Pitfalls seen in preparing living trusts

An attorney who prepares living trusts for a financial marketer or an insurance agent faces serious ethical pitfalls, according to a recent State Bar ethics opinion.

Formal opinion No. 1997-148 of the bar's Committee on Professional Responsibility and Conduct (COPRAC) warns that arrangements between lawyers and sellers of living trusts have been judged to be unethical in numerous jurisdictions, including California.

The opinion presents a hypothetical situation in which a lawyer prepares a living trust based on information provided by an individual who attends a widely advertised free seminar offered by an insurance agent or financial marketer.

At the seminar, the marketer describes the benefits of a living trust, tells participants they should have one and does not offer any estate planning alternatives. He also tells participants that an attorney will prepare the living trust and respond to any questions.

A participant fills out a questionnaire, identifies beneficiaries, and pays the marketer, who then gives the form to the lawyer. The attorney has no discretion to decide that something other than a living trust might be more suitable for the client.

After the trust is prepared, the client signs off at the attorney's office, and the marketer pays the attorney a fee.

The problem presented by the situation "is its potential to mislead members of the public into believing that they have an attorney whose sole purpose in the transaction is to look after their best interests," the opinion says, adding that the best interests of the marketer and the best interests of the seminar participant may be at odds.

Several possible problems arise:

Under the situation described, it is assumed the attorney represents the seminar participant as a client. However, a third person, the marketer, controls the lawyer's access to clients. The marketer determines the type, terms and conditions of the estate plan without the lawyer's involvement, and decides what information to solicit and convey to the lawyer.

"By acquiescing to the marketer's unilateral authority to make these critical decisions, the lawyer allows a third party to interfere with the lawyer's independence of professional judgment and violates rule 1-600 (A)," of the Rules of Professional Conduct, according to the opinion.

That rule prohibits lawyers from participating in any program or activity which allows a third party to interfere with their "independence of professional judgment or with the client-lawyer relationship."

The attorney may have conflicting relationships with the client and the marketer. The arrangement with the marketer may be an attorney-client relationship, a business and financial relationship, or one that entails fee-splitting. In any case, under these facts, the lawyer is in the position of serving two masters.

The best interest of the marketer will be served only if the partic pant's estate plan includes a living trust. But a living trust may not be in the best interests of the client.

Fee-splitting with a non-lawyer also is prohibited by rule 1-320. An attorney may not receive payment from a seminar participant for a living trust and then pay the marketer a percentage for finding clients and referring them.

Nor can the participant pay the marketer, who in turn pays the lawyer a percentage.

Statements made by the marketer concerning the employment of the lawyer violate the in-person solicitation ban because they are meant to obtain clients for the lawyer.

"In both the advertising and the solicitations, the marketer cannot do on the lawyer's behalf what the lawyer cannot do," according to the opinion. "Under the facts, the marketer simply becomes the agent of the lawyer."

In addition, the attorney also risks violating ethical rules which prohibit false advertising and in-person solicitations.

In the scenario described in the opinion, statements made at the seminar "contain untrue statements and omit facts -- such as that living trusts may not be best in every case -- necessary to make the communications not misleading," the opinion states.

A full text of the opinion, which is advisory only, is available by calling 1-800/2ETHICS.