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Stephanie B. Casteel is a partner in tax in the Atlanta office of King & Spalding LLP, vice-chair of the Trust & Estate Division Charitable Planning Committee, and an associate articles editor of Probate & Property. Letitia A. McDonald is a partner in business litigation in the Atlanta office of King & Spalding LLP. Jennifer D. Odom and Nicole J. Wade are partners in fiduciary litigation in the Atlanta office of Powell Goldstein LLP.
The number of lawsuits against estate planning attorneys has increased over the last several years. Statistics indicate that the estate planning and probate area is the third largest category of malpractice claims in the legal profession. The most recent American Bar Association Standing Committee on Lawyers' Professional Liability study, Profile of Legal Malpractice Claims 2000-2003 (2005), found that, although the number of claims filed in most areas of the law remained stable, the frequency of probate and trust claims had risen since the ABA's previous study.
The liability of an estate planning attorney for breach of duty or malpractice historically was predicated on privity between the attorney and his or her client. Although a client could bring an action against the attorney, a third party could not. Thus, if an error of the estate planning attorney were not discovered until after the death of the testator, which often was the case, there was no redress for the harm that may have occurred to the testator's heirs or beneficiaries. If the estate were harmed, however, presumably the executor could bring claims against the estate planning attorney.
Over time, this rule of strict privity has eroded in all but a handful of states. In the majority of states, a beneficiary harmed by an attorney's negligence may bring a malpractice claim against the attorney, even though the beneficiary was not the attorney's client. Yet there is no definitive standard for when an estate planning practitioner may be liable to a third-party beneficiary or heir. This article will outline the rule of privity and the theories supporting this rule, explain the basis on which most courts allow actions against estate planning attorneys by third parties, generally describe the causes of action on which breach of duty or malpractice cases have been based, and suggest why malpractice claims against estate planning attorneys are increasing. It then will suggest practical advice for the estate planning attorney to avoid potential liability for breach of duty or malpractice.
Liability Based on Privity
The issue raised in many early cases was whether the lack of privity barred claims for malpractice by a beneficiary against the attorney who drafted the decedent's will. Historically, attorneys were rarely held liable to beneficiaries or heirs under wills because of the requirement of strict privity. Over the past 50 years, however, a majority of courts have rejected privity and have allowed claims of malpractice based on a negligence theory, a breach of contract theory, or both. As stated above, only a handful of states, including Alabama, Arkansas, Ohio, and Virginia, continue to mandate strict privity as a requirement for a lawsuit by a beneficiary or heir against an estate planning attorney. Texas recently reaffirmed its strict privity requirement but now recognizes that a malpractice case alleging a mistake leading to adverse tax consequences survives the decedent and that in these limited circumstances such claims may be brought by the executor. See Belt v. Oppenheimer, Blend, Harrison & Tate, Inc., 192 S.W.3d 780, 785-86 ( Tex. 2006). Some states allow a beneficiary to bring a malpractice action but only when the beneficiary can show that the will on its face does not effectuate the testator's intent. Some jurisdictions allow an action against an attorney by a beneficiary based either on a theory of contract or tort, but not both. To the extent that courts have restricted or prohibited actions by third parties against estate planning attorneys, they generally find that allowing unrestricted malpractice suits would impose unlimited liability on attorneys, would create potential conflicts of interest in violation of the attorney's duties to his or her clients, and, to a lesser extent, would result in the disclosure of confidential information. See Martin D. Begleiter, The Gambler Breaks Even: Legal Malpractice in Complicated Estate Planning Cases, 20 Ga. St. U. L. Rev. 277 (2003-04).
Policy Arguments in Favor of Limiting Liability
A primary argument for limiting the potential liability of the estate planning attorney is the protection of the attorney-client relationship. If an attorney is subject to liability to disappointed beneficiaries or heirs, a potential conflict of interest exists that will interfere with the attorney's ability to fulfill his or her duty of loyalty to the client. For example, children may wish for their parents to create bypass and marital trusts to save estate tax in order to preserve more of the estate for their benefit. Yet the parents may have nontax reasons, such as flexibility and control, to structure their estate planning in a manner that is less tax efficient. The concern is the attorney's potential liability not only to intended beneficiaries and heirs but also to an unlimited and unknown number of potential plaintiffs who may claim to have been intended beneficiaries. Without limiting such actions, estate planning attorneys would be, in effect, subject to unlimited liability. Thus, while some courts have allowed actions by those claiming to be intended beneficiaries, other courts have allowed actions only by beneficiaries specifically identified in an invalid will or trust. Even in such cases, however, an argument exists that a testator's true intent is unknown. For example, as explained by the Texas Supreme Court in Barcelo v. Elliott, 923 S.W.2d 575 ( Tex. 1996), it is possible that, if the estate planning documents were not timely executed before the decedent's death, the attorney negligently delayed the signing. It is also possible, however, that the testator himself or herself postponed execution because of second thoughts regarding the proposed distribution scheme. If an estate planning attorney is concerned that unexecuted documents could lead him or her to malpractice liability to the contemplated beneficiaries if the testator unexpectedly dies, the attorney may feel it necessary to rush his or her clients into making decisions and hurriedly completing their estate planning. In this manner, an attorney's legal representation will be affected because the attorney will want to respond not only to the needs and wants of his or her clients but also to the potential expectations of the clients' beneficiaries. Thus, third-party liability of any kind causes potential conflicts of interest for the attorney as between his or her client and other parties.
A second argument for limited potential liability is the necessity not to place the attorney in a position in which he or she would have to reveal a client's confidence in a subsequent malpractice action asserted by a nonclient beneficiary. For example, a testator may reveal hurtful reasons why a child is being disinherited, which the attorney would have to reveal if sued by such child after the testator's death. A client may be less inclined to confide in his attorney, which would harm the attorney-client relationship, if the client fears later disclosure in defense of a lawsuit.
The Majority Rule
Many courts, however, have rejected the arguments against limiting an estate planning attorney's liability to third parties. The primary reason for not precluding liability of third parties may be that, as stated by two justices dissenting in Barcelo, unless a third party has the right to sue a lawyer for breach of duty or malpractice, no one will have a right to bring a claim for the damage. Even if an attorney is negligent in his planning, if the defect is not discovered until after the testator's death, which often is the case, the client is no longer alive to sue. Although the testator's estate may sue, frequently the estate itself may have suffered no harm, and the recovery may be limited to the relatively minor cost of the estate planning because a discovery of the error while the testator was alive would have required only that the testator revise the estate plan. Allowing a third party to sue provides accountability and thus an incentive for lawyers to use greater care in estate planning.
Furthermore, to specifically refute the arguments for strict privity, an argument can be made that potential liability would not expose an estate planning attorney to the general public and an unlimited number of plaintiffs, but only to a limited, foreseeable class. And even as to this class, for a third party to prevail he or she would have to show that the attorney breached a duty owed to the decedent. Thus, there is no duty to a third party that is conflicting. As to the argument that the hypothetical fact pattern could reflect either negligence on the part of the attorney or a testator's intent, these matters are subject to proof. As in any other type of case, the third-party plaintiff would have the burden of proving a breach of duty to the decedent. Finally, because a decedent's estate plan becomes known by his beneficiaries and heirs after his or her death, certainly the decedent understands and expects that certain facts previously held in confidence will be revealed at that time.
Supporting the arguments against strict privity, courts in a majority of states allow malpractice actions brought by third parties to proceed against estate planning attorneys. In determining whether potential liability of an estate planning attorney to a third party is appropriate, the rule cited by most states is expressed in Lucas v. Hamm, 364 P.2d 685, 686-87 (Cal. 1961), as follows:
[T]he determination of whether in a specific case the defendant will be held liable to a third person not in privity is a matter of policy and involves the balancing of various factors, among which are the extent to which the transaction was intended to affect the plaintiff, the forseeability 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.
Other courts also rely on third-party beneficiary contract law to allow contractual recovery by a third party whose inheritance allegedly was damaged in an estate plan. Claims for breach of duty brought by a decedent's estate are recognized in most states, although such claims typically arise only when a failure on the part of the attorney results in additional or unnecessary tax liability. Most recently, a few courts have become receptive to an expanded definition of a “confidential relationship,” specifically recognizing a duty of the estate planning attorney to a person other than his or her client. Thus, the standard of liability of an estate planning attorney to a third party is not clearly defined. Because such liability is a real risk for an estate planning attorney, however, he or she must be careful to take steps to reduce the likelihood of a malpractice claim.
Duty of Care
The standard of care for an estate planning attorney is that the attorney should exercise the skill and knowledge ordinarily possessed by attorneys under similar circumstances. In addition, if a legal area requires expertise, which likely is true for the estate planning attorney, he or she is held to a more stringent standard. Although the Model Code of Professional Responsibility and the Model Rules of Professional Conduct set forth ethical rules to assist the attorney in his or her law practice, these rules are general and do not address problems that arise in specific practice areas. As one commentator has observed, the rules do little to instruct the estate planner on the ethical guidelines pertaining to this practice area. Instead, they assume the existence of either an active transaction or litigation between two parties. They also assume that the identity and interests of each client are clear. For an estate planning attorney, these assumptions are rarely correct. Instead, the estate planning attorney “is frequently found in a thicket of multiple representations where the conflicts between the various parties' interests are subtle, pervasive, indirect, continuously shifting and, in many instances, even difficult to recognize.” Randall Roth, Avoiding Ethical Dilemmas, SG062 ALI-ABA 191, 195 (2002). Thus, the duties of the estate planning attorney are defined in many states only by opinions rendered in malpractice actions, which provide incomplete and insufficient guidance regarding the ethical duties of lawyers. See ACTEC Commentaries on the Model Rules of Professional Conduct 7 (3d ed. 1999).
Trend of Increased Litigation
So where does that leave the estate planning attorney? The requirement of privity has eroded, the standard for liability is ill-defined, and the specific duties are not well elucidated. Yet the number of lawsuits against estate planning attorneys is increasing. And this trend is expected to continue, especially in light of the wealth that is currently being transferred and will increasingly continue to be transferred from the baby boom generation to successive generations.
Estate planning attorneys have been sued for a number of alleged maladies. Specific causes of action have included:
Most of these causes of action are based on the tort of negligence and typically include breach of fiduciary duty, professional malpractice, infliction of emotional distress, fraud, breach of good faith and fair dealing, and/or negligent misrepresentation. But other, more novel causes of action also arise. Emerging claims include “constructive trust” claims, aiding and abetting breach of fiduciary duty, and tortious interference with the expectancy of inheritance.
There are a number of explanations for why litigation in the estate planning area is fertile. See, e.g., Jacob L. Todres, Recent Tax Malpractice Developments in the Estate and Gift Tax Area, 83 Taxes—The Tax Magazine No. 39, at 42 (Oct. 2005). First, the area is a technical and highly intricate area in which it is easy for the estate planning attorney to make mistakes. Second, the plaintiffs, usually beneficiaries or heirs of the attorney's client, often have no personal relationship with the attorney. Third, heirs or beneficiaries who feel that they have not received that to which they are entitled, or who are financially disappointed, are psychologically hurt and are often dealing with deep-seated family issues that were not dealt with before the decedent's death. This anger and frustration can finally be vented in a lawsuit against the family's advisors, who may incorrectly believe that the advisor guided the decedent's thinking in devising his or her estate plan.
Moreover, changes in the demography of the estate planner's client base may contribute to increased lawsuits against the estate planning attorney. Often a client will have had a prior marriage and have children from that earlier marriage. Clients are more transient and may have community property considerations even if no longer residing in a community property state. Younger generations may be more liberal and adopt lifestyles disapproved of by their more traditional parents. Pre- and post-nuptial agreements containing testamentary provisions are more common. Clients are living longer, increasing the potential for claims of undue influence, testamentary capacity, or fraud. Added to these types of factual circumstances are tax provisions and estate planning formulas that are highly technical and intricate. The result is an area fertile for malpractice actions. Thus, malpractice is a significant consideration in estate planning, and the estate planning attorney must be diligent in his or her practice.
Tips for Avoiding Malpractice Claims
Although it is impossible to prevent being sued for malpractice, certain steps can help a practitioner make it less likely that he or she will be sued and help ensure a favorable result in the event of a lawsuit.
Be Specific in the Engagement Letter
It is always important for attorneys to be clear in their engagement letters about whom they represent and the scope of that representation, and the estate planning context is no exception. In those few states that still require privity, the identity of the client is determinative of who can file suit for malpractice. Even in those states that have relaxed privity requirements, the fact that the engagement was limited to certain individuals can be persuasive evidence. Thus, the engagement letter should be clear that you are representing only those individuals for whom you are providing estate planning advice and that you are not representing any other individuals or entities—including any third parties. Moreover, consider whether the engagement letter should disclaim any responsibility for advising the testator of the tax effects of the testator's estate plan on other beneficiaries. It should also be clear about the scope of the representation and that you are providing only estate planning advice and not other legal services. In the case of joint representation, such as a married couple, the engagement letter should also be clear about the potential for conflict and the procedure that will be followed in the event of a conflict.
Be Consistent with the Engagement Letter
As important as it is to be clear in the engagement letter about whom you represent, it is equally important that your actions be consistent with the engagement letter. Even if the engagement letter provides that you are representing only the parents, if you provide legal advice to one or more of the children, then you might be deemed to have created a lawyer-client relationship with those children. Such a relationship could be created either during the planning stage or after the death of the client. Thus, it is important when dealing with heirs or beneficiaries to always be clear with them that you are not their lawyer, and it is important not to provide them with any legal advice. This is particularly true during the estate planning phase in the event that the estate planning might be challenged by another beneficiary or an heir—it is important for the attorney to be independent and to represent only the testator.
It is also important to be consistent with the scope of representation as outlined in the engagement letter. If, for example, as part of the representation you provide advice about various aspects of corporate structure for a company owned in whole or in part by the clients, you could be deemed to have taken on the responsibility for providing corporate representation to that company. Such an action could result in litigation in the event the company is mismanaged or if the client's estate planning adversely affects the company.
Recommend Alternative Counsel or Other Advisors When Appropriate
If a conflict does arise between joint clients, or if an heir or beneficiary does need legal advice, it is important to recommend that the client or beneficiary engage his or her own counsel. By doing so, you can ensure that you are not accused of a conflict of interest or violation of the duty of loyalty. Thus, if a married client advises you that he or she has no intention of abiding by the joint plan being created in the event he or she is the surviving spouse, then you have an obligation to disclose the conflict and recommend separate counsel for the clients. The attorney must be careful to follow applicable ethical guidelines when he or she obtains information from one joint client that could be considered adverse to the other client.
It also may be necessary to engage the assistance of additional expertise. For example, if the client has foreign assets, and you are not an expert on the tax consequences of those assets, you should obtain third-party counsel about tax consequences of the advice. The same would be true if the attorney were setting up vehicles with which he or she was not familiar. It is important to make sure that the attorney provides advice only in those areas in which he or she is qualified and that the attorney engages expert assistance when necessary.
Document Options Rejected by the Client
It is important to document any advice that is not followed by the client or any decisions by the client that are unusual or atypical. For example, many legal malpractice claims are based on a failure of the estate plan to maximize estate tax savings. Many clients, however, might choose not to maximize tax savings in order to attain other objectives, such as retaining more control over their funds. In such situations, the attorney should carefully document in writing the advice that he or she provides the client for increasing tax savings, the fact that the client rejected the advice, and the reason the client rejected it. If possible, the client should sign this document, confirming that the advice was rejected. Such a document can be very helpful in defending against a malpractice claim and can even discourage lawsuits in the first place, if the personal representative and/or beneficiaries understand that the increased taxes were caused by the testator's deliberate decision and not the attorney's faulty advice.
The attorney also should document in the will any decisions that are unusual, such as the decision to omit a natural object of the testator's bounty. If the client decides to disinherit a child, for example, a provision should be put in the will that the client considered the disinherited child, that the client made a deliberate decision to disinherit him or her, and the reason for the disinheritance. To further insulate the attorney from a post-mortem attack, the attorney should discuss with the client the idea of an in terrorem clause to prevent challenges. Again, the will itself will help protect the attorney from malpractice claims and might also protect the integrity of the estate plan by preventing subsequent challenges to the documents by the omitted child.
Have the Client Execute a Questionnaire
To ward off any challenge that you failed to investigate the nature of the client's assets or the identity of any heirs, consider having the client fill out a questionnaire with information concerning these categories. The client may be skittish about giving you any great detail about his or her assets, but at least a document is in the file that shows the right questions were asked. Also be sure and document for the file any perceived hesitation on the client's part to give any of the requested information.
Calendar or Tickler Any Deadlines
Despite the best intentions of the estate planning bar, lawsuits concerning missed deadlines continue to be brought. Be sure and calendar or tickler any important deadlines—even those that may affect the nonclient beneficiary (such as deadlines for filing disclaimers).
Be Careful in the Execution of Documents
Although the execution of estate planning documents seems very simple, it is a crucial component that cannot be discounted and about which the attorney cannot become lax. Attorneys must always remain vigilant in the execution of documents to ensure that all requirements are strictly followed, including the presence of witnesses, execution by proper witnesses, and execution in front of the proper parties. It would be a good idea to have a checklist to follow to make sure that all formalities are observed in the execution of estate planning documents, and the attorney should always be present for such execution. After the execution, it is a good idea to review the documents one final time to ensure that all legal requirements have been satisfied. Finally, although clients frequently desire to hurry through the execution of their documents (if anything, to cut down on the cost of the attorney's fees), it is wise to go through each section of the estate planning document and provide an opportunity for the client to ask questions about the meaning of and effect of each provision. You should then document for the file that you went through this process. This measure has the added benefit of protecting the client's estate against claims of lack of testamentary capacity or other defect.
Historically, estate planning attorneys have been more immune than other types of attorneys from claims of malpractice because the clients with whom the estate planning attorneys were in privity were often dead before a cause of action was discovered. Although the doctrine of strict privity has eroded over time, and an overwhelming majority of states now recognize actions against the estate planning attorney by third-party beneficiaries or heirs, the ABA Profile of Legal Malpractice Claims, cited above, reports a total of 68% of all probate and trust cases result in no payment to the plaintiff. There is no doubt, however, that the trend indicates increased malpractice claims in this area. An estate planning attorney must be diligent in taking steps in his or her practice to avoid successful malpractice claims.