Not all cases are created equally.
During his presentation at the Heckerling Institute on Estate Planning on Tuesday, S. Andrew Pharies, partner at DLA Piper in San Diego, advised attendees to identify high risk cases at the outset of any potential representation. “There are clues to look out for,” Andrew warned. “A client who wants to disinherit a beneficiary, who wants unequal distributions among people of the same class, who has multiple marriages and children from different spouses and especially, a client who leaves a long-term advisor—these are big red flags.”
The most important question you’ll ask yourself in a high risk situation is, “Should I take the case?” These high risk cases become the “notorious” cases and bring with them a high risk of being fired. Moreover, there’s a high likelihood that litigators will closely scrutinize your work product. Should you decide to take on a difficult case, go into it with your eyes wide open.
Begin With the End First
“Begin with the end in mind,” advises Andrew, which means that in the end, you want to ensure that a court upholds the validity of the documents you drafted. Ask yourself, “What do I need to do during this case to make this end a reality?” You have the power to “create” the case and make sure that your documents will withstand a challenge.
First, you’ll need to defeat a challenge for lack of testamentary competency. This concept is defined as the testator understanding the nature and extent of his property; the natural objects of his bounty; the disposition he desires to effect through his will; and that the document he’s signing is a will intended to dispose of his property at death. Competency is measured at the time the document is executed.
Second, you’ll need to defeat a challenge of undue influence, which is when a testator’s free will is overcome. Undue influence is comprised of: influence exerted on the person executing the document, in which the effect of the influence is to destroy the free agency of the person executing the document, and the product was a document that wouldn’t have been executed without the influence.
Creating a Record
There are two component to creating a strong record of testamentary competency and no undue influence. The first is the medical evaluation: Hire a medical professional to evaluate your testator’s cognitive abilities. Have a physician review the medical records and have him test the testator up to the legal standard of competency. Provide the legal standard to the medical expert, then memorialize the results in a written report and include a HIPAA waiver to allow you, on the death of your client, to distribute the report.
The second element is a third-party interview to ensure that there’s no undue influence. Andrew advises that for this interview, it’s better to hire an objective person with credibility and who’s well-known to the courts. While this may be expensive, it’s worth it to protect the estate plan. After the interview, have your client sign a waiver so that the report can be distributed after his death.
Addressing whether it’s wise to videotape the execution of the testamentary documents, Andrew noted that there’s no consensus on this issue. His view is that while a videotape is very powerful, what happens on a video can overcome reason. Importantly, ask what the testator’s purpose is to videotape the execution of the documents. Is it to dissuade a potential beneficiary contest? Or, is it to preserve the execution as evidence in the event of litigation. If it’s the latter—a videotape is hearsay, although in some states, it can fall into an exception to hearsay. Regardless of the reason, if a testator has no impairments, (no ticks, no anxiety, etc.) then consider videotaping because it’s powerful. However, if there’s anything that’s “off” about the testator (stage fright, speech impediment, etc. ) “stay far away from video because it can be prejudicial,” warns Andrew. If you do decide to do a video, use a professional videographer and establish a chain of custody from the taping into the file.
No-Contest Clauses
Is there anything you can do to prevent litigation from happening in the first case? Yes: employ a no contest clause—a forfeiture clause to disinherit a person. Importantly, you’ll need to give that person something substantial that causes him to be unwilling to put his inheritance on the line. Be clear to define the triggering act of a no-contest clause.
When inserting a no-contest clause, you can include exceptions. For example, the no-contest clause can apply to only one individual, to a class of individuals, etc. You should also include who’s responsible for defending the no-contest clause. If it’s a fiduciary, it’s important to make sure that the fiduciary has the resources to defend the no-contest clause. Along those lines, Andrew doesn’t favor inserting “reasonable compensation” clauses to limit attorney’s fees relating to defending a no-contest clause. Rather, Andrew suggests permitting a fiduciary to hire whomever he wants and compensating that attorney without obtaining court approval. He doesn’t think attorney’s fees should be questioned and be discoverable.
Interference With Testamentary Expectancy
One of the “scariest” torts is tortious interference with an expectancy of an inheritance, because this action can be brought against the drafting attorney. This tort requires a testamentary expectancy, which typically has to be more than just a belief that a testamentary disposition was considered or intended; tortious interference with that expectancy by the defendant, generally described as some unlawful conduct which often includes undue influence; a but/for causation that demonstrates that the testamentary expectancy would have passed to the plaintiff but/for the tortious interference; and damages as a result of the diversion of the testamentary expectancy. Unfortunately, there’s very little you can put in a document to prevent this tort from being lodged. But, if you have the competency report and the medical evaluation at your side, you should feel protected as the drafting attorney.
Indeed, the most effective defense to intentional interference with a testamentary expectancy is a broad no-contest clause, which expressly includes pursuing the tort as a disqualifying event, regardless of who’s the defendant or target, coupled with a direction to the executor and trustee to defend the tort and pay for the defense out of the estate or trust.
Preventing Post-Death Modification of Estate Plan
What if you have a testamentary plan that will disappear relatively early on? In that instance, elements of flexibility (such as decanting, modifications, etc.) actually disrupt testamentary intent. It’s important, then, to ascertain what the client desires. If it’s to preserve his testamentary plan, then include explicit provisions in the document to prevent these modifications from happening, such as “no decanting; a trustee can’t consent to modifications,” etc.
Structuring Gifts for Problematic Beneficiaries
There’s much you can do in the administration stage to mitigate the risk of a problematic beneficiary who may challenge the actions of a fiduciary. First, reduce the fiduciary’s profile vis a vis a difficult beneficiary. Think about the structure of a gift. If a gift to a problematic beneficiary is structured as a residuary gift, then the fiduciary will be exposed to virtually unlimited criticism from the problematic beneficiary during the entire course of the administration. A specific gift, on the other hand, or a pecuniary gift of a dollar amount, limits the problematic beneficiary’s interest and offers better protection for a fiduciary.
Fiduciary Duties
In the document, customize fiduciary duties to address issues likely to be raised by a problematic beneficiary. This customization will provide extraordinary protection for the trustee. Make the fiduciary duty lower for a problematic beneficiary and draft those protections in the document. While the duty to account typically can’t be eliminated, some states do permit other broad modifications of fiduciary duties. Importantly, include in the document the testator’s intent about why he’s customizing fiduciary duties to address issues likely raised by a problematic beneficiary.
Business Entities
Consider using a business entity to provide for the management of a difficult beneficiary’s inheritance. Using a business entity allows broad exculpation clauses, forum shopping, a heightened ability to exculpate a trustee and indemnification of a trustee. Make sure the trustee and business manager aren’t the same person if your state would impose a fiduciary duty on the business manager.
Arbitration
Include arbitration as a mandatory provision in the document. This can be a powerful tool, because you create the rules, pick the forum and select the judge. In some states, you can even modify the rules that apply in arbitration.