Recently, a medical malpractice claim brought on behalf of a child was resolved. The probate court approved the placement of the net recovery of approximately $250,000 in a court-supervised special needs trust. The mother of the child was named as initial trustee, but neither the involved attorney nor the court required that the mother obtain a surety bond to protect the child’s funds. In two years, the child’s parents misappropriated most of the funds, leaving the trust without assets.

The mother is now exposed to a surcharge and/or felony criminal embezzlement charges. Inasmuch as the parents are uncollectible, the involved attorney is at risk of a disciplinary proceeding or a legal malpractice claim brought on behalf of the child or a successor trustee to recover the financial losses.

Consultation with other attorneys in the SBM Probate and Estate Planning Section has produced a consensus that the duties, including duty of care in a malpractice context, imposed on attorneys in this or a similar situation are very fact sensitive. Issues include the scope of the retainer agreement, the degree to which the retainer agreement covers the attorney’s obligation to manage administration and the filing of annual accounts, whether the attorney continues an appearance in the Probate Court proceeding supervising the trust, the attorney’s knowledge of red flags regarding the proposed trustee that beg protection of the beneficiary, etc.

LEGAL ANALYSIS: LEGAL MALPRACTICE

Court rule and statute provide some guidance. Per MCR 5.206:

A fiduciary and an attorney for a fiduciary must take all actions reasonably necessary to regularly administer an estate and close administration of an estate. If the fiduciary or the attorney fails to take such actions, the court may act to regularly close the estate and assess costs against the fiduciary or attorney personally. [Emphasis added.]

MCL 700.1104(e), part of the definition section of the Estates and Protected Individuals Code, provides that the term “‘[f]iduciary' includes, but is not limited to, a … trustee … .” Further, MCL 700.1104(b) provides that “‘[e]state’ includes the property of the … trust ….”

Thus, the administration of an “estate” includes administration of a “trust.” If an attorney’s omissions amounted to a failure to administer the estate/trust, the attorney faces personal exposure to costs. A legal malpractice attorney may use this duty as the basis for a claim against the probate attorney.¹

In this case, it was clear to the attorney requesting court approval of the special needs trust that the mother nominated as trustee had no experience in trust administration and was unqualified to be given unfettered access to such a substantial amount of money. This became even clearer as the attorney was unable to obtain from the mother/ trustee any documentation for the first annual account showing that funds were used for her daughter’s benefit consistent with the terms of the trust, rather than as a personal piggy bank for her own and her husband’s whims. At the very least, given the red flags, the attorney should have been more assertive in protecting the child and stemming the losses by either requiring the mother to obtain a bond or petitioning the court to order one before the trust was completely looted.

LEGAL ANALYSIS: AGC DISCIPLINE

Michigan Rules of Professional Conduct Rule1.1: Competence provides in part: A lawyer shall provide competent representation to a client. A lawyer shall not neglect a legal matter entrusted to the lawyer.

The attorney’s failure to “take all actions reasonably necessary to regularly administer an estate” could be characterized as “neglect of a legal matter entrusted to the lawyer,”² exposing the attorney to action by the Attorney Grievance Commission.

The value of a bond

The child’s loss could have been avoided had a bond been obtained, either ordered by the court or required by the involved attorneys. Astute attorneys often arrange for bonds even when a court does not order one. For example, if an attorney is handling an estate for a layperson who is serving as a fiduciary for an estate, a trust, a ward, or a child, the attorney may advise or even require the client to obtain a bond. This would provide protection for the attorney in the event that the fiduciary mismanages the funds and the estate, beneficiaries, ward, or child either makes a claim against the attorney or institutes disciplinary proceedings because the fiduciary has dissipated the funds and is no longer collectible, leaving the attorney subject to a professional negligence claim or AGC action. Even if a malpractice claim is unsuccessful, the attorney must defend it with the cost of the insurance deductible, the effect on professional liability insurance premiums, reputational damage, and worry. Even if no discipline is ordered as a result of an AGC request for investigation, AGC scrutiny poses its own risk and expense.

Costs of fiduciary bonds depend on the amount of the bond to be obtained. For example, the annual premium for a bond for $500,000 would be about $2,500, or one half of one percent of the amount of the bond, which is an allowable expense of the trust or estate. This is a small price to pay for vital protection.

Restricted accounts are often ordered in Probate Court decedent or conservatorship estates. Such accounts may, at first blush, appear more economical, but such accounts involve additional administrative expenses. These include preparation and filing of the attorney’s statement to restrict funds, obtaining and filing the bank’s proof of restriction, an annual verification of restricted funds, a petition for use of funds, obtaining an order for use, submission of the order to the bank, dealing with each bank’s unique procedures, possible time-consuming review by the bank’s legal department, and then obtaining the funds. When all these are considered, the flexibility of a bond with the accompanying fixed annual cost and ready access to funds becomes attractive, and the attorney would be well advised to request that the court order a bond in lieu of a restricted account.

For estates with relatively large assets, a combination of a restricted account and a bond may be advantageous. Imagine an estate with assets of $800,000, with anticipated annual expenses of $100,000. The Court may be approached with a petition for a restricted investment account for $700,000 of the funds, with a bond for a separate operating account of $100,000. This allows the fiduciary the flexibility to spend $100,000 each year for the expenses without having to petition the Court for use of funds, and as that sum is consumed each year, the fiduciary can, when filing for approval of the annual accounting, request movement of $100,000 from the restricted investment account to the operating account protected by a bond. This arrangement would considerably reduce bond costs.

CONCLUSION

This scenario, which is all too common, is a cautionary tale for attorneys who practice in this field of law. Practitioners would do well to heed the advice of Hon. Allen Nelson (1938-2020), who served as Genesee County probate judge for 20 years before his retirement in 2006. Judge Nelson often offered this keen insight:

“Trust the family if you will, but bond the hand that holds the till.”