Community Property Planning Techniques for Professionals in Non-Community Property States

David W. Reinecke

VI.    Ethical Issues the Representation of Migrant Clients from Community Property States  

A.    Estate planning attorneys in common law states face unique ethical dilemmas in representing migrant married couples from community property states.

B.    Almost by definition, any act or failure to act that re-classifies property from community property to separate property or from separate property to community property benefits the material interests of one spouse to the detriment of the other.

C.    The Model Rules of Professional Conduct (MRPC) restrict the ability of an attorney to represent a client if the such representation is adverse to the interests of another client.

1.    MRPC 1.7. Conflicts of Interest: General Rule provides that:

a.    A lawyer shall not represent a client if the representation of that client will be directly adverse to another client, unless:

(1)    the lawyer reasonably believes the representation will not adversely affect the relationship with the other client; and
(2)    each client consents after consultation.

b.    A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer's responsibility to another client or by the lawyer's own interest, unless:

(1)    the lawyer reasonably believes the representation will not be adversely affected; and
(2)    each client consents after consultation.

D.    Identifying the Client

1.    Joint Representation

a.    Despite the restrictions of MRPC 1.7, the ACTEC commentary on the rule notes that "it is often appropriate for a lawyer to represent more than one member of the same family in connection with their estate plans. . . . Advising related clients who have somewhat differing goals may be consistent with their interests and the lawyer's traditional role as the lawyer for the 'family'."

b.    Re-classification or failure to re-classify, either by act or omission, may produce results far greater than contemplated by the "somewhat differing goals" language of the comment.  Nonetheless, depending on how drastic the consequences of re-classification are to each spouse, it may be appropriate for a common law state attorney to represent a migrant couple from a community property state jointly (i.e., to consider the family the client), provided:

(1)    a complete disclosure is made to the couple of the potential conflicts of interest in such representation;
(2)    the couple's fully informed consent is obtained for such representation;
(3)    the attorney is ready to withdraw from representing either or both spouses if a conflict develops.  

2.    Individual Representation

a.    Alternatively, the common law state attorney could agree to represent only one of the spouses of a migrant couple from a community property state.  Unfortunately, while this approach would have the benefit of eliminating unique conflict of interest dilemmas, it would retain the usual difficulties that can make such arrangements impractical, such as uncoordinated estate planning between the spouses.

(1)    Example: If H is your client, is it in H's best interest to permit community property to lose its identity over time so that more title-based property will be considered his separate property?

b.    The ACTEC comment to MRPC 1.7 states that "Multiple representation is also generally appropriate because the interests of the clients in cooperation, including obtaining cost effective representation and achieving common objectives, often clearly predominate over their limited inconsistent interests.  Recognition should be given to the fact that estate planning is fundamentally nonadversarial in nature and estate administration is usually nonadversarial."

c.    The common law state attorney must determine how "limited" the spouses' "inconsistent interests" are, and balance that factor against their consistent interests in cooperation and coordinated planning.

3.    Engagement Letters

a.    The identity of the client should be made clear to the client with an engagement letter.

b.    The engagement letter should fulfill the informed consent requirements of MRPC 1.7.

(1)    If the client is the family, (i.e, the husband and wife jointly), then potential conflicts of interest between the spouses should be carefully explained.

(2)    If the client is only one spouse, the engagement letter should so inform both spouses and should advise the non-client spouse to seek other counsel.     

E.    Attorney Liability

1.    What is the extent of a common law state attorney's liability to one spouse for the failure either to preserve or re-classify the character of property, either by act or omission, to the detriment of that spouse and to the benefit of the other?

a.    Example:  Does W have a cause of action against a common law state attorney who unwittingly allowed community property to lose its character so that the size of W's estate decreased over time and the size of H's estate increased over time?

(1)    The failure of an attorney to adequately research community property issues in estate planning has been held to constitute malpractice.  Smith v. Lewis, 13 Cal.3d 349, 530 P.2d 589 (1975).

(2)    The representation of both spouses in a divorce, during which one spouse waived her community property rights, has been held to constitute malpractice.  Ishmael v. Millington, 50 Cal. Rptr. 592 (Ct. App. 1966).

2.    What is the extent of a common law state attorney's liability to the beneficiaries of a spouse whose estate was decreased by such an act or omission?

3.    What is the extent of a common law state attorney's liability to either spouse if the failure to preserve or re-classify, by act or omission, increases the tax liability of the estate of the pre-deceasing spouse?  To the beneficiaries after the death of both spouses?