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March 2010
How to Avoid Potential Pitfalls for Trust, Estate, and Probate Attorneys
Article provided by Travelers Risk Management PLUS+ Online® A Service of Travelers Bond & Financial Products
Trust, estate and probate lawyers provide a broad range of client services, from estate planning, to tax advice, to estate administration and other related subjects. The ABA Standing Committee on Professional Liability’s statistical survey has shown a slight but steady increase in claims asserted against trust and estate attorneys—from approximately 7% to 9%—in the two decades since the figures were first compiled.
While the ABA statistics do not track claim severity by practice area, the provable damages in claims arising in the trust, estate and probate area ordinarily are easily quantifiable and can be significant. Here are some of the common causes of those claims.
Dabbling
Your cousin is going on a trip, and confides she’s never had a will. If you just run that “simple” will off the form that’s been in the computer for at least a decade, she’ll feel better.
Don’t do it. Like many other areas of practice, the field of trusts and estates is highly specialized and technical. Boilerplate forms or provisions not specifically tailored to the individual client’s current situation provide a constant source of claims.
You cannot provide effective legal services in the area of trusts and estates by attending a CLE seminar and using a form. Even though you figure your cousin would never sue you (which sometimes is true), depending on jurisdiction, you could face a claim from disappointed beneficiaries who don’t share the same bond.
Conflict of Interests
It is not at all unusual for a third party, perhaps a relative or family friend, to initiate contact with a trust and estates attorney on behalf of an elderly potential client. Regardless of the extent of the relationship with the third party, never forget to serve the best interests of the client.
To ensure that all parties are aware whose interests are being represented, the client’s identity should be specified in the engagement letter. Non-clients must also be alerted to the fact that their interests are not being protected by the attorney.
There are legitimate estate-planning reasons for divesting title in property owned by the elderly client and for giving third parties the right to act for the elderly client. Always be certain, however, that contemplated transfers through testamentary bequests or non-probate transfers of property are actually what the client wishes, and are structured to protect the client throughout his or her lifetime. Where the wishes of the third party and the client conflict, the attorney is there to protect the client.
Problematic conflicts may also arise in the simultaneous representation of spouses in the estate planning context. Take care to ensure that both spouses’ interests are completely aligned or refer the representation of one spouse to independent counsel.
Another area of concern arises where the financial planner is leading the way—and the way does not seem in the best interests of the client. Relying upon the excuse that the attorney was just the “scrivener” of an estate planning device developed by the financial planner and the client may not prevent a claim by the client.
If an accountant or financial planner is a significant source of business, the independent professional judgment of the attorney may be called into question if the strategy proves not to be sound. This can complicate otherwise straightforward malpractice claims.
Scope of Services
In addition to identifying the client, a clearly written engagement letter should define the scope of the attorney’s services. Equally as important is to specify legal services that the attorney will not perform.
If you are not providing accounting services for the estate or preparing a Medicaid application for an elderly client, be certain that the engagement letter says so and, if possible, identify the professional who is undertaking these services. If the client has not retained a professional to perform needed services excluded under the terms of the retainer, advise the client in writing about the need to seek professional assistance in the omitted areas.
Claims by Non-Clients
In most areas of practice, an attorney may only be sued by a client. But in most jurisdictions, trusts and estate lawyers are an exception to this general rule. Many states permit the beneficiary of an estate to sue an attorney whose negligence caused the testator’s intended disposition of the bequest to the beneficiary to fail.
To protect yourself against a claim by a dissatisfied beneficiary, the testator’s wishes should be clearly documented, preferably in a document generated by the testator, and the testamentary documents should be checked and re-checked to ensure compliance with the testator’s wishes.
Recognizing the potential for client dissatisfaction is the most effective way of preventing claims. It is hoped that by alerting you to some of the more common claim scenarios facing trust, estate, and probate attorneys, you will be able to avoid problems before they occur.
Disclaimer: Perspectives is published as a service to lawyers. While the information contained herein is believed to be reliable, readers are advised to consult their own legal and insurance counsel for assistance in applying it to their unique situations.
Reducing Risk in a Real Estate Law Practice
Article provided by Travelers Risk Management PLUS+ Online® A Service of Travelers Bond & Financial Products
Residential Real Estate Risks
• Foreclosure Issues — When real estate transactions slow due to market conditions, real estate lawyers often become work-out or foreclosure lawyers. Foreclosure lawyers draw more than their fair share of malpractice claims.
Predatory lending is a hot topic with jury appeal, and in many states is governed by statute. If you are involved in loan work-outs or foreclosure, be very familiar with the Fair Debt Collection Practices Act as well as the cases thereunder. If you have direct contact with a borrower facing foreclosure, meticulously document your contacts.
Beware of conflicts—foreclosing out the interests of one unknowing lender client on behalf of another lender client is a recipe for malpractice litigation.
• Mortgage Fraud — Mortgage fraud is the source of many catastrophic claims against innocent residential real estate lawyers. Avoid being unwittingly drawn into real estate fraud by watching out for:
• Transactions involving exorbitant fees or points
• Suspicious borrowers
• Strangely structured transactions
• Unusual volumes of business from strange sources
• Flips
• Payoffs of strange or poorly documented liens at closing
• Sellers who justify a vast and abrupt increase in value by alleged improvements to the real estate
Remember that real estate fraud is often facilitated by crooked loan officers, and that your obligation is to the lender rather than the loan officer or mortgage broker.
Sometimes real estate fraud is foisted upon an unsuspecting lawyer by staff at the law firm. A criminal background check before hiring key staff members is a very good idea.
• Clients, Non-Clients and Conflicts — In some states, lawyers are allowed to represent all parties to a residential transaction. In others, the lawyer may only represent the lender.
Make sure everyone at the closing knows who you represent, and always give written notice of who you represent and who you don’t. Do not take on liability to additional parties unless you have carefully weighed the risks, including problems raised by conflicts of interest.
• Escrow Accounts — Make sure your escrow account is balanced monthly. and that you can account for even small amounts of money contained therein.
Small overcharges multiplied by hundreds or thousands of transactions can result in a very large lawsuit. Consider bringing in an outside accountant on a regular basis to make sure all amounts in the escrow account are properly tied down.
Wire transfers that mysteriously “appear” in your account should be researched carefully before being disbursed. Too many lawyers end up appearing complicit in fraud or money laundering when funds simply “pass through” their escrow accounts.
• Title Examination Risk — If you use an outside title examiner, make sure that the examiner has current insurance with appropriate limits for your practice. A detailed master agreement between you and an outside title examiner can be very helpful if a problem arises.
If you use an employee as a title examiner, make sure that employee is well trained and not overworked.
Discuss close title questions with your title insurer. Remember, however, that title insurance company guidelines may differ from the standard of care for an attorney. For example, a title insurer may allow an examiner to rely on an existing loan as a basis for a title search, but the lawyer may still face a malpractice claim alleging failure to conduct a full search.
• Read and Follow Instructions — Review a lender’s closing instructions before any loan is closed. Don’t assume these instructions are just like all the others. If there are blanket agreements with warehouse lenders or others governing a particular transaction, review them as well.
• Title Agents — Many residential real estate lawyers are also title agents. Review the Title Agency Agreement periodically to ensure that your obligations are met. Agency Agreements are often ignored until a problem arises, but they will be strictly enforced against you. Waivers or amendments to a lender’s or insurer’s instructions must always be in writing. If you are sued two years after the closing, you will probably remember nothing, and the paper trail may be all that saves you.
Do not let competitive pricing pressures cause you to fail to do your job.
Commercial Real Estate Risks
• Time Pressures — Often mistakes happen in commercial real estate transactions because of unreasonable time pressures created by the client. If there simply is not time to get the deal done correctly, don’t do the deal.
Surveys reviewed hurriedly at the closing table for the first time generate claims, and ill-considered changes to loan documents jammed in at the last minute are also a frequent source of trouble.
If a deal goes awry, your client will typically not take into account your time pressures. The client expects an A+ job regardless of time considerations. You must make sure you take the time to do an A+ job.
• Title Insurance Binders — Marking up a title insurance binder or commitment correctly is critical. In some states, this becomes such a standard operating procedure that it is not really nailed down at closing. When problems arise, this can result in significant claims.
• Applying Residential Procedures to Commercial Deals — Residential real estate lawyers occasionally, take on commercial transactions, and in doing so fail to fully appreciate the differences between commercial and residential deals. While a residential real estate lawyer may have plenty of expertise to do a commercial deal, too often they inappropriately follow residential standard operating procedures.
It is critical to manage and memorialize a client’s expectations and the lawyer’s obligations by means of a solid, comprehensive engagement letter.
Disclaimer: Perspectives is published as a service to lawyers. While the information contained herein is believed to be reliable, readers are advised to consult their own legal and insurance counsel for assistanc
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