Death and Taxes - The Blog

American Family: A Living Trust Scam?

According to this article, a North Carolina judge has ordered a company called American Family Prepaid Legal Corp. (and what looks like a sister company called Heritage Marketing and Insurance Services) to stop hawking their wares in the state.  The "wares" in question are estate planning services, and a lawsuit is pending against the company (the North Carolina Attorney General filed suit against the companies back in May).  According to the article:

American Family Prepaid Legal would solicit customers to buy legal services plans to create living trusts to avoid paying probate costs, the lawsuit says. The company billed its living trust, which cost $1,995, as a bargain when compared with probate costs, the lawsuit says. But for someone to pay almost $2,000 in probate costs, his estate would have to be worth more than $500,000, the lawsuit says. Once the consumer signed up for the living trust, a Heritage sales agent visited the home, ostensibly to have the consumer sign paperwork but really to try to sell deferred annuities.

This is pretty much the same rationale that was used in Pennsylvania earlier this year (see this article), when Pennsylvania's attorney general filed suit against American Family and Heritage, and American Family was kicked out of The Better Business Bureau of Western Pennsylvania.

A few months ago I had some not-so-nice things to say (here and here) about a group of "legal reformers" called HALT.  Sure enough, HALT recently defended American Family Prepaid Legal (here).  Part of HALT's argument is true -- I agree with the statement that "[s]tate and local bar associations use unauthorized practice of law statutes to prevent affordable alternatives to lawyers from being able to do business."  However, these statutes do also have a valid purpose of consumer protection.  Unfortunately, the folks at HALT, in their quest to make consumers safe from evil lawyers, appear to have succeeded only in making consumers more vulnerable to evil non-lawyers.  Nice work!

My Office Situation

For the past two years I have rented office space in Oak Park (at 1101 Lake Street).  However, my lease ends on July 31, which means that a move is in order.  After looking at a lot of other office space, and doing a lot of thinking about my needs and the needs of my clients, I've decided not to go with a formal office arrangement.  The reasons are fairly simple:

1. I don't have a lot of client visits.  I neither have nor seek walk-in traffic, and I interact with my clients a lot via e-mail and telephone.  It seems a little silly to maintain a permanent office when I probably have one client meeting per week.

2. I have always made "house calls," and I think that's one of the things clients -- especially elderly clients, and clients with small children -- like about me.  I'll continue to do that.

3. The rents for the office space I looked at were almost double what I am currently paying in rent.  I'm not willing to eat that increase myself, and I'm reluctant to pass it on to my clients by raising my rates.

4. I was able to work out a virtual office arrangement with a company called HQ.  This allows me to schedule client meetings at what will be my main office (One Westbrook Corporate Center, Suite 300, Westchester, Illinois 60154).  I can also schedule meetings at other Chicago-area HQ offices (and there are a lot of them).

My biggest concern in getting rid of my office is that it creates an unprofessional look for my practice.  I don't want to be perceived as "the lawyer who works out of the back of a van," or some such thing.  On the other hand, I'm not interested in spending "money for nothing" just so I can create a certain image for myself -- I'm more concerned about doing good legal work.

Basic Professional Responsibility and Estate Planning

If you're an estate planning attorney looking to avoid malpractice claims and other problems, it's a good idea to meet with and/or talk to your client before preparing a Will for him.  Seems like common sense, doesn't it?  Apparently not to Ohio attorney Steve M. Soltis -- according to this article, Mr. Soltis prepared a Will and other estate planning documents for a man named Calvert M. Porter.  But Mr. Soltis never met or even talked to Mr. Porter; instead, he spoke only to Mr. Porter's girlfriend.  Needless to say, Mr. Soltis was asked to (and did) prepare a Will naming the girlfriend (Imogene Crouch) as Mr. Porter's sole beneficiary. 

One stunning fact:

The Columbus Bar Association filed disciplinary charges against Soltis, saying that, had he met with Porter, none of the current litigation would exist. Soltis was cleared of ethical charges in May.

To my mind, the above fact pattern reveals some serious professional responsibility issues, involving conflict of interest (was Mr. Soltis really representing Mr. Porter's interests?) and basic competence.  How can you prepare a Will for a client when you don't know whether or not the client is competent, and don't know the client's wishes?  You can't.

The Art of Drafting

I've always been a big believer in the importance of good legal drafting.  My feeling has only been reinforced since I've recently encountered the following:

1. A buy-sell agreement that tells how to value the company's shares upon the employee's death, but makes no mention of the valuation date to be used;

2. A premarital agreement that requires one spouse's estate to pay "for the support, health care and maintenance" of the other spouse, but doesn't define these terms or set a timeframe for payments; and

3. A trust (in the same case as the above premarital agreement) that includes numerous gifts to the surviving spouse, but doesn't indicate whether the gifts are in satisfaction of -- or in addition to -- the gifts required under the premarital agreement.

Good drafting is like insurance -- it can save you a LOT of time, trouble and money down the road.

Cloudy with a Chance of Light Blogging

Blogging is probably going to be fairly light for the next couple of weeks, first because of the Memorial Day holiday and then because of some (hopefully) minor surgery.  I hope to be up and posting again on June 6.

Attorney's Fees: How Much Do You Charge?

"How much do you charge?" is obviously an important question to ask of any attorney, but the answer can be complicated.  People want me to give them a number that fits within their idea of what the work should cost, but I'm not always able to do that, especially if I don't know anything about the client's situation.  Instead of asking "how much do you charge?" I think the better question is "how do you charge?"

Some thoughts about methods of billing:

1. I charge a fixed fee for estate planning work.  I've been doing this type of work for almost ten years, and I know what is required of me in terms of time and brainpower.  I'll meet with a client to discuss his or her situation, and quote my fee at the end of that (no obligation) meeting.  My fee won't exceed that quote except in extraordinary circumstances (like, the client completely changes his estate plan after I've already prepared it). 

2. I charge my hourly rate ($200) for probate work (including litigation).  I can't charge a fixed fee for this work because it's impossible to know from the beginning whether an estate or trust matter will be simple or complex.  I don't want to quote a small fee and then be held to that quote when the estate blows up (with Will contests, citation actions, etc.) -- that's not fair to me.  I also don't want to charge a large fee and then discover that the estate can be handled very easily and cheaply -- that's not fair to the client.

3. Every method of charging attorney's fees has its problems -- consider the Big 3:

hourly rate: can create an incentive for attorneys to spend (or bill) too much time on a matter, in an attempt to drive up fees (examples: the attorney who has 9,000 billable hours in a year, or who bills a client 10.00 hours for a matter that should've taken 5.00 hours)

fixed fee: can create an incentive for attorneys to spend too little time on a matter, in an attempt to maximize their overall fees (example: the attorney who spends 2.00 hours -- and therefore does a bad job -- on a fixed fee matter that should've taken 5.00 hours)

percentage: Some attorneys bill based on a percentage of assets in an estate -- this is how things work in California (see Sawday and Drake's excellent post on fees in California probate, here).  The problem (as I explained a few months ago) is that size of estate is a bad proxy for amount of time the estate will require.  I've worked on large estates that were handled very easily (maybe one heir and a limited number of assets), and small estates that took up a lot of my time (lots of heirs, lots of fighting, etc. etc.).

4. Every once in a while, some firm will try to introduce a billing method other than those mentioned above (like this one).  They may get some free marketing in the process, but their efforts will, I think, ultimately be worthless.  At the end of the day, if you provide good service and bill in a reasonable way, your clients will pay your bills and remain your clients, regardless of the method you use for billing. 

What do I mean by "bill in a reasonable way"?  Basically, I try to perform work and prepare bills with my clients in mind.  If I'm billing on an hourly basis, I provide a lot of detail about the work I did, and how long it took to do it.  I also don't engage in the (ethically suspect) practice of billing clients .25 hours for work that takes 1-2 minutes.  If the only work I do on a client matter during a given day is to have a brief phone call, then I note the call on my bill and put down 0.00 hours for my time. 

Do clients appreciate things like that?  Given the fact that, in almost 5 years of solo practice, I've never had a fee dispute with (or a late payment by) a client, I believe the answer is "yes."

More on Wieland, Brown, and Client Trust Accounts

The Wieland and Brown decisions I discussed on Friday create some real challenges for practicing lawyers.  To begin with, when client trust money comes in, an Illinois attorney must determine whether the money constitutes "nominal or short-term funds" under Illinois Supreme Court Rule 1.15(d).  If it does, then the money must be deposited (per paragraph (4) of Rule 1.15(d)) into an account affiliated with the state's IOLTA program.

What if the attorney's determination of whether the money constitutes "nominal or short-term funds" is incorrect?  Paragraph (5) of Rule 1.15(d) states that "[t]he decision as to whether funds are nominal in amount or are expected to be held for a short period of time rests exclusively in the sound judgment of the lawyer or law firm, and no charge of ethical impropriety or other breach of professional conduct shall attend a lawyer's or law firm's judgment on what is nominal or short term." 

It appears, therefore, that a lawyer is "off the hook" if he or she mistakenly places funds that are "nominal or short-term" in a non-IOLTA account, thereby allowing the client (rather than the Lawyers Trust Fund of Illinois) to retain the interest generated on the funds.  The converse is not true, however -- while a lawyer who mistakenly places client funds into an IOLTA account will not face disciplinary problems (because of Rule 1.15(d)(5)), the lawyer could face a lawsuit from his or her client.  Justice Stevens makes this clear in the Brown decision (in the excerpt below, "LPOs" are non-lawyers who hold money in escrow for real estate transactions -- the same analysis should apply to lawyers):

The Rules adopted and administered by the Washington Supreme Court unambiguously require lawyers and LPOs to deposit client funds in non-IOLTA accounts whenever those funds could generate net earnings for the client.... Thus, if the LPOs who deposited petitioners' money in IOLTA accounts could have generated net income, the LPOs violated the court's Rules.... Such mistakes may well give petitioners a valid claim against the LPOs, but they would provide no support for a claim for compensation from the State, or from any of the respondents.

Let's consider this hypothetical:

Attorney Andrews receives $10 million from Chuck Client on February 6, 2006.  Attorney Andrews is instructed by Chuck Client to transfer these funds to Steve Seller on February 7, 2006 (the next day).  Illinois Supreme Court Rule 1.15(d)(4) would seem to require Attorney Andrews to place the $10 million in an IOLTA account, since the funds are obviously being held on a short-term basis.  However, if Attorney Andrews does so, then (according to Justice Stevens) he risks a lawsuit from Chuck Client for the interest lost (if we assume a 1% interest rate, we're talking about perhaps $275). If this lawsuit is successful, and Chuck Client is able to recoup his "lost" interest, then...

Lawyers Trust Fund of Illinois will be +$275 for this transaction

Chuck Client will be +$275 for this transaction

Attorney Andrews will be -$275 for this transaction

Put another way, because of an error in judgment, Attorney Andrews mistakenly gave to the state money that rightfully belonged to Chuck Client.  But, rather than give the money back to Chuck Client, the state is allowed to keep it!

I'm all in favor of punishment when lawyers do wrong, but IOLTA rules put lawyers in very difficult situations.  In Washington, the lawyer must guess whether the client funds will generate net interest; in Illinois, the lawyer must ascertain whether the client funds are nominal or will be held short-term.

What can practitioners do to avoid these problems?  One of two things, I think:

1. Incorporate references to the IOLTA rules into all engagement letters (and, of course, always have an engagement letter).  Explain the dilemma, in writing, to your clients, and tell them that you plan to deposit all of their funds into an IOLTA account (meaning they lose the interest) unless you and the client sign an agreement to the contrary. 

2. If Ronald D. Rotunda is correct in stating (in this article) that the costs of getting interest from a client trust account to a client are approaching zero, then I think lawyers need to stop placing client funds in IOLTA accounts.  Instead, we need to work with banks (and, possibly, each other) so that client funds can work for the benefit of our clients.

Client Trust Accounts, IOLTA, and the Takings Clause

Lawyers occasionally hold money on behalf of their clients -- for instance, a client may pay me for legal work I have not yet completed, and I will (per my engagement letter with the client) hold these funds in a client trust account until I finish the job.

What happens to the interest earned on money held in a client trust account?  In most cases, Illinois (under Illinois Supreme Court Rule 1.15(d)) requires that such interest (referred to as IOLTA, short for Interest On Lawyer Trust Accounts) be paid to the Lawyers Trust Fund of Illinois.  According to an article in January's CBA Record, the Lawyers Trust Fund "used interest income that it received [during its last fiscal year]... to make more than $4,000,000 in grants to organizations that provide legal aid to the poor."

The problem with the above arrangement is that it seems to violate the Fifth Amendment to the United States Constitution ("... nor shall private property be taken for public use, without just compensation.")  At least, that's what plaintiffs claimed in the recent Illinois Appellate Court case of Wieland v. Lawyers Trust Fund of Illinois, 836 N.E.2d 166 (5th Dist. 2005).   The court disagreed.

Wieland follows (unsuccessful) challenges to IOLTA programs in other states.  Indeed, for its decision, the court in Wieland relied heavily on the U.S. Supreme Court's decision in Brown v. Legal Foundation of Washington (538 U.S. 216 (2003)), which involved a challenge to the IOLTA program in Washington state.  In Brown (available here as a pdf), the Supreme Court found that private property had been taken for public use, but valued the "just compensation" for this taking at zero.  Why zero?  Because the Supreme Court decided to measure "just compensation" by looking at the property owner's loss instead of at the government's gain.  Washington's IOLTA program required only funds that couldn't generate net interest to be placed in what are referred to (with some redundancy) as IOLTA accounts.  In other words, no compensation was necessary because the client wouldn't have earned interest on the funds anyway -- either the funds wouldn't have been held in an interest-bearing account, or the interest generated would have been subsumed by the administrative costs associated with it. 

Ronald D. Rotunda questions this point and some others raised by the Supreme Court in Brown, in a well-written article entitled "Found Money: IOLTA, Brown v. Legal Foundation of Washington, and the Taking of Property without the Payment of Compensation."  The article is available as a pdf at The Cato Institute's website, here.  One of Mr. Rotunda's observations is that some of the justices in Brown don't seem to understand technology or how law is actually practiced.  With computers, it has become quite easy to track the interest created from even a small amount of principal, and to assign that interest to a client as a credit.  If the potential cost of doing so is under $4,000,000 per year in Illinois (and it surely is), then how could a court set the amount of "just compensation" at zero?

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Thanks to something called domain mapping -- and the assistance of Jamie Jamison -- you can now reach this blog via the traditional URL (jas-law.typepad.com) and via www.deathandtaxesblog.com. 

Client List Analysis

Every year I go through my client list and do a bit of analysis.  This year I thought I would share some of the results here.

I categorized the matters I worked on by practice area, so I could determine how I spend my time.  In doing so, I discovered the following:

Estate planning: 44% of all matters handled
Estate and trust administration (including litigation): 18%
Real estate -- purchases: 18%
Real estate -- sales: 13%
Other (mostly premarital agreements): 7%

I also examined where my clients live, and came up with a "top 10" list:

1. Chicago
2. La Grange (where I used to live and practice -- also includes La Grange Park and Countryside)
3. Oak Park (where I currently live and practice)
4. Out of state (Note that, while I can't do estate planning for residents of a state other than Illinois or deal with real estate located in another state, I can represent non-Illinois residents in Illinois probate proceedings and in the purchase or sale of Illinois real estate.)
5. Bolingbrook
6. Westchester
7. Elmhurst
8. Downers Grove
9. Naperville
10. Darien

Of course, this list isn't exhaustive.  Much to my surprise, I cover a lot of the Chicagoland area -- I have clients as far north as Wadsworth (44 miles from Oak Park), as far west as Naperville (23 miles from Oak Park) and as far south as Chicago Heights and Park Forest (32 miles from Oak Park).  No wonder my car has so many miles on it!