It is now well established that a plaintiff s attorney should be subject to malpractice liability for not proposing a structured settlement annuity versus a lump sum payment to their injured clients and for not seeking the advice and assistance of a competent financial adviser in the process. The principles underlying this type of malpractice liability seem to justify holding estate and trust attorneys liable for failing to take steps to protect inheritors of wealth.
The lawyer’s liability in personal injury cases is based on the notion that the recipient of a lump sum payment will most likely not be able to competently manage the wealth. As a result it is thought that the wealth will dissipated before the needs of the injured party are met. So imposing liability on the lawyer helps to ensure that the injured party is not able to easily use the wealth for the purposes other than those in which it was received.
In addition, the lawyer’s liability may be based on failing to bring in a financial adviser to prevent the defense’s financial adviser from proposing an unfair transaction. Defense advisers typically have a commission arrangement with the defendant insurance companies. As a result they often have a strong incentive to make the settlement as low as possible (I am sure they would object to that statement). The plaintiff’s financial adviser helps level the playing field.
How is this any different than beneficiaries of inheritances who win the birth lottery? Like the injured party in a personal injury case, the beneficiary of new-found-wealth is probably in a weakened state. More times than not they grew up wealthy, meaning that they were protected by their wealth and therefore they did not develop the life skills necessary to manage their own affairs — yet alone their new-found-wealth. Recognizing this situation, wealth creators often turn to their estate and trust attorneys to help ensure that their wealth continues to protect their beneficiaries in light of the beneficiary’s wealth-created limitations. The typical response of estate and trust attorneys is to form various entities, such as a family limited partnerships or other business structures or a spendthrift trusts with sprinkling or discretionary or hold back provisions.
When the wealth creator meets his or her demise, the beneficiary finds his or herself in front of a trust officer, insurance agent, and/or investment broker. The trust officer earns a living by drawing down the funds over time; whereas, the insurance agent and investment broker earn a commission by encouraging the beneficiary to spend the money up front.
So if the trust officer is the first to arrive on the scene it is likely that the trust officer, under the hold back provision, will talk the beneficiary out of spending each and every penny. The trust officer will employ several avoidance techniques, such as not answering the phone and not returning phone calls. The trust officer may also exploit the dynamics underlying the beneficiary’s family relationships to “encourage” the beneficiary not to spend any of his or her wealth. Not having the ability to manage their own affairs and having no money to remedy the situation, the beneficiaries will (sadly) be in an unenviable position. On paper they are monetarily rich, but in reality they are monetarily and probably emotionally poor. Even if they knew where to look for help, the beneficiary would not want to do so for fear of the trust company, family members, and even fear of exposing their own limitations. This is probably a far cry from what the wealth creator had envisioned.
On the other hand, if an insurance or investment professional was the first responder then it is likely that the beneficiary will make a large and probably inappropriate purchase and neither the insurance nor the investment professional will stick around to help the beneficiary obtain the necessary life skills to competently manage their new-found-wealth. As a result of the commission that the professional earned and of the lack of proper guidance, the wealth will probably dissipate in a very short period of time.
In a number of ways these situations are strikingly similar to situations involving plaintiffs’ attorneys who fail to recommend structured settlements and/or fail to bring in a knowledgeable financial adviser. I am not aware of any particular malpractice case brought on these grounds, but I do believe it is only a matter of time before creative malpractice attorneys start filing these types of cases (the amount of money at steak makes these types of cases prime candidates for contingent-fee-motivated plaintiff attorneys).
Just imagine the case where a beneficiary of a sizable estate blows through his or her inheritance in a relatively short period of time (or conversely where the trust officer does not allow the beneficiary to spend a penny). The wealth creator’s estate and trust attorney is sued and takes the stand to testify. On cross-examination the cross-examiner asks the witness what steps they took to help prevent this situation from occurring. The witness responds, “I created a family limited partnership that included various transfer restrictions and provisions for replacing the manager.” The cross-examiner asks the witness basic questions about the wealth creators family and about the beneficiaries. For the most part the witness responds, “I don’t know.” The cross-examiner asks the witness if they have ever even met the beneficiary. The witness responds, “No.” Then the clincher. The cross-examiner asks the witness whether they knew that the beneficiary had a history of using drugs, a history of poor money management, a history of dominating other family members, etc. The witness responds, “No.”
These cases are out there. So what should trust and estate attorneys do in these cases to ward off this type of liability? Find a wealth coach and bring them in at the point where the wealth creator is proposing to pass wealth to others. This would help prevent this type of case from being brought. But if it were brought then the cross-examination might look something like this: The cross-examiner asks the witness what steps they took to help prevent this situation from occurring. The witness responds, “I referred the wealth creator and his/her beneficiaries to a wealth coach who helped manage the wealth transfer process and who educated and counseled the beneficiary so that they would be able to competently manage their new-found-wealth. After that I followed up with the wealth coach to make sure that the beneficiary was making progress.”
While it is not an iron-clad defense, it is at least a defense.