The Estate Analyst: Avoiding Estate Planning Malpractice

 By Robert L. Moshman, Esq.

"Fiduciary liability is a hot issue,
and estate planning is now the second or
 third highest area of new malpractice
claims--and growing rapidly."
 -Robert G. Alexander

Estate planning and estate administration practice go hand in hand. Each time an estate is planned, there is a potential estate that the practitioner may have an opportunity to serve someday. There is also a potential lawsuit if the estate does not fare well.

Let's review how an estate planner can best serve clients...while avoiding liability. Several planning scenarios that can lead to difficulty come to mind. A checklist has also been developed to avoid oversights and protect against claims.

The Modern Client

It may be going out on a limb with this prediction, but there appears to be a good chance that the Internet is here to stay. As a result, there are many people who are determined to beat the system by downloading estate planning documents that are free or extremely inexpensive.

Some of those people will turn up at an attorney's office anyway and will insist that they want a simple will, that they already have one ready, and that the attorney had better review it in a rapid and affordable way...or else!

However, even modest estates can benefit from sound estate planning, and any estate can experience setbacks that will cause beneficiaries to litigate against professional advisors and drafts people.

Beneficiaries who were not present when their family members planned estates and were not privy to what was discussed can only judge the effectiveness of the estate planner's efforts by the result. They may not know or care that the estate planner offered advice and solutions and warned of consequences that the testator chose to ignore.

A Litigious Trend

Writing in Tax Malpractice in 2002, Robert Feinschreiber and Margaret Kent noted that of 50 published cases on estate tax malpractice claims from the past 30 years, the majority of the cases were from the 1990s. These claims can be in the form of tort or contract claims and may address acts of commission and omission.

There are many planning areas that can provide opportunities for errors. An overreliance on the unlimited marital deduction is an obvious problem that bears special mention.

A number of testators prefer to have the entire estate go to the surviving spouse, and the unlimited marital deduction makes this possible without an initial transfer tax. However, the transfer of the cumulative estate of the surviving spouse could result in a heavier estate tax. Even now, during a transitional period when the estate tax is repealed, there is potential for a surviving spouse's estate to be subject to heavy transfer taxation at the state level, or at the federal level if an estate tax is reinstated.

A bypass trust--or at least a disclaimer trust--can mitigate the issue of a cumulative estate and take full advantage of the available exemptions for both spouses.

A similar issue arises when the beneficiary of an estate has creditors or qualifies for state aid. Failing to limit the beneficiary's access to an inheritance will expose the inheritance to those creditors and negate qualifications for public assistance. 

In the current context, estate planners would be wise to re-examine where the greatest tax threats originate. Currently, there is no federal estate tax, but if the estate tax is reinstated automatically due to the failure of Congress to act, the federal estate tax exclusion will be limited to $1 million, and many estates would suddenly have estate tax exposure. Other estates may have a larger exposure to state transfer taxes rather than federal estate taxes.

The biggest threat to many estates may be capital gains due to the transition to a carryover basis for appreciated assets held at death.

Avoiding Malpractice Claims

Despite the repeal of the estate tax, sound estate planning is more important than ever. Here is a modest checklist of techniques to make sure that estate planning is performed in a thorough manner and to also limit potential liability for the practitioner.

The Estate Planner's Best Practices Checklist

1.     Engagement letter. This is an opportunity to identify what planning is or is not being done.

2.     Client interview questionnaire. This is an opportunity to determine what planning areas are relevant.

3.     Asset list and family tree. These are also ways to identify relevant planning areas.

4.     Checklists. Having a standard operating procedure is one way of demonstrating that all planning areas are raised and discussed during the process.

5.     Memo to file. This is always a useful step, particularly when there is potential for liability, such as when a client insists on ignoring a planning technique, despite a likelihood of severe tax consequences. Having such a memo printed, dated, and witnessed can further provide credence to the memo.

6.     Disengagement letter. As a counterpart to the initial engagement letter that outlines the scope of services, a disengagement letter at the conclusion of the process can speak directly to those issues that arose during the process. Such a letter can state what techniques were discussed and not implemented or note that the client was informed of the consequences.

7.     Witnesses. It is not always possible to have a third party verify a private planning session. For certain estates where there are complex issues, it can be worthwhile to have a colleague sit in on a session with a client or arrange a meeting at which key issues are reviewed with professionals of various disciplines, such as accountants, insurance agents, brokers, or family planners.

8.     What is not in the plan. The focus in planning is often on the final plan that remains, how it may work, and what the potential downside could be. However, some documentation should be devoted to those planning approaches that have been discussed and rejected and why.

9.     Specific waiver. This is useful if there is a clear danger or tax exposure where the client refuses to take important advice. When this occurs and the estate planner feels strongly about it, the advice can be summarized, and the client can be asked to sign a waiver indicating that he or she has been informed and is aware of the consequences.

10.  Family conference. The malpractice lawsuit that lays dormant in a plan is not set in motion by the client, necessarily, but by his or her beneficiaries. Having them engaged in the planning process, with the permission and consent of the client, of course, may help satisfy concerns and demonstrate that the client made informed choices.