The Snt Ethical Construct: Even the Basics Can Be Difficult

STETSON COLLEGE OF LAW

SNT VIII - BASICS

LEGAL ETHICS AND SPECIAL NEEDS TRUSTS:

THE BASICS ARE STILL DIFFICULT

A. Frank Johns[1]

I. THE GENERAL FRAMEWORK OF LEGAL ETHICS

A. General Overview – Basics at the Beginning. Generally, SNT lawyers are mindful of the rules of professional conduct as they relate to client engagement,[2] merging them with the legal profession’s core values of competence, communication, confidences and loyalty. While this is no different than all other attorneys in the legal profession, SNT lawyers immediately confront complexities and obstacles when developing special needs trusts. Elder law and estates and trusts attorneys novice in developing these unique trusts must be sure they comply with basic ethics rules.[3]

1. Competence as Mandated under Rule 1.1.[4]

a. Case Study: Improper Construction of a Special Needs Trust.

Lawyer L had not handled any special or supplemental needs trusts for many years. However, L helped H and W, long time estate planning clients, with the creation of a special needs trust for their child with disability, into which funds of the child were to be placed. L failed to construct the trust under recent new laws that required certain language for the trust to be considered exempt for the child to receive Medicaid benefits. [5]

(1) Basic Analysis. This is an easy one; certainly L violated Rule 1.1. Paraphrasing Hazard & Hode, the change in law was not buried in obscure or debatable federal guidelines, but in an Act of Congress. L acted incompetently because he assumed his previous competence remained intact.[6]

(2) General Framework. As elder law, estate planning and disability attorneys move beyond basic services and documents that serve their clients, they realize how beneficial and integral the special needs trust could be for many of those clients. Before the lawyer moves into the greater complexity of the SNT specialty, he or she must meet the required expectations of legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation. While standards of SNT practice have yet to be developed that set a threshold of competence for those holding themselves out as SNT practitioners,[7] lawyers should measure their ability to be SNT practitioners against this basic criteria.

b. Case Study – Not Ready for Primetime.

A practiced law for eight years, elder law the last two. In the last two years, he prepared special needs trusts (SNT) for four different clients.

While A kept up with CLE requirements, none of them were on SNTs. He learned about SNTs through websites on the internet like the Center for Special Needs Advocacy. Even better, A found an SNT form in a trust book in the local court law library and saw no need to call one of the well known SNT experts in his area. The form that A used to write SNTs was titled The John Doe Irrevocable Special Needs Trust with d4A language, including mandatory payback.

A used the form in two SNTs that were added to wills as testamentary trusts, in one SNT that was a third party inter vivos trust and in one SNT that had a beneficiary over the age of sixty-five. In each case, A required clients use of another attorney in the firm as the named trustee, contending that no family members or individuals were authorized to be trustee, and banking and financial trustees would be too expensive.

After the documents were signed, A provided his clients with no further instruction, and did nothing to inform the state Medicaid office when necessary; neither did the firm attorney acting as trustee.

(1) Legal Knowledge. The lawyer is expected to have gained a familiarity with well-settled principles of applicable law,[8] as well as discovering additional rules and concepts specially applied in SNT practice although not commonly known, but readily accessible through standard research techniques.[9]

In this case study, A obviously had little familiarity with principles of SNTs. What are some of the basic SNT errors that A committed? Here are a few:

(1) Misuse of “Payback” in testamentary SNT;

(2) Misuse of “Payback” in 3rd party grantor SNT;

(3) Misrepresentation of law and rules to advance partner as trustee;

(4) Used d4A for beneficiary over age 65;

(5) Failed to finish legal services in a timely manner.

(2) Skill, Thoroughness and Reasonably Necessary Preparation. The skills required of a lawyer include the basic ability to draft pleadings and documents.

In this case study, A has not educated himself, taking basic courses and accessing manuscripts, on SNTs; has not consulted with an SNT expert able to guide him through or co-counsel in the cases and A has not familiarized himself with Medicaid law, regulations, procedures and guidelines.

2. Scope of Representation as Mandated Under Rule 1.2.

a. Case Study: When is the SNT Lawyer Engaged and By Whom?

PI Attorney (PIA) calls SNT Lawyer (SNTL), stating that Client wants SNTL to handle that part of a case that requires appearance before the Court, presenting how a settlement would be structured and developing the appropriate special needs trust. SNTL has a lengthy telephone conference with Client’s guardian and PIA without promptly communicating any hesitation or delay in agreeing to represent Client. Some weeks later, in preparation for the hearing before the Court, PIA contacts SNTL for a status update on the preparation of all necessary motions, settlement agreements, orders and the special needs trust. SNTL has prepared nothing, contending that they had only been discussing the possibility of representing Client.[10]

(1) Basic Analysis. Although MRPC Rule 1.2,[11] and analyses in treatises that discuss it[12], skip the focus of the case study, the Restatement points to the reasonable reliance necessary for the client to believe that the lawyer has consented to the client-lawyer relationship.[13]

(2) The Client’s Intent versus the Lawyer’s Consent. When the actions and representations of the lawyer lead the client to reasonably believe that there is a client-lawyer relationship, the lawyer will be held to the responsibility of representation.[14] In the case study, SNTL not only provides positive communication to PIA, but subsequently goes through further and lengthy communication in a telephone conference with PIA and Client, while at no time orally declaring any hesitation or delay in being the lawyer for Client. [15]

Having authorized PIA to initiate communication for engagement, and then following with the lengthy telephone conference with SNTA, the Client’s intent is manifested in the surrounding facts and circumstances,[16] especially if it is shown that Client provided SNTA relevant documents and papers, or that Client knew or should have known that PIA was providing them to SNTA on client’s directive. From the other side of the manifestation of intent, SNTA’s consent to representation is shown in two ways: First, by being involved in multiple communications that thoroughly engrossed SNTA in representations of what would be done; and second, by not declaring any delay, hesitation or qualification that would signal SNTA not being in the client-lawyer relationship.[17]

b. Case Study: Handling the Settlement of a Special Needs Trust Against the Client’s Decision.

Lawyer L represents P in a personal injury case. Up until settlement negotiations were formally mediated, L agreed that although P suffered a traumatic brain injury, P was competent to make a settlement decision in the case. During the mediation, P insisted that L stop negotiating and take the initial offer of settlement made by the defendant. L called a recess, at which time he told P to go home because the mediation had hit an impasse. L then went back into the mediation conference and declared the defendant’s offer rejected. L ended up trying the case with the verdict 10 fold greater than the defendant’s highest offer of settlement.[18]

(1) Agency Relationship and the Client’s Decision to Settle. Under Rule 1.2(a), little doubt is left as to the client’s control of a final decision to settle. P alone has the unequivocal authority to make that decision. In this case study, L has surely gone too far by intentionally misrepresenting to P what was to take place for the sole reason to keep from having to exercise P’s final decision to settle.

(2) Agency Relationship and Delegation to Attorney to Settle.

The Restatement provides an apparent exception by allowing client control as a default, and recognizing those situations in which the “counseled client” may transfer revocable authority to the lawyer.[19] This case study is not one of those situations.

There is nothing in the case study that can point to damages to P because of L’s unethical action. It is easy to see where L may see this as presumptively correct, believing that this is ethical and legally appropriate action. Why not? There was not only “no harm, no foul,” but also a much more successful outcome. However, since the probability is that there will be a time when L loses far more for a client than could have been gained in settlement, the public is better served by L being ethically reprimanded so that such conduct is shown to be unacceptable and less likely repeated.[20]

3. Reasonable Diligence as Mandated under Rule 1.3.[21]

a. Case Study: Proportionality and Promptness in Attention to a Small SNT and Undeserving Beneficiary.

Special Needs Trust Lawyer (SNTL) was involved with one of those PI settlements with an SNT that many seasoned SNT practitioners have handled. The net funds available to the SNT were just enough to warrant the shelter and structure of an SNT. SNTL reduced his fee in order to land the settlement. As difficult was the fact that the Beneficiary (B) (SNTL’s client) was an outright obnoxious squeaky wheel. Between the paralegal and SNTL, a huge number of billable hours were committed that were never compensated because of B’s insistence on changes to the SNT contrary to rules of exemption. B’s ridiculous demands forced SNTL to delay the final execution of the SNT subsequently costing B two months of lost Medicaid coverage.

Nothing in the ABA MRPC requires lawyers to invest inordinate time and resources into the client matter than that amount that comports with reason and proportionality.[22] Further, the demands of B in this situation are a direct cause for SNTL’s delay. On these facts, SNTL is neither ethically sanctionable, nor is he liable for B’s loss.

b. Case Study: Procrastination, Non-responsiveness and Inattention to SNT Clients

A has for several years been trying to develop an SNT specialty. Early in the practice, A quoted flat fees that did not return even a modest hourly rate and he was losing money. A has left three of those SNTs unfinished for more than eight months, although his flat fees, albeit too low, were paid in advance. A has paid all his attention to recent SNTs for which he will receive significantly higher flat fees. A will not return the calls of the clients of the unfinished SNTs.

Diligence is not the same as competence, although they are closely related, and ABA Ethics 2000 Commission actively considered their merger.[23] A lack of diligence or promptness is the same as neglect.[24] It is also the connector to the converse “axiomatic norm” of zealous representation within the bounds of law.[25]

In this case, A’s lack of attention cannot simply be attributed to procrastination or laziness in finishing the three SNTs. This will probably be considered worse because it is grounded in A’s intentional lack of diligence. Regardless, it is an example that violates the rule. Threat of sanction by the state bar will have little, if any, impact; while the threat of legal malpractice, although unlikely with these facts, will probably prove to be the greater incentive.[26]

B. Complicated Application. Other model rules must also be examined as more complicated ethical considerations are examined that confront elder law and estates and trust lawyers developing special needs trusts whether structured as inter vivos third party trusts, as testamentary trusts or as grantor funded d4A or d4C pooled trusts.

See Attachment “B” - Model Rules Examined in this Outline

II. RECENT CHANGES TO THE ABA MODEL RULES OF PROFESSIONAL CONDUCT THAT IMPACT ON LAWYERS DEVELOPING SPECIAL NEEDS TRUSTS

A. Changing Ethics and Practice. Over the last several years, the ABA and state bars have confronted the changing status of the legal profession by detailing ethical and practice changes, many of which are specifically impacting elder law and estates and trust attorneys.

B. 2001 and 2002 Ethics Revisions. Most practitioners are applying the revisions that came from the ABA Ethics 2000 Commission passed in 2001 and 2002. The revisions that are of interest here include:

1. Rule 1.0 Terminology, especially 1.0(e) defining informed consent, 1.0(d) defining fraud and 1.0(l) defining substantial when related to levels of harm.[27]

2. Rule 1.7 Conflict of Interest, as the clarity of the amended definition removes the confusion between direct adversity conflicts and material limitation.[28] The rule as revised now assists elder law attorneys and estate and trust lawyers in determining which situations pose "a significant risk" such that the representation will be limited by the lawyer's interests and duty to others.[29] This is applied in the outline when the lawyer is determining if there is a significant risk that compromises loyalty and duty when representing the interests of multiple clients, including the primary beneficiary as well.