As high net-worth individuals have increasingly diverse portfolios, comprised of complex assets groups (e.g., closely held-businesses, real estate holdings, etc.), the ability of those individuals to personally oversee and manage such family wealth becomes more expensive and complicated, requiring the full-time assistance of many professionals, including lawyers, accountants and business advisors. Such complexity has led many individuals to establish a “family office” to oversee and manage such assets and to plan for the efficient and tax-advantaged transfer of that wealth from one generation to the next. In many cases, the “family office” essentially runs as a small (or, in some cases, not so small) business-type entity. While such a structure tends to be very effective in managing the family's assets, it raises potential concerns in regard to the preservation of the attorney-client privilege.

New York law construing the attorney-client privilege has typically concerned the privilege when either an entity or an individual is the client. However, when a lawyer provides legal advice to an individual through a family office, New York law is unclear whether the individual or entity rules relating to the attorney-client privilege are applicable.

This is especially important when considering the potential conflicts that may arise in providing estate planning advice to a family, such as the divorce of a husband and wife or the souring of a relationship among siblings. The advantages and disadvantages of the application of the attorney-client privilege in the individual or entity context should be carefully considered in determining the best way to structure an attorney-client relationship and provide legal advice when a family office is involved.

Attorney-Client Privilege and Protections for Communications With Third-Parties. The attorney-client privilege, one of the oldest common-law evidentiary privileges, is fundamental to “foster[ing] the open dialogue between lawyer and client,” which is “essential to effective representation.” Spectrum Sys. Int'l. v. Chem. Bank, 78 N.Y.2d 371, 377 (1991). The attorney-client privilege applies where a client seeks legal advice from an attorney, in his capacity as such, and the communication is made in confidence.” 8 J. Wigmore, Evidence §2292, at 554 (McNaughton rev. 1961) (hereinafter cited as “Wigmore”); CPLR 4503. Such privilege, however, is inapplicable where the communication is disclosed to third parties (see People v. Harris, 57 N.Y.2d 335, 343 (1982)), unless such third-party (1) is an agent of the attorney or client, (2) his or her presence is necessary to facilitate the communication, and (3) the client has an expectation of confidentiality under the circumstances. Stenovich v. Wachtell, Lipton, Rosen & Katz, 756 N.Y.S.2d 367, 379 (Sup. Ct. N.Y. Co. 2003). While the agents of the attorney are typically covered by this exception (e.g., paralegals, law clerks, etc.) (People v. Osorio, 75 N.Y.2d 80, 84 (1989)), the requirement that the third-party be necessary to facilitate the communication is more strictly construed when applied to the client's agents. In construing the “necessity element,” New York courts have held that it's “more than just useful and convenient, but rather requires that the involvement of the third party be nearly indispensable or serve some specialized purpose in facilitating the attorney-client communications.”[1]

Application to the Family Office. While there appears to be a dearth of authority in New York applying the employee/agent doctrine in the Family Office context, there is some guidance that can be gleaned from the general authority relating to the scope of the privilege when otherwise privileged communications are made to and/or in the presence of third-parties. That take-away is how the attorney-client relationship is structured.

For example, if the client is the individual—not the Family Office—then the client and lawyer should be extremely cautious to ensure that for each person who is privy to the conversation in addition to the lawyer and client: (1) there is an expectation that such person will maintain the confidential nature of the communication; and (2) such person's involvement in the otherwise privileged communication is nearly indispensable or serves some specialized purpose in facilitating the attorney-client communications. In this scenario, the client and lawyer should avoid communications that include Family Office employees or agents that are not critical to the facilitation of the legal advice. Moreover, if the Family Office represents multiple family members, the lawyer must also be careful of potential conflicts that may arise between such family members to avoid potentially waiving the privilege.

However, should the individual desire to include Family Office employees as part of the legal strategizing process, the individual may want to consider having the Family Office, itself, be the client and engage the law firm. If the Family Office is the client, then it is much easier to extend the privilege to employees of the Family Office without risking a potential waiver of the attorney-client privilege. Indeed, in such instance, the Family Office will be considered the client and it will obviate the need to treat each employee of the Family Office as a “third-party” for which the client will need to establish the necessity of having each such employee be privy to privileged communications so as to avoid a waiver thereof. The individual, for whose purpose the Family Office was created, can also participate in such communications without significant fear of waiver by becoming an officer or director of the Family Office. There is always the risk, however, that a court may view such a structure as pretextual and deem the individual—not the Family Office—as the law firm's true client. Yet, making the Family Office the client does add, at a minimum, an extra and potentially valuable layer of protection and should be considered in efforts to preserve the attorney-client privilege.

It is important to note, however, that the “client” controls and can waive the attorney-client privilege. See Osorio, 75 N.Y.2d at 84. Thus, if the Family Office is the client, there is the risk that the Family Office could waive the privilege notwithstanding the individual's objections. This is particularly critical to consider when the Family Office works for more than one family member and the family members may be involved in future disputes, have conflicting interests or believe that waiver of the privilege is somehow beneficial.

Endnotes:

[1] See, e.g., Ross v. UKI Ltd., 2004 WL 67221, *4 (S.D.N.Y. Jan. 15, 2004) (emphasis added); see, e.g., Osorio, 75 N.Y.2d at 85-86 (attorney-client privilege did not protect conversation between codefendant and codefendant's attorney which was translated by defendant where there was a conflict of interest between the defendant and codefendant); Hudson Valley Marine v. Town of Cortlandt, 30 A.D.3d 377, 378 (2d Dep't 2006) (no attorney-client privilege for communication between son of plaintiff's principals and plaintiff's attorney where plaintiff failed to establish that the son was an agent or employee of the plaintiff corporation); Doe v. Poe, 244 A.D.2d 450, 451 (2d Dep't 1997) (while third-party attendee at meeting between bank's CEO and bank's counsel was also an attorney and his firm had done mortgage work for the bank, his presence at the meeting was not to render legal advice to the bank or its attorneys and thus his presence destroyed the attorney-client privilege); Stroh v. Gen. Motors, 213 A.D. 267, 268 (2d Dep't 1995) (attorney client privilege applied despite the presence of the client's daughter where the client was an aged woman who was required to recall, and perhaps relive, what was probably the most traumatic experience of her life and her daughter selected the law firm to represent her, transported her to the law office, and put her sufficiently at ease to communicate effectively with counsel); United States v. Kovel, 296 F.2d 918, 922-23 (2d Cir. 1961) (attorney-client privilege extends to communications made by a client to an accountant in attorney's employ incident to the client's obtaining legal advice from the attorney); Nat'l Educ. Training Group v. Skillsoft, 1999 WL 378337 (S.D.N.Y. June 10, 1999) (holding that notes taken by the personal assistant to a corporate director at a board meeting where legal advice was communicated to the directors were not privileged because her notes—while useful—were not necessary to clarify, facilitate or improve the director's comprehension of attorney-client communications, even though the assistant, herself, was an investment banker).

Steven H. Holinstat is senior counsel in Proskauer Rose's litigation department and a member of the firm's fiduciary litigation practice group. Daniel Hatten is an associate in the firm's private client services department.