Can a lawyer transfer the stock of a law professional corporation to a revocable living trust for estate planning, if at least one trustee is a licensed attorney?

Plain-English summary

A lawyer owned 100 percent of the stock in the professional corporation through which the lawyer practiced. The lawyer and a non-attorney spouse had created a revocable living trust for estate planning, naming themselves co-trustees, and wanted to transfer the corporation's stock into the trust, with a North Dakota licensed attorney named as successor trustee to take over the stock upon the lawyer's death. The committee was asked whether the trust could hold the law corporation's stock if at least one trustee was a licensed attorney.

The committee concluded it could not. Rule 5.4(d)(1) provides that a lawyer shall not practice in the form of a professional corporation authorized to practice law for a profit if a nonlawyer owns any interest, except that a fiduciary representative of a deceased lawyer's estate may hold the lawyer's stock for a reasonable time during administration. Comment 2 ties the rule to the traditional limit on letting a third party direct or regulate a lawyer's professional judgment. When the stock is transferred to the trust, the co-trustees become the legal owners, so the nonlawyer spouse owns an interest in the law corporation in the capacity of trustee, and the spouse is not a fiduciary representative of the lawyer's estate holding the stock for a limited time during administration.

The committee added that the problem persists even if the lawyer were the sole original trustee with a lawyer successor trustee. While the revocable trust remains revocable, the trustee's duties are owed exclusively to the settlors (the lawyer and the nonlawyer spouse), so administering the trust for the spouse's benefit creates potential for a nonlawyer to direct or regulate the lawyer's professional judgment. And because a trust must be administered for its beneficiaries, nonlawyer beneficiaries would still hold a beneficial interest in the law corporation, the very ownership Rule 5.4(d)(1) prohibits. The opinion presumed at least one beneficiary was a nonlawyer.

In practice

This opinion, approved May 14, 2015, applies North Dakota Rule of Professional Conduct 5.4(d)(1) as it stood at that time. The committee held that a revocable living trust may not own stock in a professional corporation that practices law for a profit, even if a trustee is a licensed attorney, because a nonlawyer co-trustee holds a prohibited interest and the arrangement does not fit the narrow exception allowing a fiduciary representative of a deceased lawyer's estate to hold the stock for a reasonable time during administration. The committee held that the bar continues to apply where nonlawyer beneficiaries would hold a beneficial interest in the law corporation, because a trust is administered for its beneficiaries.

Common questions

Q: Can a lawyer put the stock of a law professional corporation into a revocable living trust?

A: Not where the trust would hold the stock as an ongoing matter. The committee concluded that transferring the stock to the trust makes the co-trustees the legal owners, so a nonlawyer co-trustee holds an interest barred by Rule 5.4(d)(1).

Q: Does it help that a licensed attorney is named as the successor trustee?

A: No. The committee concluded that even if all trustees were lawyers, nonlawyer beneficiaries would still hold a beneficial interest in the law corporation, which Rule 5.4(d)(1) prohibits.

Q: What is the only nonlawyer-ownership exception in Rule 5.4(d)(1)?

A: A fiduciary representative of a deceased lawyer's estate may hold the lawyer's stock or interest for a reasonable time during administration of the estate; the committee found the living-trust arrangement did not fit that exception.

Background and rules framework

The opinion interprets North Dakota Rule of Professional Conduct 5.4 (Model Rule 5.4, professional independence of a lawyer), specifically Rule 5.4(d)(1)'s prohibition on nonlawyer ownership of a law professional corporation and its single exception for a fiduciary representative of a deceased lawyer's estate. It reads the rule against North Dakota trust law (N.D.C.C. chapters 59-09, 59-12, 59-14) defining settlors, beneficiaries, and the trustee's duties under a revocable trust.

The opinion is issued under North Dakota Rule for Lawyer Discipline 1.2(B), the safe-harbor provision protecting good-faith reliance on a written ethics-committee opinion.

Citations and references

Rules of Professional Conduct:

• Model Rule 5.4 / N.D.R. Prof. Conduct 5.4(d)(1) (professional independence; nonlawyer ownership of a law professional corporation)
• Model Rule 1.8(f) (third-party direction of a lawyer's judgment), referenced in Comment 2 to Rule 5.4
• N.D.R. Lawyer Discipline 1.2(B) (safe harbor for reliance on a committee opinion)

Statutes:

• N.D.C.C. 59-12-01, 59-12-04 (creation and purpose of trusts)
• N.D.C.C. 59-09-03 (definitions of beneficiary and settlor)
• N.D.C.C. 59-14-03 (duties owed to settlors of a revocable trust)

See also

• ABA Formal Op. 499: Passive Investment in an ABS
• ABA Formal Op. 91-360: Nonlawyer Partnerships Across States

Source

• Landing page: https://www.sband.org/page/ethics_opinions
• Original PDF: https://cdn.ymaws.com/www.sband.org/resource/resmgr/docs/for_lawyers/extended/opinion_15-03.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain; the linked PDF is authoritative.

STATE BAR ASSOCIATION OF NORTH DAKOTA
ETHICS COMMITTEE
OPINION NO. 15-03
THIS OPINION IS ADVISORY ONLY

QUESTION PRESENTED
Whether a revocable living trust may own stock in a professional corporation authorized
to practice law for a profit, if at least one of the trustees is a licensed attorney.
OPINION
APPLICABLE NORTH DAKOTA RULES OF PROFESSIONAL CONDUCT
Rule 5.4 — Professional Independence of Lawyer
FACTS PRESENTED

Attorney individually owns 100 percent of the stock in the professional corporation
through which Attorney practices law for profit. Attorney and Spouse, a non-attorney, have
created a revocable living trust for estate planning purposes. Attorney and Spouse are named as
co-trustees of the trust.

Attorney wishes to transfer 100 percent of the stock in the professional corporation to the
revocable living trust. Attorney and Spouse would name a North Dakota licensed attorney as the
Successor Trustee for the revocable living trust. The trust would specifically provide that
Successor Trustee assumes the position upon the death of Attorney, and Successor Trustee is
solely authorized to deal with the stock in the professional corporation.

DISCUSSION

Rule 5.4(d)(1), N.D.R.Prof.C., provides in whole:

A lawyer shall not practice with or in the form of a professional corporation or
association authorized to practice law for a profit, if:

A nonlawyer owns any interest therein, except that a fiduciary
representative of the estate of a lawyer may hold the stock or
interest of the lawyer for a reasonable time during administration.

Comment 2 to Rule 5.4 indicates: “This Rule also expresses traditional limitations on
permitting a third party to direct or regulate the lawyer’s professional judgment in rendering
legal services to another. See also Rule 1.8(f).”

Under the above scenario, the co-trustees of the revocable living trust become the legal
owners of 100 percent of the stock in the professional corporation upon transfer to the trust. See

N.D.C.C, § 59-12-01 (“A trust may be created by transfer of property to another person as trustee

during the settlor’s lifetime or by will or other disposition taking effect upon the settlor’s death . .
..”) (Emphasis added). As a result, such ownership is prohibited under N.D.R.Prof.C. 5.4(d)(1)
unless the arrangement meets the exception for “a fiduciary representative of the estate” where
such representative “hold[s] the stock or interest of the lawyer for a reasonable time during
administration.”

The above scenario does not meet such exception. Attorney and Spouse are the original
co-trustees. As such, Spouse, as a nonlawyer, owns an interest in the stock of the professional
corporation, even if such ownership is in Spouse’s capacity as trustee. Spouse is not a fiduciary
representative of Attorney’s estate, nor is Spouse’s ownership as trustee limited to a reasonable
period of time during administration of Attorney’s estate.

The structure of the relationship between Attorney, Spouse, and the revocable living trust
presents problems that Rule 5.4(d)(1) sought to avoid. Specifically, Attorney and Spouse are
“settlors” of the revocable living trust. See N.D.C.C. § 59-09-03(19). While the revocable living
trust remains revocable, “the duties of the trustee are owed exclusively” to the settlors. N.D.C.C.
§ 59-14-03. Attorney and Spouse must therefore administer the trust for the benefit of both
Attorney and Spouse, which provides potential for Spouse, a nonlawyer, to direct or regulate the
lawyer’s professional judgment in rendering legal services to another.

Furthermore, even if Attorney is the sole original trustee of the revocable living trust,
followed by the appointment of Successor Trustee upon the death of Attorney, the arrangement

would still likely violate N.D.R.Prof.C. 5.4(d)(1). While the trustees would all be lawyers under

this alternative, if the beneficiaries of the trust are nonlawyers, then nonlawyers would still own
an interest in the professional corporation in violation of the rule.’

Under N.D.C.C. § 59-09-03(3), “[B]eneficiary” is defined as a person that “[h]as a
present or future beneficial interest in a trust, vested or contingent... .” “A trust and its terms
must be for the benefit of its beneficiaries.” N.D.C.C. § 59-12-04, Therefore, even where lawyers
are the sole trustees, the factual scenario still presents the problems that Rule 5.4(d)(1) sought to
avoid, as the administration of the trust for the benefit of its beneficiaries could impact the
lawyer’s professional judgment in rendering legal services to another.

CONCLUSION

A revocable living trust may not own stock in a professional corporation authorized to
practice law for a profit, even if at least one of the trustees is a licensed attorney,

This opinion was drafted by Sean Foss and was unanimously approved by the Ethics

Committee on the 14" day of May, 2015.

This opinion is provided under Rule 1.2(B), North Dakota Rules for Lawyer Discipline, which
States:

A lawyer who acts with good faith and reasonable reliance on a written opinion or
advisory letter of the ethics committee of the association is not subject to sanction
for violation of the North Dakota Rules of Professional Conduct as to the conduct
that is the subject of the opinion or advisory letter.

' The factual scenario does not specify the beneficiaries of the trust either before or after the
death of Attorney. Therefore, for purposes of this Advisory Opinion, it is presumed at least one
of the beneficiaries is a nonlawyer.