May 2005
Volume 1, Number 3
Table of Contents

Estate Planning Malpractice: Special Issues in Need of Special Care
By Bradley E.S. Fogel

Recently, the news has been filled with reports of doctors complaining, and even striking, because of high malpractice insurance rates caused, they claim, by the high risk of malpractice claims. Despite the hullabaloo, doctors facing medical malpractice claims have an enormous advantage over estate planning attorneys facing legal malpractice claims. Doctors' duties extend, for the most part, only to their patients. In contrast, the typical estate planning attorney may be sued for legal malpractice by individuals she never met or worked for. This lack of privity between the attorney and the plaintiff creates special issues, and the need for special care, in the estate planning legal malpractice context.

Background and History

Attorneys typically owe a duty of care only to their clients. In estate planning, however, an attorney's malpractice typically harms only the beneficiaries (or intended beneficiaries) of the client's estate. Because of the lack of privity with the estate planning attorney, injured beneficiaries traditionally had no cause of action against the attorney, even if the attorney was clearly negligent. Buckley v. Gray, 42 P. 900 (Cal. 1895).

As the privity doctrine was rejected in other contexts, however, it was reexamined in the estate planning context. Beginning in the 1950s and 1960s, courts relaxed the privity bar to malpractice suits by beneficiaries against estate planning attorneys. Biakanja v. Irving, 320 P.2d 16 (Cal. 1958); Lucas v. Hamm, 364 P.2d 685 (Cal. 1961), cert. denied, 368 U.S. 987 (1962). Since then, state courts have addressed the issue of estate planning attorney malpractice in a variety of ways. For the most part states may be divided into three distinct groups: (1) states that allow a broad cause of action; (2) states following the "Florida-Iowa rule"; (3) and "strict privity" states.

Broad Cause of Action

The first case to breach the privity barrier between an estate planning attorney and a nonclient beneficiary was Lucas v. Hamm, 364 P.2d at 685. In Lucas, the California Supreme Court held that whether the beneficiary could maintain a malpractice cause of action against the estate planning attorney despite the lack of privity was based on a multi-factor balancing test. The factors included "the extent to which the transaction was intended to affect the plaintiff." Id. at 687, citing Biakanja, 320 P.2d at 19. Reasoning that the "main purpose" of the agreement between the estate planning attorney and the client was to benefit the beneficiaries, Lucas held that the attorney owed a duty of care to the beneficiary.

The plaintiff's victory was pyrrhic. The attorney in Lucas made a fundamental mistake regarding application of the rule against perpetuities. The court held, however, that the attorney did not breach the newly created duty of care. It reasoned that the rule against perpetuities was beyond the ken of the ordinarily skilled attorney. 364 P.2d at 690. Thus, the attorney escaped liability.

Despite this somewhat ironic holding, Lucas is a milestone in the expansion of malpractice exposure for estate planning attorneys. Indeed, the court noted that the duty of care it established could lead to "large and unpredictable" liability. Id. at 688. This statement was prescient. In California and the numerous states that have adopted the Lucas court's analysis and variations thereof (including the third-party beneficiary theory), the estate planning attorney owes a virtually limitless duty of care to nonclient beneficiaries. See, e.g., Blair v. Ing, 21 P.3d 452 (Haw. 2001); Auric v. Continental Cas. Co., 331 N.W.2d 325 (Wis. 1983); Trask v. Butler, 872 P.2d 1080 (Wash. 1994); Linck v. Barokas & Martin, 667 P.2d 171, 173-74 (Alaska 1983); Milboer v. Mottolese, No. 373081, 1996 WL 57022, at * 2 (Conn. Super. Ct. Jan. 24, 1996); Needham v. Hamilton, 459 A.2d 1060, 1062-63 (D.C. 1983); Ogle v. Fuiten, 466 N.E.2d 224, 226-27 (Ill. 1984). In these states the attorney is, for example, potentially liable for substandard tax planning. Bucquet v. Livingston, 129 Cal. Rptr. 514 (Cal. Ct. App. 1976); Petersen v. Wallach, 764 N.E.2d 19, 21 (Ill. 2002). Indeed, even if the estate plan is consistent with the client's wishes, the attorney may be forced to try to convince the fact-finder that the attorney discussed the relevant issues with the client. This will be especially difficult because the client is, of course, deceased and the attorney's testimony will seem self-serving. For example, beneficiaries have sued estate planning attorneys when husband and wife clients fail to use bypass trusts to make use of both unified credits. See, e.g., Noble v. Bruce, 709 A.2d 1264 (Md. 1998). Although the attorney may claim that she explained this estate panning technique to the clients and that they decided to forgo the potential tax savings, this may be difficult to prove.

Even more troubling, however, is beneficiaries' ability to press claims that amount to little more than dissatisfaction with the beneficiaries' share of the estate. See, e.g., Creighton University v. Kleinfeld, 919 F. Supp. 1421 (E.D. Cal. 1995). Based on a claim that the testator must have wanted the beneficiary to receive a greater share and an allegation that the attorney was negligent in her failure to effect such assumed intent, the beneficiary's case would likely survive a motion to dismiss. Thus, the disgruntled beneficiary would be able to test its case before a jury or, more realistically, be able to exact a settlement from the attorney or her insurer.

In essence, this broad cause of action splits the attorney's loyalty. The beneficiaries are made hidden parties to the attorney-client relationship, even though the interests of the client and beneficiaries may diverge. Bradley E.S. Fogel, Attorney v. Client--Privity, Malpractice and the Lack of Respect for the Primacy of the Attorney-Client Relationship in Estate Planning, 68 TENN. L. REV. 261, 311-24 (2001). This has dire consequences for the attorney-client relationship, since the attorney may be caught between the best interests of her client and potential malpractice liability.

The Florida-Iowa Rule

Dissatisfied with the virtually limitless cause of action allowed by Lucas and similar cases, several state courts have adopted a narrower cause of action. See, e.g., Glover v. Southard, 894 P.2d 21 (Colo. Ct. App. 1994); Mieras v. DeBona, 550 N.W.2d 202 (Mich. 1996); Henkel v. Winn, 550 S.E.2d 577 (S.C. Ct. App. 2001); Beauchamp v. Kemmeter, 625 N.W.2d 297 (Wis. Ct. App. 2000) (Beauchamp seems inconsistent with Auric, decided by the Wisconsin Supreme Court in 1983). This narrower cause of action--the so-called "Florida-Iowa rule"--is, not surprisingly, closely identified with the Florida and Iowa state courts. Espinosa v. Sparber, Shevin, Rosen & Heilbronner, 612 So. 2d 1378, 1380 (Fla. 1993); Schreiner v. Scoville, 410 N.W.2d 679, 683 (Iowa 1987). In fact, the rule originated in a California case that, although inconsistent with more recent California precedent, continues to meet with approval in the courts in other states. Ventura County Humane Inc. v. Holloway, 115 Cal. Rptr. 464 (Cal. Ct. App. 1974).

Under the Florida-Iowa rule, a beneficiary may maintain a cause of action against the estate planning attorney only if the client's intent, as expressed in the will (or other document), is frustrated. Espinosa, 612 So. 2d at 1380. This limitation is based on courts' traditional reluctance to appeal to parol evidence in will construction proceedings. Id. at 1379. Applying this principle to the legal malpractice context, courts following the Florida-Iowa rule require the malpractice to be apparent on the face of the will.

Under the Florida-Iowa rule, estate planning attorneys are largely immune from liability based on failure to give accurate tax planning advice or errors of law, such as failure to understand ademption of specific devises. Stept v. Paoli, 701 So. 2d 1228 (Fla. Dist. Ct. App. 1997); Schreiner, 410 N.W.2d at 683. Similarly, an attorney who drafted an ambiguous will was not liable based on the reasoning that the client's true intent was ultimately effected. O'Neil v. Sacher, 526 So. 2d 771 (Fla. Dist. Ct. App. 1988). In another case, a beneficiary who claimed that he was not mentioned in the will because of the attorney's negligence was precluded from recovery because the testator's intent, as expressed in the will (which did not mention the plaintiff) was effected. Espinosa, 586 So. 2d at 1227 (Levy, S., specially concurring), aff'd, 612 So. 2d 1378.

For the most part, only execution errors are actionable under the Florida-Iowa rule. If the documents have been properly executed, then the testator's intent as expressed therein will ultimately be effected. Thus, no action will lie.

The Florida-Iowa rule is based on the misapplication of will construction principles to a tort malpractice action. Indeed, the cases adopting the Florida-Iowa rule rely heavily on will construction precedent. Moreover, these cases have expanded the will construction doctrine without considering the similarities and differences among the policies underlying the rule in the alternative contexts.

In addition to having a questionable logical basis, the Florida-Iowa rule leads to arbitrary distinctions. For example, an attorney who provides blatantly incorrect legal advice is wholly immune from malpractice liability. In contrast, the attorney who allows a client to incorrectly execute a will may be liable to the intended beneficiaries. The difference between the two situations seems negligible, but the ramifications are enormous.

Strict Privity

In a few states, the lack of privity between the estate planning attorney and the beneficiaries is an absolute bar to legal malpractice claims. See, e.g., Robinson v. Benton, 842 So. 2d 631 (Ala. 2002); Noble, 709 A.2d at 1275; Lilyhorn v. Dier, 335 N.W.2d 554, 555 (Neb. 1983); Mali v. De Forest & Duer, 553 N.Y.S.2d 391, 392 (N.Y. App. Div. 1990); Simon v. Zipperstein, 512 N.E.2d 636, 638 (Ohio 1987); Barcelo v. Elliot, 923 S.W.2d 575 (Tex. 1996). These states retain the strict privity rule based on the fear of splitting the attorney's loyalty between the client and nonclient beneficiaries. Despite the importance of protecting the attorney-client relationship, the strict privity rule has been widely criticized. The rule can clearly lead to harsh results. The attorney is immune to malpractice liability regardless of the extent of the negligence or the severity of damage. Moreover, to the extent potential malpractice liability encourages greater care, no such increased care is obtained in strict privity states.

Proposal for Reform

The three approaches to estate planning legal malpractice claims all have substantial flaws. The states that follow Lucas, or analogous reasoning, allow for an overly broad cause of action that exalts the beneficiary's interest to the detriment of the attorney's representation of her client. The Florida-Iowa rule leads to inconsistent results and is based on questionable reasoning. Lastly, strict privity states allow an injured beneficiary to go unrecompensed and fail to take advantage of the increased care potential malpractice liability may lead to.

To balance the positive aspects of potential malpractice liability with respect for the attorney-client relationship, a new standard is required. It is submitted that allowing the beneficiaries to recover from the estate planning attorney only if they can prove their case by clear and convincing evidence strikes the proper balance. Fogel, supra, at 308-32. Such a standard allows injured beneficiaries to recover from the attorney when the negligence is clear. At the same time, it properly respects the attorney-client relationship by assuring that the attorney's loyalty is not split between the client and the beneficiaries. In essence, the attorney is immunized from liability based on an estate plan that might appear to be the result of negligence, even though it is actually the product of the client's choice. But the truly negligent attorney will be liable for the damages caused in those cases in which recovery will not impugn the attorney-client relationship.

Statutes of Limitations

Statutes of limitations have the potential to be almost as significant a bar to estate planningmalpractice recovery as the privity doctrine. As a practical matter, it is unlikely that the attorney's negligence will be discovered until after the client's death. If the statute of limitations begins to run when the negligence occurs (when the documents are executed), it is likely that the beneficiaries' cause of action will be time barred.

States that have relaxed the privity barrier, however, have also found ways to prevent a statute of limitations from creating a de facto bar to estate planning legal malpractice claims. Generally, the limitations period will not begin to run until the injury is either incurred or discovered. Petersen, 764 N.E.2d at 21; Blair, 21 P.3d at 471-72; Millwright v. Romer, 322 N.W.2d 30, 32 (Iowa 1982). Thus, the statute of limitations will generally not begin to run until the client's death, at the earliest.

Damages

For the most part, the measure of damages in a legal malpractice claim is the loss suffered by the plaintiff. Lavigne v. Chase, Haskell, Hayes & Kalamon, P.S., 50 P.3d 306 (Wash. Ct. App. 2002). Thus, for example, if the attorney's negligence voided an intended bequest, the damages should be the amount of the lost bequest. Auric, 331 N.W.2d at 329. Similarly, if the attorney's negligent planning increased the tax burden, the attorney is liable for the increased tax. Bucquet, 129 Cal. Rptr. at 516.

In some estate planning malpractice cases, plaintiffs may recover the remedial costs necessitated by the estate planning attorney's negligence. These costs include, for example, the cost of the construction proceedings if the attorney has drafted an ambiguous provision or the cost of correcting the estate plan through post-mortem use of disclaimers and lifetime gifts. Id.; Estate of Arlitt v. Paterson, 995 S.W.2d 713, 721 (Tex. App. 1999).

The damages caused by the attorney's negligence may be quite speculative. Martin D. Begleiter, First Let's Sue All the Lawyers--What Will We Get: Damages for Estate Planning Malpractice , 51 HASTINGS L.J. 325 (2000). For example, suppose an attorney negligently gives a surviving spouse a power of appointment over a bypass trust. If the surviving spouse uses lifetime gifts and/or disclaimers to fix the estate plan then, as mentioned, the cost of these remedial measures will be recoverable as damages. In contrast, if the estate plan is not fixed, the amount of damages, if any, will not be determinable until the surviving spouse's death. Id. at 346. By that time, however, the malpractice claim may be time barred. It has been suggested that courts could fashion a remedy even in the case of such speculative damages through the use of a trust created by the court to handle the alternatives. Id. at 361.

Attorney, Protect Thyself

All estate planning attorneys must be mindful of the risk of malpractice liability to nonclient beneficiaries. Even attorneys in strict privity states may represent clients outside of their home state. Moreover, considering the broad criticism of the strict privity rule, it seems that some strict privity states may eventually join the majority. Indeed, strict privity states have allowed suits against estate planning attorneys in limited circumstances. See, e. g., Estate of Arlitt, 995 S.W.2d at 713.

Of course, attorneys can protect themselves from most malpractice liability by exercising care. A startling number of estate planning malpractice cases involve very basic errors, such as having an insufficient number of witnesses sign a will or having a beneficiary witness the will. Exercising greater care in executing documents should reduce the chance of an error. Moreover, a cautious attorney might make a habit of reviewing the executed will before placing it in her will vault. If an execution error is discovered, the attorney can (sheepishly, no doubt) ask the client to re-execute the will. Embarrassing, to be sure, but a better option for both attorney and client.

To avoid more subtle errors, such as improperly drafted documents, the attorney should carefully review the documents before they are executed. Moreover, in a multi-attorney office, it would not be excessive to have a different attorney review the final draft of the documents. Unfortunately for the client, it seems that the cost of these measures must be passed on to the client.

Even a careful attorney, however, may find herself on the wrong side of a "v." simply by following a client's unusual instructions. For example, if a wealthy client declines to take advantage of the potential transfer tax savings that could be obtained by making annual exclusion gifts, beneficiaries may later claim that the attorney was negligent in failing to advise the client to make such gifts. In a similar vein, clients who are financially situated in a manner that suggests use of both spouses' unified credits (through bypass trusts, for example) or both spouses' generation-skipping transfer tax exemptions (through generation-skipping trusts) may decline to employ these techniques for personal reasons. Again, the attorney must be mindful of the risk of a later malpractice claim by nonclient beneficiaries arguing that the attorney never gave the clients adequate advice.

Similarly, some clients may make truly unusual choices. For example, one attorney tells of husband and wife clients who could not decide what to do with their property upon the death of the survivor. Because of the disagreement between the spouses, they wanted the estate to pass by intestacy upon the death of the survivor. Certainly, this unusual disposition would appear to be the result of the attorney's negligence unless the attorney can prove that the issue was fully discussed with the clients.

In these cases, the attorney should protect herself from a potential malpractice claim by confirming the client's instructions in writing. Such a "protective letter" would be powerful evidence that adequate advice was given.

Protective letters are not, however, a panacea. The protection they provide is not absolute. A letter that simply confirms the choice made by the client (for example, "As we discussed, you have decided not to use bypass trusts in your wills") invites the plaintiffs to argue that the clients would have chosen otherwise if they were fully informed. Indeed, from a strictly self-protective point of view, the attorney should draft a protective letter that urges the client, in the strongest possible language, to adopt the estate plan that is most beneficial to the beneficiaries (the likely plaintiffs). Fogel, supra, at 321. Of course, even such a strongly worded letter does not provide the attorney with absolute immunity.

Moreover, the use of protective letters is not without cost. First, there is the time spent drafting the letter. More significantly, protective letters intrude into the attorney-client relationship as an outgrowth of the attorney's duty to the beneficiaries, not the client. Certainly, most attorneys would not recommend an estate plan solely to immunize themselves from liability. But the broadsword of potential malpractice liability urges the attorney to suggest the estate plan most beneficial to the beneficiaries, regardless of the client's interests. It seems that the malpractice system should not create such a perverse incentive.

Attorneys may also consider declining clients who wish to implement an estate plan that runs a high risk of a later malpractice claim. If an attorney takes such a client, she can reduce the risk of a later claim (or, at least, the risk of a successful claim) through the methods discussed above. As mentioned, however, none of these methods is fool-proof. Moreover, estate planningmalpractice claims are rarely tried. The overwhelming majority of such cases settle. This is likely because of the public's low degree of faith in the average attorney's veracity and that the attorney's testimony will, by necessity, be self-serving. Thus, even the careful attorney with a well-documented file may find it expedient to offer a settlement payment to disgruntled beneficiaries.

Conclusion

Of the three main analyses employed by courts in estate planning legal malpractice cases, all have significant drawbacks. Lucas and similar analyses are overly broad. They create a duty in the attorney that is inconsistent with her duty to her client. The Florida-Iowa rule is less broad, but it is based on logically flawed reasoning and leads to inconsistent results. The strict privity rule, in contrast, immunizes all estate planning attorneys from malpractice claims regardless of the degree of negligence or the harm caused. A new standard is necessary. It is suggested that requiring beneficiaries to prove their claim by a clear and convincing standard of proof would strike the proper balance.

Regardless, the attorney must be mindful of her duties to nonclient beneficiaries. The best defense against malpractice liability is exercising care. Because of the breadth of the duty owed by the attorney to nonclient beneficiaries, however, even the most careful attorney may be faced with a malpractice suit. Protective letters may ameliorate the risk that such a suit would be successful. The sad fact, however, is that attorneys must decide whether accepting a client interested in a high-risk estate plan is worth it.

Bradley E.S. Fogel is an assistant professor of law at Saint Louis University School of Law in St. Louis, Missouri.

Copr. (C) 2005 West, a Thomson business. No claim to orig. U.S. govt. works. This article is reprinted with permission from West, a primary sponsor of the General Practice, Solo and Small Firm Division.

 

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