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Trust Law/Level VI · Protection/6.3 Fraud, ethics and limits/Lesson 5

Professional ethics: what advisers must refuse

What the ABA Model Rules and federal tax law say about advisers who help with fraud, and why reputable advisers ask hard questions before asset protection work.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Disclose all debts, suits and threats to the adviser at the outset; it costs nothing and lets lawful planning proceed. Catch: communications made to further a fraud lose privilege under the crime-fraud exception (United States v. Zolin, 1989).
  2. A lawyer may explain the legal consequences of any proposed plan (Model Rule 1.2(d)), so a short consultation often beats a full structure. Catch: since August 2023, Model Rule 1.16(a) requires inquiry and withdrawal if services would further fraud, where states adopt it.
  3. Treat an adviser’s hard questions or refusal as a free warning: ABA Formal Opinion 491 (2020) counts wilful blindness as knowledge. Catch: people who knowingly help with voidable transfers have faced civil conspiracy claims in some states.
  4. Report abusive tax promoters on IRS Form 14242. Catch: promoters face penalties of 50% of gross income from the activity (IRC §6700), but a buyer who joins still owes the tax.

MaterialsABA Model Rules 1.2 and 1.16, with their comments, free on americanbar.org, or the version adopted in the state you are reading aboutABA Formal Opinion 491 (2020) and Formal Opinion 513 (2024), on a lawyer’s duty to inquireLessons 6.3.1 and 6.3.2, on voidable transfers and badges of fraud

Wonder

  1. What must a lawyer do when a client asks for help with something the lawyer knows is fraudulent?
  2. Why do some advisers ask about debts and lawsuits before drafting an asset protection trust?
  3. What penalties can apply to people who promote abusive tax schemes?

Explore

  1. US lawyers are governed by state rules of professional conduct, most based on the American Bar Association’s Model Rules. The ABA rules are models; they bind a lawyer only as a state adopts them, and wording varies. Model Rule 1.2(d) says a lawyer shall not counsel a client to engage, or assist a client, in conduct the lawyer knows is criminal or fraudulent. A lawyer may still discuss the legal consequences of a proposed course of conduct and help a client work out what the law means.
  2. Under Model Rule 1.0, ‘fraud’ means conduct that is fraudulent under the law of the relevant jurisdiction and has a purpose to deceive, and ‘knows’ means actual knowledge, which can be inferred from circumstances. ABA Formal Opinion 491 (2020) said a lawyer who sees a high probability that a client wants help with a crime or fraud must inquire further, and that deliberately avoiding the facts can count as knowledge. Whether helping with a particular voidable transfer is ‘fraudulent’ depends on state law and the facts.
  3. In August 2023 the ABA amended Model Rule 1.16(a). It now says a lawyer ‘shall inquire into and assess the facts and circumstances of each representation’ to decide whether to accept or continue it, and must decline or withdraw if a client seeks to use or persists in using the lawyer’s services to commit or further a crime or fraud, after the lawyer has explained the limits. Formal Opinion 513 (2024) says the depth of inquiry depends on the risk. Not every state has adopted this change.
  4. No Model Rule is titled a ‘solvency test’, but asset protection work is one area where these duties matter. Many practitioners ask about existing debts, lawsuits and threatened claims before a transfer, and some ask the client to sign a statement of solvency. The reason is the law in lessons 6.3.1 and 6.3.2: transfers made with intent to hinder creditors, or that leave a debtor insolvent, can be undone. In some states, people who knowingly help with such transfers have faced civil claims such as conspiracy.
  5. Federal tax law adds penalties for advisers and promoters. Under IRC §6700, a person who organises or sells an arrangement while making statements about its tax benefits that they know or have reason to know are false faces a penalty of 50% of the gross income from that activity. Under IRC §6701, a person who helps prepare a document they know will understate another’s tax faces $1,000 per person and period, or $10,000 for a corporation. IRC §7408 lets courts bar people from such conduct.
  6. Confidentiality has limits too. Under the crime-fraud exception, communications made to further a crime or fraud are not protected by attorney-client privilege; United States v. Zolin (1989) allows a court to review such material privately to decide. These rules explain why reputable advisers ask questions, put advice in writing and sometimes refuse work. A refusal is not an accusation; it reflects the adviser’s own legal duties. This lesson explains those duties; it is not legal advice.

Key facts

  • ABA Model Rule 1.2(d) bars a lawyer from counselling or assisting a client in conduct the lawyer knows is criminal or fraudulent, but allows discussion of legal consequences.
  • The ABA Model Rules bind lawyers only as adopted by each state, and state versions differ.
  • ABA Formal Opinion 491 (2020) says a lawyer who sees a high probability of client crime or fraud must inquire, and wilful blindness can count as knowledge.
  • Since August 2023, Model Rule 1.16(a) requires a lawyer to inquire into and assess each representation and to decline or withdraw if the client persists in using the lawyer’s services for crime or fraud.
  • IRC §6700 penalises promoters of abusive tax arrangements; for knowingly false statements the penalty is 50% of the gross income from the activity.
  • IRC §6701 imposes $1,000 per person and period ($10,000 for a corporation) on those who help prepare documents they know will understate another’s tax.

Exercise nine, six, three, one

9CollectList up to 9 duties or limits from the rules described in this lesson or the text of a rule you are reading (some sources give fewer), such as what a lawyer may not do, what a lawyer must ask and what penalties apply.
6ClusterSort them into 6 categories: prohibited assistance, permitted advice, duty to inquire, declining or withdrawing, tax penalties, and limits on confidentiality.
3DistillReduce the 6 categories to 3 groups: rules about what advisers may not do, rules about what they must find out, and consequences for breaking the rules.
1CrystallizeWrite 1 sentence explaining, in your own words, why a reputable adviser may refuse a request even when the client is willing to pay.

Fact check

Dates, figures and claims checked against the published sources listed below.

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