Estate Planning for the Dysfunctional Family

Frank W. Streng, Surrogate’s Court Lawyers
by Frank W. Streng on 05/06/2002

 

Frank W. Streng, Esq.

Partner

McCarthy, Fingar, Donovan,

Drazen & Smith, L.L.P.

11 Martine Avenue

White Plains, NY 10606-1934

914-946-0134 (fax)

914-946-3817 ext. 256 (voice)

e-mail:

web:

www.mfdds.com www.mfdds.comfstreng@mfdds.com

 

 

 

 

Westchester Women’s Bar Association – Elder Law Section – May 6, 2002

 

 

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    • “Bad families with No Parental Control”: No one likes each other, including the parents

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    • “Bad families with Parental Control”: No one likes each other, but the parents are able to require members of the family to act with propriety and respect

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    • Good Family with Bad Marriage: Children seem to respect each other, but parents hate each other

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    • “Good Families that are Broken through Divorce”

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    • “Good Families that are Broken through Remarriage (with children from second marriage)

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    • “Good Families that are Broken through Remarriage (without children from second marriage)

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    • “’Good/Bad Families” on the Death of the Survivor Parent: Throw out the Family Rule Book and Become Super Dysfunctional

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    • “’Good Families” that have Very Good Actors

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    • What is Defensive Estate Planning? How do you go about estate planning for your dysfunctional family?

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    • Protecting integrity of client’s decisions in estate plan (e.g., preparing will where client cuts out distributees or makes so-called unequal distributions)

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    • Ethical considerations

         

      • Taking instructions from nonclient as to client’s instructions

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      • Actual or potential conflicts of interests

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  1. Selected Ethical Considerations in Representation

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  3. Source Information for Ethics Rules

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  5. Canons of Ethics: Code of Professional Responsibility

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    • Ethical Considerations (ECs) (aspirational standards)

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    • Disciplinary Rules (DRs) (black letter rules)

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

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    • Bar Association Opinions, including:

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    • New York State Bar Association Committee on Professional Ethics

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    • Association of the Bar of the City of New York

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    • New York County Lawyers Association

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    • Court decisions

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Canon 4:

 

EC 4-1:

 

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

 

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

 

1. Reveal a confidence or secret of a client.

 

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  • A lawyer may reveal:

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    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. * * * *

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      1. 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.

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    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.”

     

     

     

  • 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)

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      • Estate Adminstration/Litigation

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      • all of the above?

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      • 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)

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      • When does a lawyer advise the fiduciary that “litigation . . . is anticipated”? For purposes of privilege, should we be identifying areas where litigation might be “anticipated”?

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      • The answer: tell executors and trustees that, with few exceptions, they cannot be expected to have a true privilege. As in the case of Justice Stewart’s famous definition of pornography – you’ll know that the subject is “privileged” when you see it

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      1. Representation of Multiple Clients

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      1. 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).

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      2. 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).

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      3. 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.

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      • Conflict Rules. Existence of Conflict

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        : 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).

     

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      • Possible Waiver of Conflict by Clients:

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      • Disclosure before Obtaining Waivers:

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        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).

     

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      • 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.”

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    C. Different Factual Scenarios and Options for Legal Work

     

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      • Your engagement as counsel

           

        • Separation between Mom and #1 child

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        • Attorney-client privilege

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        • Joint representation issues

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      • Diligence in legal work

           

        • Detailed interview with memoranda

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        • Satisfying yourself that client has capacity and is not subject to undue influence

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        • Sending drafts of instruments with letters of explanation

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        • Dealing with Mom, and Mom alone as to drafts and redrafts

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        • Supervision of execution

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        • No shortcuts

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        • Other estate planning

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        • Living will/health care proxy

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        • Durable power of attorney

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        • Consideration of creation of revocable trust

             

          • Advantages of revocable trust re procedural and substantive obstacles to “will contest”

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      1. Lifetime Planning.

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        Same facts as 1 above. But now, after you have engaged in initial work for Mom on Will, Power of Attorney, Health Care Proxy, Mom may be mentally incompetent and #1 child retains you for “Medicaid Planning” and related services

     

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      • What is Medicaid planning

           

        • Planning to assure that Mom becomes eligible for Medicaid and that part or all of Mom’s assets is sheltered from payment to health care providers/nursing home

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      • Planning Options

           

        • Conventional (if Mom competent to act on her own):

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        • Rule of halves: making outright gifts through use of prescribed monthly rate – Westchester rate for 2002 is currently $7,138 per month

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        • Possible transfer of residence with retained life estate

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        • Tax consequences for planning recommendations

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        • Options on “gifting” to #1 child

             

          • Outright v. trust

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          • Nonprobate: Joint v. Totten trust

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        • If Mom not competent to act on her own

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        • Does the durable power of attorney form have gift powers beyond statutory form (i.e., gift tax exclusions)?

             

          • If gift powers exist, can #1 child, as agent, make gifts to herself

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          • If gift powers do not exist, extra legal options for family unit acting together

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        • Medicaid planning under Article 81

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      1. Post-Death Issues.

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        John, age 69, and Mary, 62, have been married for 20 years. They each have 3 children of their prior marriage, but John’s assets in his names alone are worth approximately $2,000,000. Mary’s assets in her names alone are worth approximately $1,000,000. Both John and Mary have stable relationships with each other’s children, but John has prevailed upon Mary to favor John’s children in their soon to be prepared wills. Their home has a value of approximately $700,000 and is owned as tenants of the entirety. John also has an IRA Rollover account with a value of approximately $1,500,000. John and Mary hire Susan Esquiry, Esq., a specialist in Estate Planning and Elder Law, to represent them in the preparation of wills and/or other estate planning. John and Mary decided that they wish to make reciprocal wills placing their entire residuary estate in trust, in which the trustees are required to distribute all of the income to the surviving spouse, with principal distributable pursuant to an ascertainable standard. On the surviving spouse’s death, the property is distributable 2/3 to John’s children and 1/3 to Mary’s children. Separately, John, without Mary’s knowledge changed the beneficiary designation on the IRA Rollover from Mary to the trustees of the trust created under John’s Will. John dies 2 years later, and Mary and John’s son, Jeffrey, are co-executors and co-trustees. Susan Esquiry is asked by Mary and Jeffrey to handle the estate.

     

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  • Should Ms. Esquiry suggest that Jeffrey or Mary retain separate counsel:

       

    • Ms. Esquiry is asked by Mary’s children, acting jointly, whether Mary should elect against the Will

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    • Elective share is one-third of net estate less assets passing to spouse (Assumed probate estate is $3,500,000. Assumed net estate is $4,200,00; 1/3 less $700,000 for house is $700,000

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    • Ms. Esquiry is asked to prepare a new Will for Mary in which she intends to give all of her property to her children.

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    • Ms. Esquiry is asked by Jeffrey and Mary to evaluate income tax consequences of IRA Rollover account and how best to handle the account, including consideration of the possibility of a type of a renunciation so that Mary receives the IRA Rollover account outside of the trust.

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    Dad is deceased and Mom is in poor health and has 4 children. 1 of the 4 children is closest to Mom, both physically and emotionally. Mom wishes to give all of her property to #1 child, and you are engaged by Mom but #1 child arranges for the initial meeting.

  • Lifetime Planning.

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    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).

    Canon 5:

     

    DR 5-105: Conflict of Interest; simultaneous representation

     

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

    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 [4th 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 [4th 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)

     

  • 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:

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  • What does it mean to “act in a fiduciary capacity” Is it different to “act in a representative capacity”?

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

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    • the estate?

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    • the executor(s)?

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    • specific legatees of tangible personal property

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    • cash or pecuniary legatees

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    • the independent trustee of residuary trust?

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    • permissible lifetime beneficiaries of residuary trust?

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    • remainderman of residuary trust?

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    • the outright residuary beneficiaries?

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  • Attorney Client Privilege

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    Lawyer Should Preserve the Confidences and Secrets of a Client.

    Estate Planning for the Dysfunctional Family

     

     

  • What does it mean for a family to be “dysfunctional”

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  • Dysfunctional – Webster defines it as “impaired or abnormal functioning”

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  • Examples of Dysfunctional Families

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