebutted under Probate Code § 21384 if the trust is reviewed by an independent attorney who counsels the client about the nature and consequences of the intended gift and determines that it is not the result of fraud or undue influence, and signs and delivers to the client an original certificate providing the required declarations in Probate Code § 21384. If the lawyer is unaware of this presumption and the requirement to obtain a certificate of independent review to overcome it and, as a result, a named beneficiary does not receive the testamentary gift, such lawyer may be subject to a malpractice claim. See Osornio v. Weingarten, 124 Cal. App. 4th 304 (2004).

Rule 1.0 provides that a violation of the Rules does not itself give rise to an action for damages and that nothing in the Rules or the Comments is intended to enlarge or to restrict the law regarding the liability of lawyers to others. Having said that, there is unfortunately a growing number of trust and estate disputes involving plan beneficiaries. As the number of trust and estate disputes continue to rise, so too does the number of malpractice claims against trust and estate lawyers. This in turn is making the area of practice risky and expensive due to increasing malpractice insurance premiums.

Three issues that impact malpractice claims against California estate planning lawyers are the (1) statute of limitations, (2) concept of privity, and (3) potential amount of claims. First, in many areas of law, the date on which the statute of limitations for a legal malpractice claim may begin is the date on which the legal services have been completed. However, that is not necessarily the case for bringing claims against an estate planning lawyer. Instead, the statute of limitations may not begin until after the client’s incapacity or death, which may not occur for years or decades after the lawyer has completed the estate plan. It is not unheard of for a malpractice claim to be filed against even retired estate planning lawyers. If such lawyers do not have tail malpractice coverage, they would have to pay for defense costs out of pocket and cover the amount of any settlement or judgment, which emphasizes the importance of purchasing tail coverage.

Second, while an estate plan is prepared for the client, it can be viewed as for the benefit of the beneficiaries. While the beneficiaries are not clients of the lawyer and there is no attorney-client relationship, California is not a strict privity state when it comes to malpractice claims brought by third parties. Instead, California applies a balancing test to determine if a third party beneficiary has standing to bring a malpractice claim against a lawyer. Lucas v. Hamm, 56 Cal. 2d 583, 589 (1961). The factors for the court to consider in the balancing test include “the extent to which the transaction was intended to affect the plaintiff, the foreseeability of harm to him, the degree of certainty that the plaintiff suffered injury, the closeness of the connection between the defendant’s conduct and the injury, and the policy of preventing future harm.” In a recent appellate ruling, Gordon v. Ervin Cohen & Jessup LLP, 88 Cal. App. 5th 543 (2023), the court clarified one element of the balancing test, holding that the extent to which the client intended the transaction to benefit the nonclient must be clear, certain, and undisputed.

Third, the amount of potential damages that may be claimed against a lawyer by a plaintiff beneficiary is likely to exceed by an enormous magnitude the amount collected from the client for the services. Depending upon many factors and for illustration purposes only, the fees for an estate plan may range from several thousand to a hundred thousand dollars or more, but the exposure for the lawyer could be hundreds of thousands or hundreds of millions of dollars. The fees from preparing an asset plan will likely never be close to the fees and costs to defend a malpractice action or increase in malpractice premiums, not to mention the time and stress to deal with it.

Kristin L. Yokomoto is a partner at BakerHostetler in Costa Mesa where she focuses her practice on private wealth planning. She is a Member of the California Trusts and Estates Executive Committee (TEXCOM) and Certified Specialist in Estate Planning, Trust and Probate Law by the State Bar of California Board of Legal Specialization. She is a member of the OCBA’s Professionalism & Ethics Committee and a contributing author of the Guide to the California Rules of Professional Conduct for Estate Planning, Trust and Probate Counsel (4th Edition). The views expressed herein are her own. Kristin can be reached at kyokomoto@bakerlaw.com.