In Belt v. Oppenheimer, Blend, Harrison & Tate, Inc., No. 04-0681, 2006 Tex. Lexis 440, 49 Tex. Sup. Ct. J. 598 (Tex. 2006), the Texas Supreme Court held that the executors of a decedent's estate may sue the decedent's estate planners for negligence in drafting a will. The executors alleged that the negligence in drafting the will resulted in over $1.5 million in tax liability that could have been avoided by competent estate planning.

In its central holding, the Court rejected the attorneys' privity argument. The Court had previously held, in Barcelo v. Elliott, 141 S.W.3d 706 (Tex. 1996), that beneficiaries cannot maintain a malpractice cause of action against a decedent's estate-planning attorney because the attorney lacks privity with non-client beneficiaries and therefore owes them no duty. 141 S.W.3d at 708-09. In that case, the intended beneficiaries of a trust, which was declared invalid after the client's death, sued the attorney who drafted the trust agreement. Id. The Court held that the non-client beneficiaries could not maintain a suit against the decedent's estate planner because "the greater good is served by preserving a bright-line privity rule which denies a cause of action to all beneficiaries whom the attorney did not represent." Id. at 578.

This is the minority rule in the United States – only eight other states require strict privity in estate-planning malpractice suits. In the majority of states, a beneficiary harmed by a lawyer's negligence in drafting a will or trust may bring a malpractice claim against the attorney, even though the beneficiary was not the attorney's client.

The question in Belt was whether the Barcelo rule bars suits brought on behalf of the decedent client by his estate's personal representatives. The Court held that it does not, finding that “in accordance with the long-standing, common-law principle that actions for damage to property survive the death of the injured party, we hold that legal malpractice claims alleging pure economic loss survive in favor of a deceased client's estate, because such claims are necessarily limited to recovery for property damage.” Intriguingly, the Court found that the client had sustained recoverable damages before he died:

Even though an estate may suffer significant damages after a client's death, this does not preclude survival of an estate-planning malpractice claim. While the primary damages at issue here – increased tax liability – did not occur until after the decedent's death, the lawyer's alleged negligence occurred while the decedent was alive. Apex Towing Co. v. Tolin, 41 S.W.3d 118, 120 (Tex. 2001) (legal malpractice claim accrues "when facts have come into existence that authorize a claimant to seek a judicial remedy"). If the decedent had discovered this injury prior to his death, he could have brought suit against his estate planners to recover the fees paid to them. See, e.g., Burrow v. Arce, 997 S.W.2d 229, 240 (Tex. 1999) (client need not prove actual damages in order to obtain forfeiture of attorney's fees for the attorney's “clear and serious” breach of fiduciary duty to the client). In addition, the decedent could have recovered the costs incurred in restructuring his estate to minimize tax liability. See, e.g., Porter v. Ogden, Newell, & Welch, 241 F.3d 1334, 1337 (11th Cir. 2001) (allowing suit to recover client's costs, incurred during his lifetime, in curing problems created by negligent drafting of trust document, including funds expended in seeking judicial reformation of the trust and in lobbying the Florida legislature to change law affecting the trust). Therefore, if the injury occurs during the client's lifetime, a claim for estate-planning malpractice survives the client's death.

The Court's reference to Arce is curious. Does this mean that the executors must prove that the decedent had, or would have had, a valid Arce claim if the negligence had been discovered before her died? The standard for an Arce claim – a clear and serious breach of fiduciary duty followed by a judicial determination of whether any fee forfeiture is warranted and, if so, how much – is quite different from a garden variety negligence claim against a lawyer, which requires a lesser showing of a breach of the applicable standard of care.

Or does Belt simply stand for the proposition that in all instances of negligence in will drafting, the client may recover the fees paid to the estate planner and “the costs incurred in restructuring his estate to minimize tax liability”? If so, Belt dramatically expands on Arce to reach the simple negligence context. If that is how Belt should be read, then the next logical question is whether Belt extends to other alleged “transactional” malpractice, for example, negligence in drafting a prenuptial agreement.

The Court also noted that:

In cases involving depletion of the decedent's estate due to negligent tax planning, however, the personal representative need not prove how the decedent intended to distribute the estate; rather, the representative need only demonstrate that the decedent intended to minimize tax liability for the estate as a whole. [fn7]

[fn7] A testator may intentionally structure the estate in a way that does not minimize tax liability. Thus, courts should not presume that the testator intended to minimize tax liability; rather, it is the complaining party's burden to present evidence of this intent.

What the Court leaves unsaid here is that the evidence must also show that the testator's intent was communicated to the lawyer, likely not a difficult burden in most cases since tax benefits are a common “selling point” for many estate planning lawyers.

The Court rejected the notion that its holding provides a ready end-run around Barcelo, saying, “Because the claim allowed under our holding today is for injuries suffered by the client's estate, any damages recovered would be paid to the estate and, only then, distributed in accordance with the decedent's existing estate plan.” But because the recovered damages must flow through the decedent's tax-inefficient dispositive scheme, this raises the possible argument that the damages must be “grossed up” to account for any such further tax losses.