When an attorney represents a client with respect to the client’s estate plan, the attorney owes that client certain duties and contractual obligations. These duties and obligations constitute the basis of the attorney’s liability in tort, fiduciary, and contract law. That liability is imposed when the attorney fails to render advice or renders incorrect or inadequate advice that results in damage to the client, be it the settlor or the trustee. Liability may also extend to the settlor’s intended beneficiaries.
Life insurance is a central component of many carefully crafted estate plans. The life insurance is often trustee-owned life insurance (TOLI), with the ownership vehicle being an irrevocable life insurance trust (ILIT) created during the life of the settlor.1 Thus, one might assume that the law regarding the nature and extent of the attorney’s duties and contractual obligations with respect to life insurance, TOLI, and ILITs has been spelled out carefully in case law and commentary. In fact, however, there is a surprising dearth of authority and commentary respecting these matters.
Several relatively recent developments have accentuated the need for addressing these matters. First, life insurance products and the mechanisms for owning them are becoming increasingly popular and, in some cases, quite sophisticated.2 Second, estate planning attorneys may well involve themselves, or be drawn in episodically or continuously, perhaps as a result of client pressure, into the design, implementation, oversight, and termination of these policies and the administration of trust vehicles for owning and managing them. Third, the Uniform Prudent Investor Act (UPIA), which has been widely adopted, appears to have heightened the standard of care owed by a trustee with respect to life insurance. This has a number of implications for the estate planning attorney and his or her own exposure to liability. Fourth, in response to the UPIA, certain states have enacted statutory relief, essentially exculpating trustees from liability with respect to TOLI. To the extent the trustee is “off the hook,” the dissatisfied settlor or beneficiary can be expected to look elsewhere to be made whole when the policies or trust vehicle fails to deliver the anticipated benefits. An inviting target is the estate planning attorney. In this regard, the recent New York Court of Appeals decision in Estate of Schneider v. Finmann3 indicates a more expansive conception of the duties and obligations owed by the estate planning attorney with respect to life insurance tax planning and TOLI. On the other hand, the precise scope of attorney duty and contractual obligation remains ill-defined. Fifth, there still exist critical barriers to the estate planning attorney’s liability, notwithstanding the arguable expansion of the attorney’s duty of care. Two notable barriers, privity and the statute of limitations occurrence rule, are not what they once were, as courts have chipped away or, in some cases, demolished these stalwart defenses to liability. Yet, they still may afford the estate planning attorney protection, notably vis-à-vis trust beneficiaries.
The purpose of this article is to highlight for the estate planning attorney, who deals with life insurance and TOLI, the exposure to contract, negligence, and fiduciary liability. The estate planning attorney simply cannot afford to ignore the changing, but still ambiguous, landscape of duty concerning this evolving area of law. The article seeks not only to flesh out the current parameters of the jurisprudence, but to detail those everyday planning situations that could give rise to unanticipated duties and obligations.
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