Report No. 16 (Wed. add + Thu. 1/17 cont.)
As we have done in January for the last eleven years, and again with the
permission of the University of Miami School of Law Center for Continuing
Legal Education, we will be posting daily Reports to this list containing
highlights of the proceedings of the 42nd Annual Philip E. Heckerling
Institute on Estate Planning that is being held January 14-18, 2008 at the
Orlando World Center Marriott Resort and Convention Center in Orlando,
Florida, a new venue for the Institute starting in 2007. A complete listing
of the proceedings will be published here and is also available on the
Institute's Web site at http://www.law.miami.edu/heckerling.
We also will be posting the full text of each of these Reports on the ABA
RPPT Section's Web site, as we have since the 2000 Institute. Those Reports
can be found at URL http://www.abanet.org/rppt/meetings_cle/heckerling. In
addition, each Report can also be accessed at any time from the ABA-PTL
Discussion List's Web-based Archive at URL
http://mail.abanet.org/archives/aba-ptl.html.
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This Report covers an important ADDEMDUM to Report #7 and the presentation
that Carlyn McCaffrey did on Wednesday about Gifting and Selling by
Formula, plus the Top Ten Ethical Challenges Facing Estate Planning
Practitioners Today and the Best Practices for Addressing Them (both the
main session and the special session that were held on Thursday), plus the
announcement of the release of the new Life Settlement software program by
Steve Leimberg of Leimberg & LeClair. We anticipate that the next Report
will cover the balance of the Thursday sessions and the Wednesday ever
popular Q&A session (it's on its way).
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ADDENDUM TO WEDNESDAY PRESENTATION
Gifting and Selling by Formula - Shield Against Gift Tax Valuation Risk or
Invitation to Audit Exposure
Presenter: Carlyn McCaffrey
Reporter: Ronda Martinez
Addendum Materials Supplied by the Presenter, Carlyn McCaffrey
One of our ABA-PTL readers commented to the entire list as follows in
response to the posting of Report #7:
Date: Thu, 17 Jan 2008 11:22:24 +0000
From: "Gil A. Nellis"
Subject: Re: [ABA-PTL] - Heckerling 2008 - Report No. 7 (Tue. 1/15 and Wed.
1/16)
To: ABA-PTL@MAIL.ABANET.ORG
There is a substantial part of McCaffrey's presentation that is not in this
report concerning a planning option involving using an incomplete
Gift concept. It is cutting edge. The audio is available for purchase
Sent via BlackBerry from T-Mobile
Unfortunately the audio tape of this tail end portion of Carlyn's
presentation is not complete, so your Editor asked Carlyn if she could
supply all of us with the full details, which she has so kindly done below:
Here are my lecture notes on this topic. It will be included in the final
version of my article.
"This brings us to our last valuation protection technique the incompleted
gift approach. It can be used whenever the asset to be transferred is to
be sold rather than gifted.
Back to Imogene and Blackacre. But add one more fact. Imogene is married
and her husband has established a trust for her benefit and for the benefit
of their children. It's a discretionary trust and Imogene has a power of
appointment over it exercisable in favor of issue. The trust has assets
worth at least $200,000, the amount most estate planners would feel
comfortable is enough to support a purchase for a note of a $1,000,000
asset. Imogene transfers a 25% interest in Blackacre to the trust for a
$1,000,000 note. The sales contract provides that the trustees are issuing
the note to Imogene in exchange for a $1,000,000 interest in the 25%
interest in Blackacre. To achieve finality, she reports the transaction on
a timely filed gift tax return as a non-gift completed transfer under
regulation section 301-6501(c)-1(f)(4).
What happens if the IRS successfully challenges the valuation and it is
determined that the 25% interest is worth $1,500,000? Will Imogene owe any
gift taxes? No, because, to the extent she has made a gift, it is
incomplete because of her power of appointment over the trust. Instead,
she has become the transferor, for transfer tax purposes, to the trust to
the extent of 29.5% of its assets (500,000/1,700,000).
Once it has been determined that she has become a partial transferor, it
would be convenient to be able to separate the portion of the trust of
which she is the transferor from the other portion so that, for example,
distributions could be made to the children while she is still alive
without triggering gift taxes. This should be doable if the trust
agreement contains language directing or permitting the trustee to divide
the trust into separate trusts whenever anyone makes a gift to the trust,
so that assets gifted by each donor are held in separate trusts.
What are the income tax consequences of this transaction? Because the
trust is a grantor trust deemed owned by Imogene's husband, her sale to the
trust is treated as a gift for income tax purpose under section 1041.
This technique can also be used with a trust created by someone other than
the transferor's spouse so long as the transferor has a power of
appointment over the trust, but a sale to such a trust would be an income
taxable event if the transferred property is appreciated.
If Imogene wants to make sure that she has transferred at least a 25%
interest, without gift tax risk, the transfer can be structured this way.
The trust transfers its $200,000 worth of assets to an LLC, the X LLC, and
also issues a $1,800,000 note to the LLC.
Imogene then transfers a 25% interest in Blackacre to the trust. In
exchange, the trust transfers a fraction of its interest in X to
Imogene. The numerator of the fraction is the greater of $1,000,000 or the
value of the 25% interest in Blackacre as finally determined for gift tax
purposes; the denominator of the fraction is $2,000,000. If the finally
determined value of the 25% interest in Blackacre is $1,000,000, Imogene
will own 1,000,000/2,000,000 worth of the X LLC. If the finally determined
value is $1,500,000, Imogene will own 1,500,000/2,000,000 or 75% of the X
LLC. In either case, Imogene will have transferred the full 25% interest
in Blackacre without incurring gift tax risk."
Thank you Carlyn for your most timely and helpful response to our request.
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The Top Ten Ethical Challenges Facing Estate Planning Practitioners Today
and the Best Practices for Addressing Them
Thursday, January 17, 2008
Presenter: Charles (Skip) Fox
Reporter: Mike Stiff
Mr. Fox's materials included a 64 page outline, a sample husband and wife
engagement letter and summaries of the implementation of ABA Model Rules
5.5 (multi-jurisdictional practice of law) and Rule 8.5 (disciplinary
authority; choice of law) in the various states.
Mr. Fox's top ten ethical challenges facing estate planning practitioners
today are as follows:
1. Issues in Multi-State Representation
2. Representing Multiple Parties
3. Advising on Asset Protection Issues
4. Providing Effective and Timely Counsel to Clients
5. Fees
6. Designation of the Lawyer as Fiduciary or the Attorney for the Fiduciary
7. Failure to Disclose Adequate Information to the Internal Revenue Service
8. Clients with Diminished Capacity
9. Obtaining Exoneration or Releases from Clients
10. Dealing with Metadata
Mr. Fox cited numbers from a 2005 ABA survey that showed there were
approximately 1,323,735 lawyers in 2005 with active licenses. In 2005,
approximately 128,294 complaints were filed against these lawyers. Most of
the complaints were dismissed for various reasons with only 4,426 lawyers
actually charged. Therefore, the number of complaints is high
(approximately 1 in 10) and the number actually charged is relatively low
(approximately 3.5%). However, the cost and expense of dealing with such a
complaint, even if eventually dismissed, is high both financially and
emotionally.
1. Issues in Multi-State Representation:
There has been a lot of progress in this area, but still an area that lacks
clear cut guidance. The trend has been away from the broad prohibitions
and toward more permissive and liberal rules for the transactional
attorney. The Restatement of the Law Governing Lawyers adopted by the
American Law Institute allows a lawyer to provide legal services to a
client outside of his or her home state to the extent the lawyer's
activities arise out of or are otherwise reasonably related to the lawyer's
practice in his or her home state. The Restatement also includes a trusts
and estates example. An Illinois attorney receives a call from a long time
client who has recently moved to Florida. The call leads to the Illinois
attorney preparing a new codicil to the client's will. The Illinois
attorney takes the codicil to Florida for execution by the client. While
there, the client introduces the lawyer to his neighbor who also wishes for
the lawyer to prepare similar estate planning documents for him. The
Illinois lawyer conducts the necessary research, communicates by telephone
and letter and then returns to Florida to execute the documents with the
new client, the original client's neighbor. The Restatement concludes that
the Illinois lawyer's activities in Florida on behalf of the old and new
client are permissible. Although Mr. Fox believes the conclusion that the
representation of the new neighbor client arises out of or is reasonably
related to the lawyer's home state practice seems a bit of a stretch, this
demonstrates the liberalization that is occurring in this area. Similarly,
Model Rule 5.5 was amended in 2002 and now permits a lawyer to provide
transactional representation, counseling and other non-litigation work in
another jurisdiction, on a temporary basis, if such activities arise out of
or is reasonably related to the lawyer's practice in the jurisdiction in
which the lawyer is admitted to practice. Model Rule 8.5 was also amended
in 2002 to provide that a lawyer is subject to the disciplinary authority
of his or her home jurisdiction as well as the disciplinary authority of
the jurisdiction where the lawyer's conduct occurs. The lawyer may be
subject to the disciplinary authority of home jurisdiction as well as
another jurisdiction for the same conduct.
2. Representing Multiple Parties:
The common view is that lawyers have to do it to maintain their
practices. It is also commonly viewed as beneficial for clients as long as
there is not a direct conflict. Model Rule 1.7 creates the presumption
that the lawyer cannot provide common representation, but this presumption
can be overcome if the lawyer reasonably believes that the lawyer will be
able to provide competent and diligent representation to each client and
each client gives informed consent, confirmed in writing. The ACTEC
Commentary on Model Rule 1.7 states that the representation of multiple
members of the same family is often appropriate and beneficial to the
family. According to ACTEC, estate planning is fundamentally
nonadversarial in nature.
3. Advising on Asset Protection Issues
The Model Rules do not specifically address asset protection planning but
they require an attorney to represent a client within the boundaries of the
law and to carry out the representation without conduct involving fraud or
deceit. An attorney crosses the ethical line when he begins counseling or
assisting in conduct that he or she knows is criminal or fraudulent.
4. Providing Effective and Timely Counsel to Clients
Model Rule 1.3 requires "a lawyer to act with reasonable diligence and
promptness in representing a client." As stated in Comment 2 to the Model
Rule, "a lawyer's work load must be controlled so that each matter can be
handled competently." Mr. Fox pointed to Comment 3 which states that
perhaps no shortcoming is more widely resented by clients than
procrastination.
5. Fees
Mr. Fox noted that the costs for providing estate planning services are
increasing. Model Rule 1.5 requires that lawyers may only charge and
collect reasonable fees and a reasonable amount for expenses.
6. Designation of the Lawyer as Fiduciary or the Attorney for the Fiduciary
If you choose to designate yourself as a fiduciary or attorney for the
fiduciary, you must discuss with the client, provide the adequate
information required under Model Rule 1.4 and the written consent of the
client is required under Model Rule 1.7. There also are very strict rules
on gifts to the attorney and harsh consequences for those who do not
comply. Generally no gifts are allowed to the attorney unless the attorney
is related to the client. If the client wishes to make a gift to the
attorney, the attorney cannot prepare the gift and the client should have
independent counsel.
7. Failure to Disclose Adequate Information to the Internal Revenue Service:
Lawyers are subject to the ethical rules as well as the rules of conduct
imposed by the IRS. If a lawyer knows that a client has failed to comply
with the tax laws or has made an error or omission, the lawyer must advise
the client promptly and must also advise the client of the consequences
that could result. The next question is whether the lawyer has a duty to
also inform the IRS. The general consensus is that a practitioner must
only advise the client about the consequences of not filing a corrected
return and not to advise the client to file an amended return.
8. Clients with Diminished Capacity:
Model Rule 1.14 requires that a lawyer, as far as reasonably possible, must
maintain a normal client-lawyer relationship with the client. It also
provides that the lawyer, if he or she believes that the client has
diminished capacity and is at risk of substantial physical, financial or
other harm unless other action is taken, can take reasonable necessary
protective action. However, in taking the necessary protective action, the
lawyer should only disclose information about the client as is reasonably
necessary to protect the client's interest.
9. Obtaining Exoneration or Releases from Clients:
Model Rule 1.8(h) states that "a lawyer shall not: (1) make an agreement
prospectively limiting the lawyer's liability to a client from malpractice
unless the client is independently represented in making the agreement; or
(2) settle a claim or potential claim for such liability with an
unrepresented client or former client unless that person is given
reasonable opportunity to seek the advice of independent legal counsel in
connection therewith." If you want an exoneration or a release from a
client then make sure client has independent counsel. Otherwise, it
probably won't hold up.
10. Dealing with Metadata
One of the more difficult challenges is dealing with the issues presented
by the increasing use of technology in our practices. Metadata is the data
within the data that, while possibly hidden, can be discovered to show, for
example, what changes that have been made to the original document. If
opposing counsel sends a document and fails to eliminate the metadata, may
the lawyer review the metadata or does the lawyer receiving the document
(a) have a duty not to read the metadata, or (b) have a duty to read the
metadata. The rules appear to vary from state to state and appear to
produce conflicting results.
Mr. Fox concluded with a short story about Washington Lee University whose
only rule for its all male student body was "to be a gentleman." Mr. Fox
stated that similarly each lawyer simply needs to do what he or she
believes is right, and the lawyer will avoid most ethical problems. Mr.
Fox's materials also included the closing statement that "simply by being
aware of the rules, a lawyer will be better prepared to avoid the
difficulties that can arise if the rules are violated."
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Special Session 3-E - Case Studies on Best Practices for Confronting
Ethical Issues
Thursday, January 17, 2008
Presenters: Charles (Skip) Fox and Thomas Spahn
Reporter: Mike Stiff
This was a special session that followed Mr. Fox's general session on the
"The Top Ten Ethical Challenges Facing Estate Planning Practitioners Today
and the Best Practices for Addressing Them." The materials included 11
case studies that highlighted issues from the general session
materials. Due to the time constraints, the presenters were unable to
cover all of the case studies. The following is a summary of the case
studies that were covered and some of the comments from the presenters.
Case Study 1: A Virginia lawyer assists a longtime client who moves to
Florida with updating his estate planning documents with Florida law. Has
the lawyer engaged in the unauthorized practice of law that would violate
the Model Rule 5.5 or the amended Model Rule 5.5?
This type of conduct was not specifically addressed under the prior Model
Rule 5.5. The lawyer did not have a systematic or continuous presence in
Florida. The conduct was temporary in nature and reasonably related to the
lawyer's practice in his home jurisdiction. Therefore, it does not appear
to violate the amended Model Rule 5.5. This case study also illustrated
that knowing your own state's rules doesn't always help. You need to know
the rules of the state where the conduct or contact is occurring. The
unauthorized practice of law is a felony in some states and a misdemeanor
in others. The rules also do not differentiate between a licensed attorney
from another state and an individual with no legal background. Most of the
claims come from lawyers protecting their turf and not from clients who
have been ill served. The claims initiated by clients usually arise from
fee disputes or malpractice cases. Even if you may ethically practice law
outside your home jurisdiction, you still must be competent to do the
work. Malpractice risk remains whether licensed or unlicensed.
Case Study 2: A lawyer licensed in Illinois lives on the border of
Illinois and Indiana. Although the lawyer is not licensed in Indiana, he
has helped Indiana clients with their estate planning. Eventually, due to
the number of clients in Indiana, the lawyer opens an office in
Indiana. Has the client engaged in the unauthorized practice of law? What
if the lawyer only practiced federal law with clients in Indiana?
Yes, the lawyer has engaged in the unauthorized practice of law due to the
systematic and continuous presence in the state of Indiana. Even if the
lawyer never opened an office in Indiana, the systematic and continuous
contact may cause a violation without actual presence in the
state. Lawyers in several states have tried to argue that they were only
practicing federal law, but this argument has not been successful in either
California or Florida. It also is clear that certain states are much more
protective than other states.
Case Study 3: A lawyer has represented a father and his three children
with their respective estate planning documents. The lawyer also assisted
the family in establishing a family partnership with the three children as
the general partners. The lawyer also served as general counsel to the
partnership and continued to help with family matters. Several years
later, numerous disputes arise among the family members. One child
requests access to all of the lawyer's files on the partnership. The father
instructs the lawyer not to turn over any files to the child. The father
also requests that the lawyer amend his will to leave the child's share in
a restrictive trust. What should the lawyer do?
If a lawyer has multiple clients, the lawyer owes equal duties of loyalty
to each client. If the lawyer has multiple clients and one client wants
confidential information, the lawyer should let a court decide what
information should be disclosed. The lawyer should not choose one client
over another client. The lawyer may not use confidential information
against a client. If a dispute arises among jointly represented clients,
the lawyer will not be able to represent one client against another. The
lawyer will probably be unable to represent any of the parties without the
consent of all the parties involved.
Case Study 6: A sole practitioner gets a lot of his work from insurance
agents. One of the agents proposes a reciprocal referral fee
arrangement. The lawyer would receive a referral fee for all clients
referred to the insurance agent and the insurance agent would receive a
referral fee for all clients referred to the lawyer. What should the
lawyer consider before entering the agreement? A separate financial
advisor also works with the lawyer. This advisor usually meets initially
with the clients and then prepares a summary of the assets and the estate
planning documents to be drafted by the lawyer. This advisor does not like
the lawyer to meet with the clients without the advisor present. What must
the lawyer do to fulfill his ethical obligations?
The lawyer has a duty of diligence to send clients to the best
person. Lawyers are not allowed to share their fees with non-lawyers and
may not pay referral fees to non-lawyers. Some states allow lawyers to
receive referral fees from non-lawyers but most prohibit referral fees both
ways. The ACTEC commentaries also prohibit referral fees. The presenters
do not believe lawyers will be able to split fees with non-lawyers in the
future. The trend appears to be heading in the other direction. If the
financial advisor joins the meeting or phone conference with the client,
the communication is no longer protected by the attorney client
privilege. The lawyer also has to be careful what correspondence is
forwarded to other parties either by the lawyer or the client if the desire
is to keep such communications privileged. Some members present questioned
whether the privilege is necessary during most estate planning
meetings. The presenters responded that it is often difficult to predict
when it will be important and when it will not be important. In any event,
this decision should be made by the client and not by the financial advisor
or lawyer.
Case Study 10: An attorney working on a prenuptial agreement emails the
first draft to the opposing counsel. In emailing the prenuptial agreement
the metadata was not scrubbed. May the opposing counsel look at the
metadata in the document?
Mr. Spahn indicated that the metadata cases epitomize what ethical rules
are all about. Ethical rules are about balancing duties to clients with
duties to others. The ABA and Maryland have said it is ethical for lawyers
to look at the metadata. New York, Florida and several other states have
said it is unethical for the lawyer to look at the metadata. You can't
always rely just on your instincts.
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And now from the Technology Front, Steve Leimberg, who has kindly provided
us with some LISI News items that we have published as part of these
Reports has just sent us the following new software announcement:
Announcing Life Settlement
NumberCruncher--Now Available
What is it? Life Settlement NumberCruncher (LSNC) is easy-to-learn and
easy-to-use software designed to assist professionals and their clients in
the difficult decision of whether to retain or sell an existing life
insurance policy. This indispensable software is the first commercially
available professional tool to run economic "hold" (retain) or "fold"
(sell) numbers, an essential factor in the decision-making process.
LSNC was created to run the "HOLD or FOLD" numbers" - so that life
insurance and life settlement practitioners, trustees, attorneys, CPAs, and
other professionals can compute the economic viability of a sale - in
conjunction with taking a hard look at the other long-term needs,
objectives, and circumstances of the client and the client's family and/or
business or entity. Either one without the other deprives the client of a
full, fair, and completely objective analysis. Furthermore, LSNC helps
clients who are thinking of selling their policies to be more comfortable
with - and better understand the context and implications of - a sale.
You'll find more information at our website
at: http://www.leimberg.com/LSNC">http://www.leimberg.com/LSNC
LSNC is currently available for $299. You can obtain Life Settlement
NumberCruncher at
http://www.leimberg.com/LSNC/ or by calling
Leimberg & LeClair, Inc. at 610 924 0515.
This new product was also both mentioned and briefly demonstrated during
the two Technology Special Sessions that were held on Wednesday and
Thursday afternoons at Heckerling courtesy of Vince Lackner and The Lackner
Group (Vince helped to develop this program).
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THE REPORTERS
Our on-site local reporters who are present in Orlando this year are Gene
Zuspann Esq. of Zuspann & Zuspann in Denver, Colorado; Joanne Hindel Esq.
of Fifth Third Bank in Cleveland, Ohio; Jason Havens Esq. of Howard, Mobley
& Havens PLLC in Florida and Tennessee; Kimon Karas Esq. of McCarthy,
Lebit, Crystal and Liffman Co., LPA in Cleveland, Ohio; Bruce Stone Esq. of
Goldman, Felcoski & Stone, PA in Coral Gables, Florida; Craig Dreyer Esq.
of McDonald Hopkins LLC in Cleveland, Ohio; Carol Sobczak Esq. of The Law
Offices of Carol A. Sobczak in St. Helena, California; Ronda Martinez Esq.
of Fifth Third Bank in Southfield, Michigan; and Mike Stiff Esq. of
Hutchins & Stiff LLC in Denver, Colorado. The editor again this year will
be Joseph G. Hodges Jr. Esq, a solo practitioner in Denver, Colorado, who
also is the Chief Moderator of the ABA-PTL List.
_________________________________________
GENERAL INFORMATION ABOUT INSTITUTE:
Inquiries/Registration:
Philip E. Heckerling Institute on Estate Planning
University of Miami School of Law
Center for Continuing Legal Education
P.O. Box 248087
Coral Gables, FL 33124-8087
Telephone: 305-284-4762 / FAX: 305-284-6752
Web site: www.law.miami.edu/heckerling
E-mail: heckerling@law.miami.edu
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8701 World Center Drive
Orlando, FL 32821
Telephone (407) 239-4200, FAX (407) 238-8777
==================================================
NOTICE: Although audio tapes of all of the substantive session at the Miami
Institute currently are only made available to Institute registrants for
purchase, the entire proceeding of the Institute are published annually by
Lexis/Nexis. For further information, go to their Web site at
http://www.lexisnexis.com/productsandservices. The text of these
proceedings is also available on CD ROM from Authority On-Demand by
LexisNexis Matthew Bender. For further information, contact your sales
representative, or call (800) 833-9844, or fax (518) 487-3584, or go to
http://www.bender.com, or write to Matthew Bender & Co., Inc., Attn: Order
Fulfillment Dept.,1275 Broadway, Albany, NY 12204.
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