Estate & Trust Administration For Dummies, 2nd Edition
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Everyone makes mistakes. When determining if a mistake with your estate or trust is malpractice, it’s the nature of the error and what steps are taken to rectify it that counts.

Professional malpractice covers quite a bit of ground. Among the reasons you may claim malpractice are cases where a professional has been negligent, where a professional has acted unprofessionally according to the standards set by his or her peers, and where there is a fee dispute.

We’ve seen many cases of malpractice over the course of our careers, and cleaned up after a variety of attorneys, accountants, and investment advisors who not only messed up, but left the mess sitting for the next person. What defines the malpractice is that, not only was the mistake preventable and the cleanup expensive, but the estate or trust has to foot the cost.

Malpractice can occur while you’re administering the estate, but it also could have occurred during the decedent’s lifetime, and you need to be on the lookout for potential malpractice when you first become executor or trustee.

For instance, if the decedent’s attorney didn’t draft the will and/or trust correctly, with unintended results, that’s malpractice. Although you may not have the professional expertise to know this type of malpractice when you see it, those professionals whom you hire hopefully will.

Why estate and trust malpractice occurs

Malpractice happens for primarily two reasons: lack of knowledge and/or oversight, and lack of ethics. The first, lack of knowledge or oversight, causes most mistakes. Unfortunately, ignorance of the law is no excuse, so an unwitting omission is still a mistake, and may still cost you.

True professionals do everything in their power to make sure that you don’t suffer for their mistakes. When an error is discovered, not only will a professional notify you of the problem but he will also take steps to rectify it while limiting, or even eliminating, the cost to you.

So, for example, an accountant who fails to file accurate income tax returns should pay for the penalties if the inaccuracy was due to his failure, and not the client’s. On the other hand, it’s reasonable to expect the client to pay the additional tax and interest, as the tax was owed regardless, and the client had the use of the money for the additional time the tax remained unpaid.

Malpractice due to an ethical lapse is rarer, but much more difficult to identify and fix. Face it, crooks are crooks; they know things that you don’t, they know ways to steal and hide money that you’ve never thought of, and they have excuses and explanations ready and waiting to hand to you when you first begin to feel uneasy.

The types of ethical malpractice are limited only by your imagination. There are numerous cases of elder abuse, of embezzlement, of fees charged for phantom work, of experts hired whose sole claim to expertise is the fact that they’re Uncle Joe’s nephew. The list is truly endless, and just when you think you’ve seen everything, something new comes along to surprise you.

Just because you’re in the dark about what someone is doing in your name doesn’t mean that you’re necessarily off the hook if he turns out to be shady. Remember, you hired this person. If your radar is going off and you’re not doing anything to discover why, a court may find you equally liable even though you had no knowledge of the misdeed.

The key to finding malpractice is checking, auditing, or whatever else you’d like to call it. Don’t assume that something is done just because someone has given you assurances. Check it yourself. Call the beneficiary to make sure that he or she received the distribution. Insist on receiving, and then reading, your quarterly or monthly statements. If you don’t like something, it’s time to have someone else take a look.

Protect your estate and trust assets

Whenever you hire any professional to do work for you, be sure that person has adequate insurance. Just as you wouldn’t let someone work on your roof without first being certain he carried liability insurance, don’t give anyone access to your books and records without seeing proof that this person carries professional liability insurance (sometimes known as errors and omissions [E&O] insurance).

In addition, if you’re acting as a trustee for a testamentary trust, as a court-appointed guardian, conservator, administrator, or executor, you will likely be required to obtain a fiduciary bond. Being bonded is a good thing; it provides you with protection in case someone decides you’re doing a bad job. Unfortunately, if there is no bond required, you may have no insurance protection if someone brings a lawsuit against you.

For non-testamentary trusts (those not created under the decedent’s will) or if no bond is required for a testamentary trust, you should check with your insurance agent to see if your actions as a fiduciary are covered under your own umbrella liability policy.

About This Article

This article is from the book:

About the book authors:

Margaret Atkins Munro, EA, has more than 30 years of experience in trusts, estates, family tax, and small businesses. She lectures for the IRS annually at its volunteer tax preparer programs. Kathryn A. Murphy is an attorney with more than 20 years of experience administering estates and trusts and preparing estate and gift tax returns.

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