Malpractice in Estate Planning Chapter 6 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company1 “Target of Opportunity”

Malpractice in Estate Planning Chapter 6Tools & Techniques of

Estate Planning

Copyright 2011, The National Underwriter Company 1

“Target of Opportunity” – Why Me?

Mere good faith and honest intent will not protect the practitioner who has caused a client loss.

Who are likely “targets of opportunity”?– Deep pockets– Insurance– Touted experience, skill and knowledge– Impersonal– Big guy vs. little guy– Frustration with the laws


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Simple vs. Compound Liability

• Simple liability for mere errors in judgment or negligence– Expensive mistakes that are part of the cost of doing business

• Compound liability for gross breach of fiduciary duty– Self-dealing– Active concealment– Fraud– Oppression– Gross negligence


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To Whom is One Liable?

• General Rule: A duty is owed only to the person with whom you have contracted, your client

• You also owe a duty to those with whom you have privity

• An advisor is not liable, even for an act of negligence, to someone to whom he owes no duty


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Six-Pronged Test to Determine Privity

1. To what extent is the transaction intended to benefit the third person?

2. Can harm to that third person be foreseen?

3. How likely is it that the third person will suffer real injury?

4. How close is the connection between the advisor’s conduct and the injury that the third party could suffer?

5. How “morally wrong” is the advisor’s action?

6. Would future harm to this or some other client be served by finding privity here?


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What Can Get the Advisor Into Trouble?

• If one says he knows, he’d better– Skill, knowledge, diligence and care used must equal or

exceed that standard ordinarily exercised by others in the same profession

• Not knowing who the client is– For instance, interview both spouses and if there is marital

discord recommend separate counsel• If one says he will, he’d better

– Do not create false expectations by making promises you do not intend to keep or cannot deliver upon

• Overnight express– Make sure to leave enough time to collect, analyze and act

upon information


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How Does One Stay Out Of Trouble?

• Hiring and firing the client– Ask why the client has chosen you

– Watch out for clients that are wealthy with poor cash flow, perfectionists, hurried, angry, overly optimistic, overly fee-conscious

– Turn down a client that requests something that is not quite right or beyond your capacity

• Know the risk-taking propensity of the client and the beneficiaries– Maintain constant communication


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• Expertise boundaries– Do only those things which you are licensed to do and can do

competently

• Resource limits– Do not accept engagements that will require resources beyond

what you can cost effectively deliver


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• Outside experts– When appropriate make a referral to another qualified

professional, give the client three names

• Keep Current– Stay up-to-date with legal developments as well as events that

can influence client’s personal and business life


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Critical Elements of the “Engagement Letter”

• Scope of services and description of work product

• Period of time covered

• Responsibilities undertaken

• Responsibilities the client is expected to assume

• Fee arrangements - amount, terms, and frequency of billing


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Critical Elements of the “Engagement Letter”

• Arrangements for update and extension of service

• List of parties represented and exclusion of those not represented

• Intended use and distribution of advisor’s work

• Client’s acceptance signature and date


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Put It All In Writing

• Protecting one’s self means meticulous recordkeeping– Keep detailed, contemporaneous notes– Wherever possible quote the client’s exact words

• Have client sign off when they decline services normally provided

• Secure a written agreement as to fees and billing procedures at the onset of the relationship


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Put It All In Writing (cont.)

• Develop a comprehensive and accurate data gathering system to minimize planner errors and misunderstanding of the facts

• Verify property ownership and dispositive arrangements from documents

• Include and have the client sign disclosures or acknowledgements with regard to representation or recommendation of any products by the planner


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Limits of the Relationship

• Correctly follow client’s instructions

– Obtain written memorandum signed by client

– If needed, develop an investment policy to document• Agreed –upon investment objectives• Risk parameters• Return targets• Volatility tolerance• Asset allocation ranges

– Obtain written consent for actions beyond scope of relationship outlined in engagement letter


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Records and Systems

• The right stuff– Develop a presentation system that will prove all key areas of

estate planning were discussed with the client– Develop a checklist for key issues, client circumstances and

client objectives– Establish a retrieval system to locate documents and plans

that need updating for specific changes– Keep the following in your client files

• Research documents, analysis, and reports• Documents stating the tax law at the time decisions were made• Memos of client meetings and conversations


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Records and Systems

• Trigger system– Develop a checklist of follow-up procedures– Create a tickler file (docketing system) to meet deadlines,

to produce client reminders, to set up a to-do list with who is responsible for what and when


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Quality Control

• Understanding of ethical issues– “A profound lack of knowledge of ethical problems can often

lead to professional liability claims”

• Who is the quarterback?– On an estate planning team, this person makes sure

essential tasks do not fall through the cracks– In a firm this person accepts responsibility for:

• Ensuring all staff members are kept informed• Ensuring that there is a logical and automatic flow of

necessary information• No tasks have been overlooked• No efforts are duplicated


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Quality Control (cont.)

• Independent review of final products by a qualified associate

• Review of staff competence, experience, and qualification– Appropriate supervision and continuing education should be

part of the firm’s business plan


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External Communication

• Make it clear• Make it often• Avoid casual or informal advice

– Liability can be imposed even though you did not charge a fee

• Call back promptly• Avoiding “heel cooling”

– Do not keep clients waiting on the phone or in your office


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Avoiding (Neutralizing) Problems

• Conflicts with existing clients– Duty of loyalty– Be cautious about serving a client in more than one capacity– Be cautious of representing more than one client in a single

transaction– Duty not to disclose confidential information– Disclose any possible conflicts of interest in writing or

withdraw without disclosure to maintain confidential information


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Avoiding (Neutralizing) Problems (cont.)

• Conflicts with future clients– Will acceptance of this client create a conflict for more

desirable work with another client in the future?

• Red flag procedures– A procedure for identifying problems and quickly dealing

with them is essential– Train the staff to recognize “red flags”

• Dealing with problems– Review and deal with problems promptly– Contact client immediately and explain the problem,

potential consequences, and alternatives


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Avoiding (Neutralizing) Problems (cont.)

• The problem team– Group of designated people in a firm that meet to deal with

potentially dissatisfied clients and problems that could develop into litigation

• Early active remedial conciliatory efforts– The quicker an attempt is made to resolve the problem to

the client’s satisfaction, the less likely there will be litigation– An apology might avoid writing a small check or defending a

large lawsuit


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About Your Malpractice Insurance

• Sufficient levels of coverage

• “Claims made” policies– The policy only covers claims that are first asserted and

reported to the insurer within the policy year

• “Prior acts” coverage– This covers claims asserted during a policy year in which

the negligence giving rise to the claim occurred in some prior year


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About Your Malpractice Insurance (cont.)

• The “tail”– Extended reporting option allowing conversion from claims

made coverage into occurrence coverage for any negligence allegedly committed, but not yet reported up to the end of the policy year

• The deductible – higher deductible means lower premium outlay


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• Settlement provision – limits insurer’s payment to the amount specified in a settlement agreement with the plaintiff, obligating the insured to cover other exposure on his own

• Duty to defend vs. duty to indemnify– Duty to defend policy requires insurer to appoint defense

counsel and pay that attorney’s fees as billed– Duty to indemnify policy allows the insured to select

counsel but he must fund his defense and will not be reimbursed for defense costs until the case is concluded


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• Definition of “damages” is crucial, check your policy

• Innocent partner coverage– Partners are liable for the bad acts of other partners– The insurer will deny a claim based on your partner’s fraud

and/or criminal activity unless there is innocent partner coverage

• Other key provisions– Defense cost coverage– Libel or slander coverage– Defense of RICO claims


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• Insurer’s financial stability, responsiveness, and reputation for integrity are important

• Handling the Claim1. Notify the insurer immediately

2. Once notified of suit, say as little as necessary to suing client

3. Secure all work product immediately

4. Inform staff of problem and game plan

5. Do whatever is necessary to assist in the defense of the case


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Total Costs

• Direct costs– Malpractice premiums

• Loss of reputation• Loss of standing with peers• Psychological trauma• Hidden economic costs

– Loss of referrals– Time required to gather documentation for defense .

• Cut and run?– As a last resort, if it appears a matter cannot be resolved,

discharge the client


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Summary

To reduce the success of malpractice claims, a planner should:

– Establish and improve client relationships– Control the management of client relationships– Improve office practices– Identify problem areas– Correct problems before they occur– Systematize a policy of internal and external communication– Practice common sense courtesy– Implement quality controls– Maintain a standard of high quality continuing education for

every member of the firm