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Westchester County Bar Association – Trusts & Estates Section

Ancillary Documents – Power of Attorney, Health Care Proxy and Living Will; and Ethical Issues in Estate Planning – November 24, 2003

I. POWER OF ATTORNEY, HEALTH CARE PROXY AND LIVING WILL – SEE OUTLINE FOR MAGDALEN GAYNOR

II. ETHICAL ISSUES IN ESTATE PLANNING

A. Introduction – Source Materials

· Introduction:

· Our goal: to try to raise some issues for Trusts and Estate lawyers so we are better able to work with the ethics rules and to become effective lawyers for our clients

· What is professionalism? How does a lawyer maintain professionalism and a successful business?

· What are lawyers selling? Knowledge, competence and experience in solving a client’s problem?

· In the wake of the internet, how can you, the lawyer, compete in this market place? How do you compete in market in which, following a community based seminar on estate planning, someone asks you if you could recommend (1) books or periodicals on estate planning or (2) good web sites?

· Have you ever talked to anyone who attended a “lawyer bashing” revocable trust seminar?

· Canons of Ethics: Code of Professional Responsibility

· Ethical Considerations (ECs) (aspirational standards)

· Disciplinary Rules (DRs) (black letter rules)

· American Bar Association’s Model Rules of Professional Conduct (adopted by 4/5ths of states) (black letter rules, with commentary)

· Bar Association Opinions, including:

· New York State Bar Association Committee on Professional Ethics

· Association of the Bar of the City of New York

· New York County Lawyers Association

· Court decisions

B. Canons of Ethics; Ethical Considerations and Disciplinary Rules

Introduction: Take us through the Canons of Ethics and to focus on particular ECs and DRs relevant to trusts and estates practice and estate planning

1. Attorney-Client Privilege and Attorney-Fiduciary Relationship

a. Intro on Attorney-Client Privilege

b. Discussion of fiduciary exception rule

c. Multiple representation issue

d. Special problems, such as fiduciary options on new Unitrust statute and power to adjust in prudent investor statute

Canon 4: Lawyer Should Preserve the Confidences and Secrets of a Client.

EC 4-1: Both the fiduciary relationship existing between lawyer and client and the proper functioning of the legal system require the preservation by the lawyer of confidences and secrets of one who has employed or sought to employ the lawyer. A client must feel free to discuss anything with his or her lawyer and a lawyer must be equally free to obtain information beyond that volunteered by the client. * * * *

DR 4-101: Preservation of Confidences and Secrets of a Client

* * *

B. Except when permitted under DR 4-101(C), a lawyer shall not knowingly:

1. Reveal a confidence or secret of a client.

* * *

C. A lawyer may reveal:

* * *

4. Confidences or secrets necessary to establish or collect the lawyer’s fee or to defend the lawyer or his or her employees or associates against an accusation or wrongful conduct.

CPLR 4503(a) “[U]nless the client waives the privilege, an attorney . . . shall not disclose, or be allowed to disclose such communication . . . .”

CPLR 4503(b) “in any action involving the probate, validity or construction of a will, an attorney or his employee shall be required to disclose information as to the preparation, execution or revocation of any will or other relevant instrument, but he shall not be allowed to disclose any communication privileged under subdivision (a) which would tend to disgrace the memory of the decedent.”

a. Attorney Client Privilege – exceptions:

1. consent;

2. law/court order;

3. crime;

4. fee collection/malpractice

b. Attorney Client Privilege – outside if:

1. no legal representation;

2. presence of third party;

3. client waiver

c. Attorney Client Privilege

1. does not protect the facts, only the communication;

2. retainer agreement and terms:

d. Attorney Client Privilege – for joint clients, there is no privilege between them; only for third parties:

e. Attorney Client Privilege – death of client

1. privilege survives and cannot be waived by executor;

2. survives, except for will contest/will construction;

3. even in will contest, can’t “tend to disgrace the memory of the decedent”;

f. Attorney Client Privilege – codified in CPLR 4503(a)

· Estate Adminstration/Litigation

· Reconciling the traditional attorney-client privilege rules with the attorney-client relationship between a lawyer and a fiduciary of an estate. What is different about trusts and estates clients? In theory, estate planning clients are no different than any other client whose confidence we must uphold. But see CPLR 4503(b) (will exception) (“tend to disgrace” the decedent’s memory; concerned about how the decedent will be seen)

· After the client’s death, who does the lawyer represent:

· the estate?

· the executor(s)?

· specific legatees of tangible personal property

· cash or pecuniary legatees

· the independent trustee of residuary trust?

· permissible lifetime beneficiaries of residuary trust?

· remainderman of residuary trust?

· the outright residuary beneficiaries?

· all of the above?

· In Hoopes v. Carota, 74 N.Y.2d 716 (1989), the Court of Appeals held that, since the trustees of a trust were acting in a fiduciary capacity, the privilege is not absolute and may be set aside on a showing of “good cause” by the beneficiaries. The Court also noted that “some courts have held that the privilege does not attach at all.” Id. at 717. The Court upheld the Appellate Division’s finding of “good cause” and concluded that “the communications are not privileged in any event.” Id. But see AMBAC Indemnity Corp. v. Bankers Trust Co., 151 Misc. 2d 204 (Sup. Ct., N.Y. Co. 1991) (good cause not shown for indentured trustee)

· What does it mean to “act in a fiduciary capacity” Is it different to “act in a representative capacity”? No; you are acting “in behalf” of someone else – the beneficiaries.

· Contrast: Fiduciary’s Duty of Loyalty to Beneficiaries v. Lawyer’s Duty of Loyalty to His/Her Client

· In Matter of Baker, 139 Misc. 2d 573 (Surr. Ct., Nassau Co. 1988), Surrogate Radigan, after analyzing the various cases and issues as to whether a privilege can be asserted by a fiduciary of an estate, compelled the fiduciary to turn over a sensitive document in the estate that pertained to distributions from the estate. Surrogate Radigan held as follows:

This court is of the opinion that a fiduciary has an obligation to disclose the advice of counsel with respect to matters affecting the administration of the estate (2A Scott, Trusts § 173 [4^th ed]). This is subject to the limitation that the fiduciary should have the protection of the privilege when litigation has commenced or is anticipated (2A Scott, Trusts § 173 [4^th ed]); see, In re LTV Sec. Litig., 89 FRD 595). Certainly, the fiduciary is entitled to the benefit of counsel in the preparation of his defense in a contested accounting or other proceeding.

Id. at 577 (Emphasis Supplied)

· The New Law:

· Amended CPLR 4513 (“reinstates” attorney-client privilege by defining the beneficiaries of estate as not being “clients”)

· Is there risk in asserting privilege for trusts and estates lawyers whose fee applications may need to be determined by the Court; and the lawyer is considered, more than in other areas, to be “officers of the Court”?

2. Bequests or Fiduciary Appointment to Person in a Confidential Relationship

Canon 9: A Lawyer Should Avoid Even the Appearance of Professional Impropriety.

· The Putnam rule: Almost needs no introduction: It started with an attorney, in which, in 1931, the Court of Appeals held that, in the absence of an acceptable explanation, a jury would be justified in drawing an inference of undue influence as to a bequest drafted by the drafting attorney to the drafting attorney. Court advised: have someone else draw the Will under these circumstances.

· Hearing v. Affidavit

· Even when attorney did not draft, court can hold hearing

· Bare minimum Court will require an affidavit explaining circumstances of the bequest to attorney

· Usually Court renders decision

· Putnam rule has been widely expanded to apply to just about anyone with a confidential relationship able to exercise influence.

· Examples: doctors, dentists, nurses, clergyman, accountants, secretary and relatives of attorney, charity created by attorney

· Ethical derivation of Putnam rule:

· Canon 5: must exercise independent judgment; and by accepting a gift, attorney is susceptible to charge that he or she unduly influenced or overreached the client

· Proposed ABA rule bars lawyer from preparing an instrument providing for gift, unless attorney is related to donee

· Ethical Considerations

· EC 5-6: Do not influence a client to name you as fiduciary; avoid the appearance of impropriety.

· See NYSBA Opinion #481 (3/28/78): Opinion holds that a lawyer offering to serve as executor is not improper, per se, but you must exercise great caution. Initially, the opinion stresses the propriety of the drafter using his or her influence in being named as an executor. However, the opinion found a substantial exception as follows:

There may be circumstances which can justify a lawyer’s conduct in offering his services as executor. Principally, those circumstances must be such as support a firm conviction that the client would request his lawyer to serve in that capacity if he were aware of the lawyer’s willingness to accept the responsibility. Not only should the lawyer have enjoyed a long-standing relationship with the client, but it must also appear that the client is experiencing difficulty in selecting other persons qualified and competent to serve as executor.

(Emphasis Supplied)

· What if your don’t have the relationship? Can you still accept an appointment? Yes, in my judgment, if the client wants you, an independent lawyer (who was well recommended to him/her) to handle the estate

· Sanctions can be applied if you are not careful and follow the letter and spirit of the ethical considerations

· Weinstock case: attorney fiduciary is denied letters in probate proceeding

· Harris permits Weinstock objection in accounting proceeding

· Courts take action

· Denial of letters

· Denial of commissions

· Limitation to one commission where multiple fiduciaries

· Possible disciplinary ruling

· Relationship between attorney fees and commissions

· SCPA 2307-a: Absence compliance with the statute’s disclosure forms to be executed by client - client agrees that you are entitled to full commissions and full fees - then commission is one-half of statutory commission

· If, however, will is made prior to statute - 12/31/95, Court will examine on a case-by-case basis. However, as time passes, the window is virtually completely shut by the Court.

· Consider attorney-trustee: Advice: broaden disclosure form for trustee, whether attorney serves as primary or ultimate alternate fiduciary

Attorney fiduciary can act as witness to will, but beware: if there is will contest, perhaps the attorney fiduciary appointment may prove to be fodder for objectant

(The paragraphs below are reprinted with permission from McQuaid, Streng and LaPiana, NEW YORK WILLS AND TRUSTS (3rd Ed. Lexis, 1998))

Persons who are in a confidential relationship to a testator, and who receive legacies or other benefits under a will, have a special burden to explain the circumstances leading to such benefit. The principle leading to this rule was enunciated by the Court of Appeals in 1931 in Matter of Putnam,21 in which the Court said: "Attorneys for clients who intend to leave them or their families a bequest would do well to have the will drawn by some other lawyer. Any suspicion which may arise of improper influence used under the cover of the confidential relationship may thus be avoided."22

Under the Putnam Rule, a legacy in favor of a person who is in a confidential relationship to the testator may be excised from a will if the Surrogate finds that the legacy was the product of undue influence. While the Putnam Rule is an offspring of the objection of undue influence,23 the Surrogate can allow the probate of the will but expunge the legacy.24 In applying the rule, the court either requires the submission of an affidavit or schedules a hearing to explore the circumstances that led to the legacy.

The Putnam Rule has its most obvious application to an attorney- drafter, but it has been applied to individuals who share different confidential relationships with the testator, including, but not limited to, relatives of the attorney-drafter,25 doctors,26 nurses,27 nursing home personnel,28 accountants and financial advisors,29 and clergy.30 If another attorney is selected to prepare a will in which the testator's primary attorney, or a member of his or her family, is a beneficiary, the attorney who is selected must be independent of the control or interest of the initial attorney.31

In a developing area of the law, the Putnam Rule has been used by Surrogates to review the propriety of the designation of an attorney- drafter as an executor or trustee under the will. In Matter of Weinstock,32 the Court of Appeals reinstated a Surrogate's decree in which letters testamentary had been denied to attorneys, a father and a son, who were named as executors in a will prepared by the father, but who had had no previous professional relationship with the testator. Noting that the attorneys were aware of the testator's intention to avoid executor's commissions, the Court held that the testator's confidential relationship with the attorneys required that the attorneys disclose the effect of a joint designation to the testator.33

The designation of attorneys as fiduciaries, which is illustrated by Weinstock , has led to close supervision by Surrogate's Courts over compensation to the attorney-fiduciary for both legal services and statutory commissions. In Matter of Laflin ,34 the Appellate Division, Second Department, held that objections to multiple executors' commissions may be made by the beneficiaries in the final accounting proceeding. And in view of the "fact that an attorney draftsman of a will is uniquely situated to selfishly gain additional employment"35 as counsel for a testator's estate, Surrogates generally are giving strict scrutiny to attorney fees for the attorney-fiduciary.36

3. Representing Married Couples or Other Joint Representation

Canon 5: A Lawyer Should Exercise Independent Professional Judgment on Behalf of a Client.

DR 5-105: Conflict of Interest; simultaneous representation

A. A lawyer shall decline proffered employment if the exercise of independent judgment in behalf of a client will be or likely to be adversely affected by the acceptance of the proffered employment, or if it would be likely to involve the lawyer in representing differing interests, except to the extent permitted under DR 5-105(C).

B. A lawyer shall not continue multiple employment if the exercise of independent professional judgment in behalf of a client will be or is likely to be adversely affected by the lawyer’s representation of another client, or if it would be likely to involve the lawyer in representing differing interests, except to the extent permitted under DR 5-105(C).

C. In the situations covered by DR-105(A) and (B), a lawyer may represent multiple clients if a disinterested lawyer would believe that the lawyer can competently represent the interest of each and if each consents to the representation after full disclosure of the implications of the simultaneous representation and the advantages and risks involved.

· Conflict Rules. Existence of Conflict: Under DR 5-105, you first determine whether a conflict exists. A conflict exists if either (1) the attorney’s “exercise of independent professional judgment” on behalf of one client “will be or is likely to be adversely affected” by representing the other client, or (2) the simultaneous representation of both clients “would be likely to involve the lawyer in representing differing interests. DR 5-105(A) and (B).

· Possible Waiver of Conflict by Clients: If there is a conflict, the attorney must determine whether the conflict may be waived by both clients. Specifically, both clients can waive the conflict, provided “it is obvious that the lawyer can adequately represent the interests of each” client. DR 5-105(C).

· Disclosure before Obtaining Waivers: If the attorney concludes that, upon waiver, he or she can still adequately represent client, the attorney can obtain waiver from both clients only “after full disclosure of the possible effect of [the joint] representation on the exercise of the lawyer’s independent professional judgment on behalf of each.” DR 5-105(C).

1. Conflicts of Interest – can’t accept engagement if “independent professional judgement” compromised;

2. Conflicts of Interest – avoid them to further protection of confidences;

3. Conflicts of Interest – avoid appearance of impropriety;

4. Conflicts of Interest – applies to associates and partners;

5. Conflicts of Interest – in estate administration

· Representing multiple clients with potential conflicts of interest is a common theme for many trusts and estates lawyers, particularly since a substantial part of trusts and estates practice is considered to be “nonadversarial.” Examples of some problems follow.

· Lifetime Planning: Can you represent both clients in these scenarios? Does it matter whether husband and/or wife are on second or third marriages and have children of prior marriages?

· Pros and Cons of Multiple Representation

· Pros

· Joint economic unit and common goals;

· Joint planning is efficient and less expensive;

· Joint planning can maximize tax planning;

· Planning for multiple families allows coordination

· Cons

· Couples may have different objectives and priorities (e.g., prior marriage);

· Unequal bargaining position;

· Lack of confidence in each other – “unresolved” issues;

· Planning may involve “waivers”, which will often require separate counsel;

· Examples

· Husband and Wife in preparation of Wills and Trust Agreements and Related Estate Planning.

· Husband and Wife in Execution of Spousal Waivers of Elective Share.

· Husband and Wife in Husband’s or Wife’s creation of Irrevocable Life Insurance Trust.

· Husband and Wife in Husband’s or Wife’s execution of spousal waiver of Qualified Plan accounts.

· Husband and Wife who cannot agree on who the “ultimate” beneficiaries of estate will be.

· Both fiancees in prospective marriage in the preparation and execution of prenuptial agreements.

· Parents/Children in power of attorney for parent appointing children as agent in which child is appointed as agent

· With out gift power

· With gift powers

· Without other work for parents

· Medicaid planning for Parents to preserver assets for Children

· $64,000 Question: Who is your client?

· Multiple Fiduciaries. Inform fiduciaries of the consequences of representing all of them. In the event of a conflict, you may continue to represent one of them, with the consent of the other fiduciary. See discussion below on representing fiduciaries and beneficiaries.

· New Power to Adjust in Prudent Investor Statute and Option to Convert to 4% Unitrust. Different scenarios in applying new statute.

· Fiduciary and Surviving Spouse in Will with Q-Tip trust with issues as to Whether Spouse Files Elective Share. Husband and Wife make reciprocal wills creating Credit Shelter outright bequests and Q-Tip trusts. Husband predeceases and an issue exists as to whether the wife will get “more money” by an elective share. Must there be independent representation for the wife?<