Can a lawyer leave law-firm shares transfer-on-death to a revocable trust that has nonlawyer beneficiaries?
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This page answers the general question as of 2019. Ezel answers yours: whether it's allowed on your facts, under the current Ohio Rules of Professional Conduct, with citations.
Plain-English summary
The Board addressed a lawyer who proposed to designate his or her interests or shares in a law firm as transfer-on-death (TOD) to a revocable trust that would become irrevocable at death and distribute to named beneficiaries. The Board explained that Ohio's Uniform Transfer on Death Security Registration Act (R.C. Chapter 1709) allows titling securities so they pass at death without probate, with the TOD designation having no effect on ownership until the owner's death (R.C. 1709.06).
The Board then applied the ownership limits in the conduct and bar-government rules, which protect lawyers' independent professional judgment by limiting nonlawyer influence. Prof. Cond. R. 5.4(d)(1) bars a lawyer from practicing in a professional corporation or association if a nonlawyer owns "any interest," and Gov. Bar R. III, sec. 3(B) bars participating in a law firm in which a member, partner, or equity holder is not authorized to practice law. The Board reasoned that a TOD-to-trust designation eventually transfers a legal interest in the firm to the trust's beneficiaries, so if any beneficiary or heir is not a lawyer, the surviving firm lawyers would be left out of compliance. It illustrated with a two-member LLC where the deceased member's shares pass to a trust with nonlawyer beneficiaries, leaving the surviving lawyer participating with a nonlawyer equity holder. The Board advised that lawyers must avoid such transfers.
On the second question, the Board concluded that naming a licensed lawyer as trustee does not eliminate the problem, because "any interest" in Rule 5.4(d)(1) encompasses a nonlawyer's equitable interest in a trust that holds the firm shares, citing Pack v. Osborn and S.D. Ethics Op. 15-3. The opinion withdrew Advisory Opinion 2002-12.
In practice
The opinion holds that, under the Ohio rules as they stood at the time, a lawyer must avoid designating law-firm shares as transfer-on-death to a revocable trust (becoming irrevocable at death) where the trust has nonlawyer beneficiaries, because the resulting nonlawyer ownership interest would leave the surviving firm lawyers out of compliance with Prof. Cond. R. 5.4(d)(1) and Gov. Bar R. III, sec. 3(B). Per the opinion, designating a licensed lawyer as trustee does not solve the problem, because a nonlawyer beneficiary's equitable interest is still "any interest" in the firm.
Common questions
Q: Can a lawyer name a trust with nonlawyer beneficiaries to receive law-firm shares at death?
A: The opinion concluded a lawyer must avoid this, because the nonlawyer beneficiaries would acquire an ownership interest in the firm, putting the surviving lawyers out of compliance with Prof. Cond. R. 5.4(d)(1) and Gov. Bar R. III, sec. 3(B).
Q: Why does nonlawyer ownership matter?
A: The opinion concluded the rules limit nonlawyer ownership to protect a lawyer's independent professional judgment from nonlawyer influence on the lawyer-client relationship.
Q: Does naming a lawyer as trustee fix the problem?
A: The opinion concluded no; "any interest" under Rule 5.4(d)(1) includes a nonlawyer beneficiary's equitable interest in the trust, so a lawyer-trustee does not cure the nonlawyer ownership.
Q: Does the Transfer on Death statute change the analysis?
A: The opinion concluded that although R.C. Chapter 1709 lets securities pass outside probate, the eventual transfer of a firm interest to nonlawyer beneficiaries still violates the conduct and bar-government rules.
Background and rules framework
The opinion interprets Ohio Prof. Cond. R. 5.4 (professional independence of a lawyer), in particular 5.4(d)(1)'s bar on nonlawyer ownership of a firm, together with Gov. Bar R. III, sec. 3(B) (Model Rule 5.4). It applies those limits against the Ohio Uniform Transfer on Death Security Registration Act (R.C. Chapter 1709) and reads "any interest" to include an equitable trust interest under Pack v. Osborn.
Citations and references
Rules of Professional Conduct and Government of the Bar:
- Ohio Prof. Cond. R. 5.4 (professional independence of a lawyer), incl. 5.4(c), 5.4(d)(1) (Model Rule 5.4)
- Gov. Bar R. III, sec. 3(B) (participation in a law firm; nonlawyer equity holders)
- Ohio Prof. Cond. R. 1.0 (definition of "firm")
Statutes:
- R.C. Chapter 1709 (Ohio Uniform Transfer on Death Security Registration Act), incl. R.C. 1709.06
- R.C. 1707.01 (definition of "security")
Cases:
- Pack v. Osborn, 117 Ohio St.3d 14, 2008-Ohio-90, equitable interest in a trust as an interest in property
Other opinions cited:
- Ohio Atty. Gen. Op. 85-065 (1985)
- S.D. Ethics Comm. Op. No. 15-3 (2015): nonlawyer trust beneficiaries would own an interest in the professional corporation
See also
- Ohio BPC Op. 2002-012: Transfer of Law-Firm Shares to a Trust With Nonlawyer Beneficiaries (withdrawn by this opinion)
- Ohio BPC Op. 2016-003: Lawyer Participation in Referral Services (Rule 5.4)
- Ohio BPC Op. 2002-011: Church-Group Legal Services Plan and Trust Bequest
Source
- Landing page: https://ohioadvop.org/advisory-opinion-index/
- Original PDF: https://www.ohioadvop.org/wp-content/uploads/2019/04/Adv.-Op.-2019-02-Final.pdf
Original opinion text
Reproduced from the official source for research purposes. The linked source is authoritative.
OPINION 2019-2
Issued April 5, 2019
Withdraws Adv. Op. 2002-12
Transfer on Death of a Lawyer’s Shares in a Law Firm to a Revocable Trust
SYLLABUS: A lawyer may not participate in a law firm in which a member, partner, or
other equity holder is a nonlawyer or practice in a law firm if a nonlawyer will own any
interest in the law firm. A lawyer must avoid designating his or her interests or shares
in a law firm as transfer-on-death to the successor trustee in a revocable trust, becoming
an irrevocable trust upon death, when one or more beneficiaries of the trust are
nonlawyers.
This nonbinding advisory opinion is issued by the Ohio Board of Professional Conduct
in response to a prospective or hypothetical question regarding the application of
ethics rules applicable to Ohio judges and lawyers. The Ohio Board of Professional
Conduct is solely responsible for the content of this advisory opinion, and the advice
contained in this opinion does not reflect and should not be construed as reflecting the
opinion of the Supreme Court of Ohio. Questions regarding this advisory opinion
should be directed to the staff of the Ohio Board of Professional Conduct.
65 SOUTH FRONT STREET, 5TH FLOOR, COLUMBUS, OH 43215-3431
Telephone: 614.387.9370 Fax: 614.387.9379
www.bpc.ohio.gov
HON. JOHN W. WISE RICHARD A. DOVE
CHAIR DIRECTOR
PATRICIA A. WISE D. ALLAN ASBURY
VICE- CHAIR SENIOR COUNSEL
KRISTI R. MCANAUL
COUNSEL
OPINION 2019-2
Issued April 5, 2019
Withdraws Adv. Op. 2002-12
Transfer on Death of a Lawyer’s Shares in a Law Firm to a Revocable Trust
SYLLABUS: A lawyer may not participate in a law firm in which a member, partner, or
other equity holder is a nonlawyer or practice in a law firm if a nonlawyer will own any
interest in the law firm. A lawyer must avoid designating his or her interests or shares
in a law firm as transfer-on-death to the successor trustee in a revocable trust, becoming
an irrevocable trust upon death, when one or more beneficiaries of the trust are
nonlawyers.
APPLICABLE RULES: Prof.Cond.R. 5.4, Gov.Bar R. III, §3(B).
QUESTION(S) PRESENTED:
(1) Whether a lawyer may designate his or her interests or shares in a law firm
as transfer-on-death to the lawyer’s revocable trust, becoming an irrevocable trust on the
death of the lawyer.
(2) Whether a lawyer may grant to a revocable trust his or her interests or
shares in a law firm for the benefit of individuals not licensed to practice law if the trustee
who holds the interests or shares in trust is a licensed lawyer.
Op. 2019-2 2
OPINION:
Question (1)
A lawyer proposes to designate his interests or shares in a law firm, as defined in
Prof. Cond. R. 1.0, as transfer on death (TOD) to a revocable trust, to be distributed by
the trustee to the named beneficiaries according to the provisions of the trust that will
become irrevocable at the time of the lawyer’ death.1 Chapter 1709. of the Revised Code,
referred to as the Ohio Uniform Transfer on Death Security Registration Act, allows the
titling of securities2 so that the transfer of property can be completed as a result of death
without the necessity of those securities being administered as an asset of the deceased
lawyer’s probate estate. The designation of a transfer-on-death beneficiary has no effect
on ownership until the death of the owner of a security. R.C. 1709.06.
Both the Ohio Rules of Professional Conduct and the Rules for the Government of
the Bar include rules to protect and maintain the independent professional judgment of
lawyers by limiting the influence of nonlawyers on the lawyer-client relationship. Certain
rules limit the ownership of law firms to licensed lawyers. For example, Prof.Cond.R.
5.4(d)(1) prohibits a lawyer from practicing with or in the form of a professional
corporation or association if a nonlawyer owns “any interest” in the corporation or
association.3 A similar Supreme Court rule prohibits a lawyer from participating in a law
firm in which a member, partner, or equity holder is a person not authorized to practice
law in Ohio or elsewhere. Gov.Bar. R. III, §(3)(B).
The question presented proposes one method for the transfer of the lawyer’s
interests or shares in a law firm to his or her beneficiaries. However, a lawyer’s
designation of shares in a law firm as TOD to a revocable trust will eventually lead to the
1
Ordinarily, under Ohio law, shares in a legal professional association may be transferred to a trust
for the benefit of individuals who are not licensed to render the professional services for which the
association was organized. Ohio Atty’ Gen’l Op. 85-065 (1985). However, both Prof.Cond R. 5.4(c) and
Gov.Bar R. III, 3(B), discussed infra, prohibit the conduct.
2 “’Security’ means any certificate or instrument, or any oral, written, or electronic agreement,
understanding, or opportunity, that represents title to or interest in, or is secured by any lien or charge
upon, the capital, assets, profits, property, or credit of any person or of any public or governmental body,
subdivision, or agency * * ” R.C. 1707.01.
3 An exception is provided in Prof.Cond.R. 5.4(d)(1) if a fiduciary representative of an estate holds
the stock or interest of a lawyer for a reasonable time during estate administration for the purposes of future
sale or transfer. This exception is not applicable in circumstances where the property is transferred
pursuant to a trust.
Op. 2019-2 3
transfer of a legal interest in the law firm to the beneficiaries of the trust or to their heirs
in the event of the death of the beneficiaries prior to distribution. At the time of the
lawyer’s death, the beneficiaries would then hold an ownership interest in the law firm
as a matter of law. Nevertheless, an ethical issue arises if the named beneficiaries or heirs
are not licensed to practice law. In such a scenario, the remaining lawyers in the law firm
are placed in a position where they are not in compliance with Prof.Cond.R. 5.4(d)(1) or
Gov. Bar III, §3(B) due to the ownership interests of a nonlawyer beneficiary or heir. For
example, if a deceased lawyer had been a member of a two-member limited liability
company (L.L.C.), and his or her shares were designated TOD to the successor trustee of
a revocable trust with nonlawyer beneficiaries, becoming irrevocable on death, the
remaining lawyer member of the L.L.C. would be eventually be participating in the L.L.C.
with a nonlawyer who holds a legal interest in the L.L.C. as an equity shareholder.
Based on the forgoing, the Board concludes that a TOD designation of shares in a
law firm to the successor trustee of a revocable trust, becoming irrevocable upon the
death the lawyer, when there are potential nonlawyer beneficiaries of the trust, creates a
situation where the surviving lawyers in the law firm would not be in compliance with
Prof.Cond.R. 5.4(d)(1) and Gov.Bar R. III, §3(B). The Board advises that lawyers must
avoid the transfer of their interests or shares in the manner discussed above because of
the potential ethical issues created for the remaining lawyers in the law firm.
Question (2)
The designation of a licensed lawyer as trustee does not eliminate the ethical
problems created when a nonlawyer is a beneficiary of a revocable trust holding a
lawyer’s shares or interests in a law firm. Prof.Cond.R. 5.4(d)(1) prohibits lawyers from
practicing in a law firm when a nonlawyer holds “any interest” in the firm. The term
“any interest” in the rule encompasses an equitable interest in a trust that holds a lawyer’s
interest or shares in a law firm. Pack v. Osborn, 117 Ohio St. 3d 14, 16, 2008-Ohio-90, ¶ 7.
The end result of nonlawyers being named as beneficiaries to a revocable trust is
that the remaining lawyers in the law firm would be participating in a law firm where a
nonlawyer owns an interest in the firm in contravention of Prof.Cond.R. 5.4(d)(1). See also
S.D. Ethics Comm. Op. No. 15-3 (2015) (in a transfer of shares to a revocable trust with
non-lawyer beneficiaries, the nonlawyers would own an interest in the professional
corporation in violation of Rule 5.4(d)(1).) Because the transfer of a law firm’s shares to
Op. 2019-2 4
a revocable trust or an irrevocable trust with nonlawyer beneficiaries implicates the
prohibitions contained in Prof.Cond.R. 5.4(c) and possibly Gov.Bar R. III, §3(B), the
designation of a licensed lawyer as trustee does not ameliorate the underlying ethical
problem with the nonlawyer equitable ownership in the law firm.
CONCLUSION:
A lawyer’s independent professional judgment may be impaired when a
nonlawyer holds an interest in the law firm. To eliminate the potential negative impact
on a lawyer’s professional judgment, both Prof.Cond.R. 5.4(d)(1) and Gov.Bar R. III, §3(B)
prohibit lawyers from practicing in a law firm where a nonlawyer holds any ownership
interest in the law firm. The transfer of shares via a trust to nonlawyers results in
situations where the remaining lawyers in the firm cannot comply with either rule due to
the nonlawyer ownership interests. Moreover, the designation of a lawyer’s shares as
TOD to a revocable trust, becoming irrevocable upon death, does not remove the
possibility that beneficiaries of the trust may be nonlawyers. The fact that a lawyer’s trust
has a licensed lawyer as trustee does not avoid the problem created for the remaining
lawyers in the law firm if the beneficiaries are nonlawyers.
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