Minimizing Professional Risk in the Representation of Estates and Trusts: a Practical Guide for Iowa and Nebraska Lawyers

• Publication year: 2022

50 Creighton L. Rev. 801. MINIMIZING PROFESSIONAL RISK IN THE REPRESENTATION OF ESTATES AND TRUSTS: A PRACTICAL GUIDE FOR IOWA AND NEBRASKA LAWYERS

MINIMIZING PROFESSIONAL RISK IN THE REPRESENTATION OF ESTATES AND TRUSTS: A PRACTICAL GUIDE FOR IOWA AND NEBRASKA LAWYERS

MARK R. GRAY(fn*)

I. INTRODUCTION

The practice area with the highest professional liability risk is Wills, Trusts, and Estates.(fn1) In fact, the claims frequency in this area has nearly doubled between 2007 and 2014.(fn2) This should be no surprise given the aging of the "baby-boomers." In addition, in Iowa and Nebraska alone, the amount of wealth now being transferred, and to be transferred over the next fifty years via wills, trusts, and estates, is estimated to be over a trillion dollars.(fn3) A complex tax system and the various tax implications in the transfer of that much wealth also increase the risk of liability. These factors, considered alone, might not explain the growth in liability claims, but when one considers these factors in conjunction with the propensity of family members and other beneficiaries to sue each other and their attorneys, there is reason for concern. Additionally, the risk is not limited to malpractice claims, because the allegation of an ethics violation is equally great.(fn4)

In order to minimize professional risk in this area, perhaps the easiest advice to follow is "don't dabble."(fn5) However, if one already is or becomes comprehensively involved in this field, the advice becomes more complicated. Part of the difficulty is that there is significant disagreement over the most fundamental question we must ask our-selves-namely, who is the client?

II. WHO IS THE CLIENT: AN ESTATE OR TRUST AS AN ENTITY

A. What's the Big Deal?

Shouldn't any ethics class, article, or presentation start with a simple question: who is the client? Once one understands the answer to this question, the answers to other troublesome issues almost seem to flow naturally. However, in the area of estates and trusts, there are at least four possible answers:

* The estate or trust as an entity;

* The fiduciary of the estate or trust, as a fiduciary;

* The fiduciary in his or her individual capacity; or

* The estate or trust beneficiary or beneficiaries in their individual capacities.

The issue is further complicated by the fact that various jurisdictions follow different rules. For example, this Article will show the rules and the courts in Iowa strongly indicate an estate or trust will be treated like an entity. Nebraska law, on the other hand, clearly states an estate or trust is not an entity.

Whether the estate or trust is treated like an entity will often dictate an answer to the question, who is the client? There are many guiding principles for the representation of a corporation or other recognized entities. However, deciding whether an estate or trust is one of those entities, or like one of those entities, is not easy.

B. The American College of Trust and Estate Counsel

The American College of Trust and Estate Counsel's ("ACTEC") commentaries for the Model Rules of Professional Conduct ("Model Rules") support the theory that a lawyer represents the fiduciary of an estate or trust rather than the estate or trust as an entity. In particular, the commentaries advise "the lawyer for the fiduciary should inform the beneficiaries that the lawyer has been retained by the fiduciary regarding the fiduciary estate and that the fiduciary is the lawyer's client."(fn6) Although the ACTEC annotations do not include an annotation for Nebraska under Rule 1.2, the Nebraska Supreme Court has previously held that an attorney for an estate represents the fiduciary, not the estate as an entity.(fn7) Thus, Nebraska follows the majority rule under the ACTEC commentaries.

However, "[w]hile the Commentaries are intended to provide general guidance, ACTEC recognizes and respects the wide variation in the rules, decisions, and ethics opinions adopted by the several jurisdictions with respect to many of these subjects."(fn8) The ACTEC Commentaries explain:

If a lawyer is retained to represent a fiduciary generally with respect to an estate, the lawyer's services are in furtherance of the fulfillment of the client's fiduciary responsibilities and not the client's individual goals. The ultimate objective of the engagement is to assist the client in properly administering the fiduciary estate for the benefit of the beneficiaries. Confirmation of the fiduciary capacity in which the client is engaging the lawyer is appropriate because of the priority of the client's duties to the beneficiaries. The nature of the relationship is also suggested by the fact that the fiduciary and the lawyer for the fiduciary are both compensated from the fiduciary estate.(fn9)

Though the Commentaries may be relevant for the majority of jurisdictions, the annotation to the Commentaries for Model Rule 1.2 for Iowa presents evidence that Iowa does not follow the majority with regard to this issue.

Schmitz v. Crotty(fn10). is the source for the annotation for Iowa's Model Rule 1.2. In this legal malpractice action, the Iowa Supreme Court found that an attorney retained to handle a decedent's estate had breached the duty of care he owed to the estate's beneficiaries.(fn11) Crotty was alleged to have negligently prepared the estate's death tax returns and negligently identified and reported certain real estate in the returns. In other words, the Annotation for Model Rule 1.2 suggests Iowa has separated itself from the majority of Model Rule jurisdictions that hold a lawyer represents the fiduciary, not the estate.

C. The Rules Provide Little Guidance

The Model Rules themselves are confusing, even contradictory. Model Rule 1.13 makes clear that "[a] lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents."(fn12) This rule recognizes corporations are "inanimate and can only act through agents."(fn13) This begs the question, why should an estate or trust be treated differently than "an organization"? The Iowa Probate Code(fn14). is likewise unclear, even contradictory. For example, section 633.82 of the Iowa Probate Code describes the attorney as "employed by the fiduciary to assist in the administration of the estate."(fn15) However, section 633.198 of the Iowa Code, pertaining to fees, refers to the attorney as the "personal representative's attorney."(fn16)

Model Rule 1.7 confirms the confusion in this area and states that "[u]nder one view, the client is the fiduciary; under another view the client is the estate or trust, including its beneficiaries."(fn17)

In order to address the conflicting rules, one must understand how various rules of a particular jurisdiction will be applied. How the rules and courts define the duty of the lawyer will provide guidance. The key duties of the lawyer in the estates and trusts field are discussed below.

III. DUTY OF THE LAWYER

To determine an answer to the fundamental question, "who is the client?" it is helpful to understand how the rules and courts have described the duties of the lawyer. Although the rules and courts of each jurisdiction may not expressly dictate whom the attorney represents in the context of an estate or trust, some at least indicate the answer. There are several factors one can use to help with the analysis.

A. Duty of Allegiance to "Similar Entity"

A lawyer employed by a corporation or similar entity owes allegiance to the entity and not to an officer, representative or other person.(fn18) In representing the entity, a lawyer should keep paramount its interests and the lawyer's professional judgment should not be influenced by the personal desires of any person in the organization. Therefore, if state law treats estates and trusts like an entity, the lawyer has significant ethical risk and/or liability by not following Model Rule 1.13 (duty of allegiance to the entity). In other words, if the rules and courts of a jurisdiction treat estates and trusts like entities, the lawyer's duty is owed to the estate or trust, not the fiduciary (as an agent). On the other hand, if a jurisdiction does not treat an estate or trust like an entity, it should be easier to conclude that the lawyer represents the fiduciary; the lawyer's duties flow to the fiduciary not the estate or trust (as an entity). The following analysis strongly suggests Iowa treats estates and trusts like an entity and that Nebraska treats estates and trusts as a non-entity to which the lawyer owes no duties.

The Iowa Supreme Court explained in Ruden v. Jenk(fn19). that "although the estate attorney is hired by an executor or administrator, his obligations, like those of the fiduciary, extend to the estate and all other distributees."(fn20) In this malpractice case, the court found the attorney, Jenk, was hired to act as attorney for the estate and had a duty to advise the administrators relative to that estate. Although Jenk was ultimately found not liable, the court stated the rule that "[a]n attorney designated for an estate is charged with the duty of . . . overseeing administration of the estate."(fn21) This language indicates the duty is upon the lawyer to oversee the estate itself, and not to merely advise the fiduciary.

The Nebraska Supreme Court, on the other hand, has held that "[a]ttorneys represent people. There...