 |  |  |  |  |
 |
 |
 |
 |
 |
|
|
|
|
|
|
B
F
A
R
In April, 2003, our Newsletter covered a costly mistake by Wells Fargo Bank in New Mexico, where proper
marital deduction elections were not made in a timely fashion. The bank paid dearly for that mistake, having
been held responsible for the error and the increased estate taxes that resulted.
Now in 2004, Wells Fargo Bank in Wisconsin (formerly known as Norwest Bank) was held liable for the
negligence of an attorney when drafting a trust. The attorney settled. The bank (60%) and the Trust Officer
(40%) were held liable for a client’s additional tax.
Facts. In the Hatleberg case, a Trust Officer for the bank, had recommended an irrevocable trust for a client to
take advantage of annual exclusion gifts. The Trust Officer recommended an attorney. Unfortunately, the
clients selected another attorney not experienced in estate planning matters.
What was the defect? Apparently, the trust document as drafted and executed did not meet the requirements
of IRC § 2503, to qualify as a present interest gift. There was evidence that the bank knew of the defect but did
not notify the clients. The clients continued to make annual gifts, claiming the Annual Gift Tax Exclusion. The
IRS disallowed the annual exclusion. The taxpayers paid and sued the bank for damages.
The Crux of the Case. The bank and trust officer claimed expertise in estate planning. The court said that the
bank had a duty to the client to bring any known defects to the client’s attention and not to continue business
as usual knowing that a defect existed. The bank argued that it had no duty with respect to legal matters; but
the court rejected this matter claiming that the bank claimed expertise and having knowledge of the defect,
had a duty advise the client and not continue to encourage client actions that it knew to be questionable under
the applicable tax laws.
This should serve as a warning to financial planners, investment advisors, insurance agents and trust
officers. Many investment firms, banks and advisors claim estate planning expertise in their advertisements.
The Hatleberg case should serve as a warning to these institutions that if they are going to claim expertise,
they had better have experienced estate planning attorneys involved in the preparation of documents for their
clients. The Court in Hatleberg rejected the Bank’s defense that giving notice of tax consequences would
constitute the illegal practice of law.
What was the defect? The irrevocable trust to which annual donations were made, did not provide for
automatic distributions to the named beneficiaries at age 21, and did not contain Crummey withdrawal
powers that would qualify the gifts for the annual gift tax exclusion. The technical point is not nearly so
important as the over all principle that institutions and organizations claiming expertise may be held
responsible for defects in documents about which they knew or should have known.
If you are involved in make estate planning suggestions to clients, you should be aware of the Hatleberg case
and the exposure that you have for errors, even errors which were not made by you or your personnel. Make
sure when making your recommendations of attorneys, that you chose competent professionals with plenty of
insurance coverage. The latter is a subject that we attorneys don’t like to talk about. However, I am informed
that some financial firms will not recommend any attorney or CPA without a written representation of the
extent and limits of their malpractice insurance coverage. We would be happy to supply this information upon
request of organizations who have made or will make in the future recommendations for estate planning
services.
If you would like to discuss this matter or would like to obtain any of this information, please do not hesitate to
call Jim Modrall at (231) 941-9660.
Incidentally, our estate planning practice has grown dramatically in the past few years. Our firm is interested
in adding an attorney with 15 or 20 years experience in estate planning, probate and trust matters. If you know
of anyone with these credentials, please contact myself or Donald A. Brandt at (231) 941-9660.
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
| WEALTH CONSERVATION: PROFESSIONAL ALERT Brandt, Fisher, Alward & Roy, P.C. |
| May 2004 COSTLY MISTAKE BY WELLS FARGO by James R. Modrall III, J.D., C.P.A. |
| If you would like to receive future editions of the monthly Wealth Conservation Newsletter directly to your e-mail account, please e-mail our office using the following link: Estate Planning Newsletter |
| Brandt, Fisher, Alward & Roy, P.C. Attorneys at Law |