Your Fiduciary Duty to Invest “Prudently”

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by Elizabeth Meck

As promised, this is the second post in a series on the fiduciary duties of a trustee. In the first blog in this series, we discussed the fundamental duty of loyalty. In this post, we will discuss the trustee’s duty to exercise care and skill in the management and investment of trust assets.

Acting in the best interests of the trust and the trust beneficiaries, a trustee has the duty to protect and preserve trust assets and, generally, to make the assets productive. In making investment decisions and managing trust assets, the trustee must further abide by the “prudent investor rule,” which requires a trustee to exercise reasonable care, skill and caution. See Colo. Rev. Stat. §§ 15-1.1-101, et. seq. (the “Uniform Prudent Investor Act”) and §§ 15-1-1101, et. seq. (the “Uniform Management of Institutional Funds Act”).

Pursuant to the prudent investor rule, a trustee should consider broad investment factors, such as: current economic conditions, effects of inflation or deflation, tax consequences, the nature of closely-held business interests, alternative investments, expected returns on income and capital, other resources of the trust or trust beneficiaries, the need for liquidity versus preservation of capital, the production of income, the special value or relationship of a particular asset to the trust or the beneficiaries, diversification of investments, and more. See, Restatement (Second) of Trusts § 227. Additionally, while it is important to note that Colorado courts have not officially adopted the Restatement (Third) of Trusts, one could refer to § 90, which lists five helpful “principles” of the prudent investor rule. Generally, any single investment will not violate the prudent investor rule and the trustee should manage the trust portfolio as a whole taking into account these considerations.

The trustee must also abide by any specific instructions in the trust instrument. He should exercise caution in doing so, however, because there are many instances in which blindly following the trust terms may result in unreasonable investment decisions. For example, if the settlor instructs the trustee that he is not required to diversify investments in the case of a closely-held family entity, the trustee would still want to closely monitor the performance of such investments to ensure that the closely-held entity value is not plummeting to the point that the beneficiaries’ interests may be significantly impaired.

It is important to note that poor performance of investments alone will not subject the trustee to a claim for breaching his duties to prudently invest. Beneficiaries frequently and incorrectly think they will have a claim against a trustee simply for poor performance. The trustee, however, will be able to overcome such a claim so long as the underlying investment decisions were reasonably made.

Colorado law does authorize a trustee to hire professionals and to delegate certain aspects of investing and portfolio management. However, the law does not allow for wholesale delegation and the trustee should exercise great caution in hiring professional advisors or fund managers. See Colo. Rev. Stat. §15-1.1-109 (trustee has the authority to delegate investment and management functions, but must engage and monitor such professionals carefully); see also GEORGE G. BOGERT, ET AL, The Law of Trusts and Trustees § 557; Colo. Rev. Stat. §15-1-804(2)(x)(I)(trustee has the power to “employ attorneys or other advisors to assist the fiduciary in the performance of his or her duties” (emphasis added)).

Finally, a trustee should keep in mind that uninformed beneficiaries are uneasy beneficiaries. Not only is it a good idea for a trustee to provide information to the beneficiaries as to investment and asset management decisions, Colorado law requires the trustee to keep beneficiaries “reasonably informed” and to provide accountings to beneficiaries upon reasonable request. Colo. Rev. Stat. § 15-16-303. Keeping beneficiaries informed as to investment decisions not only provides peace of mind to the beneficiaries, but may provide the trustee with an argument particularly in the situation where the beneficiaries have consented to risky or unusual investment strategies. See Beyer v. First Nat. Bank of Colorado Springs, 843 P.2d 53 (Colo. App. 1992).

In sum, the trustee has a duty to continually observe and evaluate investments to ensure that they are consistent with the purpose of the trust, current economic conditions, and the needs of the current and remainder beneficiaries. So long as the trustee exercises reasonable care in investment decisions, exercises care in selecting and hiring investment advisors and professionals, follows the general principles of prudent investing, and keeps the beneficiaries informed, the likelihood of a claim against the trustee for improper investment decisions may be reduced.

Colorado Supreme Court Upholds the Strict Privity Doctrine for Attorney Malpractice Claims

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by Kelly Dickson Cooper

The Colorado Supreme Court upheld the strict privity doctrine for attorney malpractice claims by nonclients and reaffirmed that an attorney’s liability is limited to when the attorney has committed fraud or a malicious or tortious act, including negligent misrepresentation. Baker v. Wood, Ris & Hames, case number 2013SC551 (2016 CO 5).

In Baker, the dissatisfied beneficiaries sued the attorneys for their father and alleged as follows:

  • The attorneys failed to advise their father of the impact of holding property in joint tenancy.
  • The attorneys failed to advise their father that failing to sever those joint tenancies would frustrate his intent to treat his children equally with his stepchildren.
  • The attorneys’ actions allowed the surviving spouse to change their father’s estate plan after his death.
  • The attorneys drafted documents for the surviving spouse that were different from their father’s original plan.
  • The beneficiaries were the intended beneficiaries of the client’s plan, that the attorneys failed to advise the beneficiaries of the relevant facts, and that they had suffered damages as a result.

The beneficiaries asked the Colorado Supreme Court to adopt the “California Test” or the “Florida-Iowa Rule” and set aside the strict privity rule. The Court rejected the adoption of both tests and reaffirmed the strict privity rule. The Court also held that the beneficiaries’ claims would fail under both the California Test and the Florida-Iowa Rule.

The Court put forth the following rationales for upholding the strict privity rule in Colorado:

  • It protects the attorney’s duty of loyalty to the client and allows for effective advocacy for the client.
  • Abandoning strict privity could result in adversarial relationships between an attorney and third parties. This could result in conflicting duties for the attorney.
  • Without strict privity, the attorney could be liable to an unforeseeable and unlimited number of people.
  • Expanding attorney liability to nonclients might deter attorneys from taking on certain legal matters. The Court reasoned that this result could compromise the interests of potential clients by making it more difficult to obtain legal services.
  • Casting aside strict privity would increase the risk of suits by disappointed beneficiaries. Those suits would cast doubt on the testator’s intentions after his or her death when he or she is unavailable to speak.
  • The beneficiaries have other avenues available to them, including reformation of the documents.
  • A personal representative can pursue legitimate claims on behalf of a testator.

The Court held, “We further believe that the strict privity rule strikes the appropriate balance between the important interests of clients, on the one hand, and non-clients claiming to be injured by an attorney’s conduct, on the other.” As a result, the strict privity rule remains intact in Colorado.

Equity: Alive and Well in Colorado

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by C. Jean Stewart

Historically, courts of law, presided over by judges, and courts of equity, presided over by chancellors, were separate in function and procedure.  Law courts were governed by strict rules and rights while chancellors, the representatives of the king, were said to rule with discretion, utilizing concepts of fairness, morality and conscience.

In modern times, courts of law and equity have been merged and concepts of equity have receded as a myriad of statutes and regulations have replaced the application of “conscience” in the administration of justice.  Early probate courts in America exercised equity jurisdiction.  Probate judges continue to be conscious of the equitable legacy of the courts over which they preside.  The Colorado Probate Code, adopted in Colorado in the 1970s, reminds judges sitting in probate that “Unless displaced by the particular provisions of this code, the principles of law and equity supplement its provisions.” C.R.S. §15-10-103.

Recently, the Colorado Supreme Court reaffirmed that the “probate court’s traditional powers in equity supplement and reinforce the statutory directives of the Colorado Probate Code.”  Beren v. Beren, 349 P.3d 233 (Colo. 2015) .  While the Supreme Court faulted the method used to calculate an equitable adjustment to a surviving spouse’s elective share, the Supreme Court approved the equitable award if calculated using alternative methods, including several suggested by the Court itself. 

Undoubtedly there will continue to be resistance to the application of equity in probate proceedings—particularly from counsel or parties who are at risk of suffering detriment resulting from its application. It’s hard to imagine such efforts will be any more successful in light of the current status of Colorado law.   

The Uniform Trust Code — A Time for Colorado

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by Carol Warnick

The Uniform Trust Code (“UTC”) has now been adopted in 31 states.  It is now the law in significantly more states than the Uniform Probate Code.  The UTC is a uniform law drafted by the Uniform Law Commissioners, over a seven-year period.  It is the first comprehensive uniform act dealing with trusts, although several states, notably California, Georgia, Indiana and Texas, all had comprehensive trust statutes at the time.  These statutes, as well as any existing trust statutes in other states, were reviewed by the committee drafting the UTC.  The stated goal of the National Conference of Commissioners on Uniform State Laws (“NCCUSL”) when drafting the model act was to “provide States with precise, comprehensive, and easily accessible guidance on trust law questions.”  The impetus behind the model trust act was the growing use of trusts throughout the country, which coupled with the sparse body of trust law in many states, created significant issues for lawyers and courts trying to deal with trust disputes. 

I practice trust and estate law in three states, Colorado, Utah and Wyoming.  Both Utah and Wyoming have adopted the UTC.  I find that it is so much easier to deal with and solve trust disputes in both Utah and Wyoming because of the provisions of the UTC.  One reason is that the law is set forth much more clearly and gives judges ready authority to back their decisions.  In my experience, bringing a statute to the attention of the court carries more weight than finding a case that is close to “on-point” in the dispute, if finding such a case is even possible.  Because the law is set forth more clearly, everyone going into a dispute knows what the law is.  There is not a significant body of trust common law in any of the states I practice in, therefore the UTC brings significantly more uniformity to the decisions of the variety of judges who have to rule on trust issues. 

In addition, there are innovative portions of the UTC that provide more options to trust beneficiaries and potential litigants when issues arise with respect to a given trust.  One example of such innovation are non-judicial settlement agreements.  The UTC specifically provides that parties may enter into binding non-judicial settlement agreements to resolve issues concerning trusts as long as the agreement doesn’t violate a material purpose of the trust and includes terms and conditions that could be properly approved by a court under the UTC or other applicable law.   Examples of matters that can be approved by a non-judicial settlement agreement would be the interpretation or construction of terms of the trust, approval of a trustee’s report or accounting, direction to the trustee to refrain from performing a particular act or to grant the trustee a necessary or desirable power, resignation and appointment of a trustee and determination of trustee compensation, transferring the trust’s principal place of administration, and the liability of a trustee for an action relating to the trust.  Any interested person can also seek court approval of the agreement, but in my experience working with non-judicial settlement agreements in Utah and Wyoming, no one has felt the need to obtain court approval after the negotiation of such an agreement.   Such flexibility allows the interested persons with regard to a trust (defined as those whose consent would be required to achieve a binding settlement if it were to be approved by the court) to collaborate and work out a variety of issues that would otherwise require the additional time and expense of obtaining court approval for such actions.  I have found this option to be invaluable in working out trust issues for clients, especially when the size of the trust does not justify significant court involvement, and often brings about settlement more readily. 

Much to the chagrin of many estate planners, the UTC was defeated in Colorado over a decade ago but is again being studied by a committee at the Colorado Bar Association.  Each state legislature has the ability to adjust the model act and modify it as seems appropriate to reflect local preferences, so there is hope that the model act can be adjusted in such a way that it can be passed next year.  I want to lend my voice of support to the adoption of the UTC in Colorado as an act that would greatly facilitate the ability to solve trust disputes early, more readily, and with less expense. 

Updates for fiduciaries from the IRS and Colorado

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by Kelly Cooper

The IRS has stated that it will not issue closing letters for federal estate tax returns filed on or after June 1, 2015, unless one is requested by the taxpayer. The information provided by the IRS states that the taxpayer should wait at least four months after filing the return to request a closing letter. A closing letter indicates that the estate’s federal estate tax liabilities have been paid. While a closing letter is not a formal closing agreement, many fiduciaries wish to have a closing letter from the IRS before making final distributions and closing estates. For returns filed prior to June 1, 2015, please refer to the following document for guidance as to when a closing letter will be issued:

Frequently Asked Questions on Estate Taxes

Certain statutes in the Colorado Probate Code are subject to cost of living adjustments each year. The numbers for 2010-2015 can viewed here:

Cost of Living Adjustment of Certain Dollar Amounts for Property of Estates in Probate

ICCES Tips for Probate/Trust Filers

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by Jody Hall, Paralegal

We have all heard that the secret to someone’s heart is great food; well, in our professional realm, I venture to say that the secret to the probate clerk’s heart is a properly done filing.   In order to determine exactly what that means, I surveyed some of the Colorado probate registrars.  The following are tips from their feedback along with those that I have discovered here at our practice at Holland & Hart LLP:

  • Scan and upload EACH document separately and label each of them clearly.  Exhibits should not be attached to the petition or motion, but each should instead be loaded separately.  You should provide a detailed description of each document (e.g. rather than “Exhibit 1”, title the document “Exhibit 1 to the Petition to Approve Accounting: June 2015 Statement for ABC Bank Account”).  Codicils should be uploaded as separate documents from the Will and should be identified accordingly (e.g. “First Codicil to the Will dated May 1, 2015”).  I received differing requests as to whether to use Event Code Will or Filing Other for Codicils, however, I understand that an Event Code of “Codicil” has been requested for future ICCES releases.
  • Reduce File Size for Large Documents.  If you have a number of significantly large exhibits, utilize the features in Adobe to create smaller file sizes in order not to exceed the ICCES maximums for either document size (3MB) or total upload (50MB).  My personal favorite recent discovery is to open your document in Adobe, click on Print and select Adobe PDF as your Printer.  Just under the Properties button in your Print Box is a small click-box for print in grayscale (black and white).  If your original document contains color images or was just scanned in color as a default, you will be amazed at how much smaller the file size of your “new” document is.
  • Demographic Information.  Please be as complete as possible and enter the name, addresses, phone number(s), e-mail address for applicant/petitioner, and the name address, phone number, date of birth, and gender for respondents, date and pages of Will, etc. All this information is required for the Court’s computer system to function effectively. Therefore, if you do not enter the information, the Registrar has to do so, and the time they expend doing so is time they cannot utilize reviewing your case and issuing Letters.
  • Requesting Certified Letters.  If you are requesting certified copies of your Letters (for decedent estates or protective proceedings) at the time of your initial filing, the Registrars that I spoke with would prefer to receive that request in the “Note to Clerk” field.  If you require additional certified copies during the administration or have a special request, you will then have to file your request in a separate letter or memo.  Note that the Court does not have access to any “Note to Clerk” field once the filing has been accepted, therefore, those notes are not part of the history of the case.

In addition, please note that ICCES has released their updated Pricing Model effective as of 5/31/2015 which includes, among other things, increased postage costs due to new postal service rates.  The announcement can be found on the ICCES home screen, or by clicking here.

It is really just simple math – the easier we make it for the Probate Registrar or Clerk to review our documents, the faster they will be able to process them and issue the Letters, or other relief requested.  I hope that you found this helpful.  Happy Filing!

What Does It Mean To Be A Trustee?

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by Carol Warnick

We are constantly surprised to realize that the normal, average trustee who is not a professional fiduciary doesn’t really understand what is required of him or her and often makes serious mistakes.  You would expect that someone taking over the role of being a trustee would inquire or do some type of research as to what is expected, but unfortunately many new trustees don’t seem to take the responsibility seriously enough, often with disastrous consequences.

The trustee stands in a special relationship with the grantor of the trust as well as to the beneficiaries.  This relationship is unique and the trustee should keep that in the forefront of his or her mind.  By appointing someone as trustee, the grantor is depending upon the trustee to both honor the provisions of the trust to the best of his or her ability, but also to respond to the needs  of the beneficiaries and to maintain their confidence and trust.  The trustee must be careful not to do anything which would benefit the trustee to the detriment of the beneficiaries or to ignore the duties and obligations of a trustee.  Thus the word “trust” inside the term “trustee” should not be taken lightly. 

The obligations of a trustee are defined not only by the trust agreement, but also by state law, some of which is statutory and some of which is common law.  State laws may differ from state to state, but some basic premises hold true wherever  a trust is being administered.  In general, these duties of a trustee are important and can result in litigation, removal, and potentially surcharge if the trustee ignores them.  

Some of the general duties of a trustee are set forth below, as taken from “What It Means to Be A Trustee:  A Guide for Clients,” published in the ACTEC Journal, Volume 31, No. 1, Summer 2005. 

  • Duty to Administer Trust by Its Terms.  The trust, including amendments,  provides a roadmap for the trustee and unless its terms are ambiguous, the trustee must follow its terms.  As mentioned above, state law will govern many areas where the trust is silent, so the trustee must be versed in the state law where the jurisdiction is administered. 
  • Duty of Skill and Care.  Skill, prudence and diligence — this is a high standard of performance — higher that one would be expected to follow if administering one’s own assets. 
  • Duty to Give Notice.  The trustee must be familiar with the language of the trust as well as state law to determine when he or she must give notice to beneficiaries, or perhaps a co-trustee.  Some examples requiring notice to certain individuals are resignation, delegation or designation of a successor trustee, rights of beneficiaries to withdraw principal at certain times, the naming of a professional investment advisor, of delegation of the investment function.
  • Duty to Furnish Information and to Communicate.  The trustee must keep the beneficiaries informed about the administration of the trust.  This may include information about investment performance, actions of the trustee or anything else reasonably requested by the beneficiary. 
  • Duty to Account.  The laws of most states require that the beneficiaries be given regular accountings reflecting the liabilities, receipts and disbursements of the trust.  The form and frequency varies from state to state or the language of the trust document. 
  • Duty Not to Delegate.  Generally, the trustee has the duty not to delegate acts requiring judgment and discretion (typically the trustee was chosen because he or she exhibited good judgment and sound exercise of discretion) unless specifically given that authority in the trust document or by statute.  The trustee may hire agents such as attorneys, accountants, investment advisors, etc. but the trustee should not blindly follow their advice.  The exception to that would be a Directed Trust, which is beyond the scope of this article
  • Duty of Loyalty.  The trustee has a duty to administer the trust solely in the interest of the beneficiaries.
  • Duty to Avoid Conflict of Interest.  The trustee should not use trust property for personal gain and should not use the trust assets in a manner that benefits the trustee personally.  The exception to this is when self-dealing provisions are written into the trust for the benefit of trustees who are also beneficiaries of the trust.  Even if such provisions are present, a trustee needs to be especially careful of self-dealing transactions and should consider appointing an independent trustee (if the trust or state law allows it) strictly for the purpose of authorizing such transactions. 
  • Duty to Segregate Trust Property.  The trustee must not co-mingle personal funds or any other non-trust funds with the assets of the trust.
  • Duty of Impartiality.  The trustee must treat all the beneficiaries impartially unless the trust itself instructs otherwise.  This becomes complicated when the trustee must balance the interests of the income beneficiaries with the interests of the remainder beneficiaries of a trust. 
  • Duty to Invest.  The trustee has a duty to invest the assets appropriately.  Unless otherwise specified, that includes a duty to diversify assets.
  • Duty to Enforce and Defend Claims.  The trustee must take reasonable steps to defend claims against the trust and to enforce claims the trust may have against others.  Part of the decision-making process in determining what is reasonable needs to be an assessment of the costs  of enforcing or defending versus the costs to the trust of not taking action on the claim.
  • Duty of Confidentiality.  The affairs of the trust should be kept confidential except with those who are by law “interested persons” such as the beneficiaries and co-trustees. The trustee should not disclose to third parties the identify or interests of the beneficiaries or the nature of trust assets, unless requested to do so by a beneficiary who may need certain information disclosed to a third party.  This duty of confidentiality also extends to personal things about beneficiaries that may come to the knowledge of the trustee in the process of administering the trust.

Any trustee paying close attention to the duties listed above will stand a much better chance of making the trustee experience a positive one and will be much more likely to avoid problems or lawsuits from beneficiaries. 

Who Gets the Embryo?

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by Elizabeth Meck

This has been a busy week in celebrity news, particularly with regard to advancements in assisted reproductive technology and the applicability of legally enforceable agreements.

For example, Sophia Vergara, superstar of ABC sitcom Modern Family, is now embroiled in a legal battle with her ex-fiancé, Nick Loeb, regarding two frozen embryos created by the then-couple several years ago when they were planning to use in vitro fertilization and a gestational surrogate to have a baby. Vergara and Loeb executed documents at their fertility clinic stating their agreement to keep the embryos frozen unless both parties mutually agreed to use them (i.e., to implant them into a surrogate) or to destroy them. Otherwise, the parties agreed that the embryos would only be destroyed if one of them dies. Apparently, the standard documents did not address what would happen to the embryos in the event the couple did not remain together or could not agree whether to use or destroy the embryos. Hence, Loeb filed a lawsuit in which he requests that a judge order that the embryos cannot be destroyed under any circumstances and states his position that the survivor between Loeb and Vergara would have control over the embryos upon the death of the other party. For more on the dispute, click here.

This type of dispute is not limited to the rich and famous. Assisted reproductive technology, or “ART,” is on the rise.1 The Centers for Disease Control estimates that approximately 12% of couples experience problems with fertility and as many as 12% of U.S. women and their partners receive infertility services.2 In 2009, the Colorado Legislature adopted the Uniform Probate Code III into the Colorado Probate Code (the “Code”), which incorporated several important changes regarding ART.3 For example, the Code now specifically includes definitions of a “genetic father” and a “genetic mother,” § 15-11-115(5-6), the definition of a “genetic parent," § 15-11-115(7), and clarification as to the individual who “functions as a parent of the child,” § 15-11-115(4), to assist in the determination of exactly who constitutes a child’s “parent” for purposes of succession under the Code.

Further, sections 15-11-116 to -121 of the Code re-codified the existing concept that marital status is not necessarily determinative of a parent-child relationship. As a result, the rules of who is eligible to “take” in an intestacy proceeding have been expanded to include ART children who are adopted or in the process of being adopted. § 15-11-119(5). An ART child does not, however, maintain intestacy rights as to a gestational carrier, absent additional evidence of the parent-child relationship. § 15-11-121(3). Importantly, though, an ART child who is born to a birth mother, who is not a gestational mother, is considered the child of the birth mother regardless of whether the child is genetically tied to the birth mother; and, the person who consented to the assisted reproduction by the birth mother with the “intent” to be treated as the other parent of the child is the parent. § 15-11-120. Intent can be demonstrated any number of ways pursuant to § 15-11-120(6).4 It is important to note that a parent can demonstrate “intent” to be treated as the parent of a posthumously conceived child, so long as the child is in utero within thirty-six months or born within forty-five months of the intended parent’s death. § 15-11-120(11).

ART children may also be included in the definition of a class defined in estate planning documents such as “children” or “grandchildren” or “descendants,” even though they may or may not be genetically related to the grantor or settlor. For example, an ART child may be included in the class even though he or she is not in utero for thirty-six months or born up to forty-five months after the grantor’s or the settlor’s death. § 15-11-705(7).

The presence of ART and the constantly-evolving technologies in this area require that estate planning attorneys, drafters of marital agreements and probate litigators be vigilantly aware of the repercussions of these definitions and our changing laws, as well as how the changing definition of “family” will play out after a decedent’s death. It is increasingly important to ask estate planning clients whether they have any children who were the result of ART, or whether they still have any cryopreserved sperm, eggs, or embryos. Also, including specific instructions with regard to ART in the estate planning documents may become necessary so as to try to avoid dispute after the passing of a genetic parent, an adoptive parent, or an individual who consented to ART by a birth mother.

Additionally, it is increasingly important to inquire as to the existence of any existing written document or directive that specifies the ultimate use or destruction of frozen genetic material such as embryos. Sophia Vergara’s experience could teach us all a good lesson in terms of covering all aspects of “family” as well as “property” when discussing issues with clients whether in the planning stages or during the administration of an estate or trust. For example, practitioners should start to think about the importance of including genetic material in estate planning documents and marital agreements. Further, practitioners should discuss post-death use and disposition of genetic materials with their clients, and address questions such as whether the surviving spouse should be able to utilize a frozen embryo after the death of the other spouse.

At the end of the day, it is crucial to ensure that a client’s documents consistently reflect his or her wishes regarding all assets, family and dispositions, including the often-difficult decision of how to treat and manage genetic materials. Clarification in the planning documents and marital agreements may reduce the potential for surprises and disputes during estate and trust administration or divorce. Otherwise, as in many other areas of probate litigation, disputes with regard to one’s entitlement to an estate or trust will continue to rise.

1ART commonly includes a variety of assisted reproduction methods such as: sperm or egg donation, in vitro fertilization, gestational surrogacy, embryo donation or adoption, embryo or egg or sperm cryopreservation, post-death conception, and the disposition of cryopreserved embryos.
2Centers for Disease Control, 2006-2010 National Survey of Family Growth.
3The Code defines ART as “a method of causing pregnancy other than sexual intercourse.” § 15-11-115(2).
4Intent can be demonstrated by the following: a signed record that evidences the individual’s consent; evidence that the individual functioned as the parent of the child no more than two years after the child is born; or, the intent to function as the parent of the child within two years of the child’s birth notwithstanding that the individual’s intent was thwarted by incapacity or death. § 15-11-120(6).

Trustees Take Heed: Arizona Adopts the Fiduciary Exception to Attorney-Client Privilege

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by Kelly Cooper

For trustees in Colorado, the question remains to what extent does the attorney-client privilege offer protection from disclosure of confidential communications between trustees and their attorneys in litigation with beneficiaries.  Despite the uncertainty in Colorado, several states and the U.S. Supreme Court have weighed in on this question and Arizona is the latest state to adopt the fiduciary exception to the attorney-client privilege.  Hammerman v. The Northern Trust Company, 329 P.3d 1055 (Ariz. App. June 3, 2014).

The Court of Appeals of Arizona held that a trustee’s attorney-client privilege “extends to all legal advice sought in the trustee’s personal capacity for purposes of self-protection.”  However, the Court also held that the trustee had an “obligation to disclose to Hammerman [beneficiary]  all attorney-client communications that occurred in its fiduciary capacity on matters of administration of the trust.”

These standards will inevitably give rise to many questions depending on the facts and circumstances of the trust administration at issue, but one will likely come up over and over again.  At what point will a trustee be permitted to seek advice for self-protection.  Is a question from a beneficiary enough?  Does a lawsuit have to be filed?  A demand letter sent?  Can the trustee use trust funds to pay for the advice?

In a departure from other courts, the Court of Appeals of Arizona held that the trustee’s attorney-client privilege does not end merely because the advice was paid for out of trust funds.  (For example, the U.S. Supreme Court noted that the source of payment for fees is “highly relevant” in identifying who is the “real client.”  United States v. Jicarilla Apache Nation, 131 S. Ct. 2313, 2330 (2011).  The Delaware Court of Chancery found that the source of payment was a ““significant factor… [and] a strong indication of precisely who the real clients were.”  Riggs National Bank of Washington, D.C. v. Zimmer, 355 A.2d 709, 712 (Del. Ch. 1976).)

Without any clear guidance in Colorado, it is important for trustees (and their counsel) to keep a close watch on future developments. 

Avoidable Litigation as a Threat to the Assets of An Estate

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by Carol Warnick

It wasn’t that long ago when the real threat to the financial well-being of a person’s estate was death taxes.  People were concerned about losing close to 50% of their estate to taxes without proper planning.  But with the increased exemption amounts, death taxes are not a big issue in most cases.  But something else is taking its toll on the hope of a smooth and simple passing of assets at death, and that is litigation. 

Much of the current estate litigation relates to family disputes, some of which might have been avoided through better estate planning.  But a certain amount of these family disputes would have occurred anyway simply because the families were upset enough to litigate over anything once mom and dad have passed away.  There is a different type of litigation beginning to crop up, however, that may create just as many problems for an estate as family in-fighting, and one which can be totally prevented.  I am speaking of litigation over wills and trusts drafted with forms obtained over the internet.

Unfortunately, with the increased exemption amounts (currently $5.43 million per person) and since many people no longer need tax planning they are more apt to decide they can do their estate planning documents themselves and not involve an attorney.  While self-drafted wills are not new and have been creating estate administration problems for years, I believe that the current ease of finding forms on the internet, making a few changes, and printing them at home will likely make this a more significant problem in the future. 

Cases are starting to crop up regarding mistakes made by consumers using internet forms.  One Florida case is a good example.  The case is Aldrich v. Basile, 136 So. 3rd, 530 (Fla. 2014).  In this case, Ms. Aldrich used a form and listed all the assets she owned at the time (her home and its contents, an IRA, a car and some bank accounts) and stated they should go to her sister.  If her sister didn’t survive her, she listed her brother as the one to receive everything. 

As luck would have it, her sister predeceased her and left her some additional assets which weren’t listed in Ms. Aldrich’s will because she didn’t own them when she drafted her will.   Either because the internet form didn’t contain one or because Ms. Aldrich took it out when she printed the will because she thought all her assets were covered, there was no residuary clause in the will.  As a result, after a trial court decision, an appellate court reversal, and ultimately an appeal to the Florida Supreme Court, it was decided that the listed assets would go per the will but the after-acquired assets inherited from her sister would pass through intestacy, bringing in two nieces who were the daughters of Ms. Aldrich’s deceased brother to share in the estate.

Although the living brother offered a note left by Ms. Aldrich and other extrinsic evidence that Ms. Aldrich intended all of her assets to go to him, the court refused to consider them because of the “four corners” doctrine. There was no ambiguity within the four corners of the will, therefore no extrinsic evidence was admitted.

It is easy to see how Ms. Aldrich could have simply deleted the residuary clause thinking she didn’t need it, but it is very unlikely that a competent lawyer drafting a will would make that mistake.  If the lawyer had made the mistake, there would potentially have been recourse through the lawyer’s malpractice insurance. It seems that the ease of which will and trust forms are now available on the internet and the fact that many people don’t need a lawyer’s expertise for tax planning under current law will combine to create many more of these problems.  Such problems lead to costly litigation with really no recourse for the families of those “do-it-yourselfers.”

Several states have looked at the issue of whether or not legal form providers are violating unauthorized practice of law statutes, but the cases are by no means consistently decided.  While such issues are being sorted out, the old adage “buyer beware” certainly applies with regard to do-it-yourself wills and trusts. 

A concurring opinion in the Florida case summed it up as follows:

Obviously, the cost of drafting a will through the use of a pre-printed form is likely substantially lower than the cost of hiring a knowledgeable lawyer.  However, as illustrated by this case, the ultimate cost of utilizing such a form to draft one’s will has the potential to far surpass the cost of hiring a lawyer at the outset.  In a case such as this, which involved a substantial sum of money, the time, effort, and expense of extensive litigation undertaken in order to prove a testator’s true intent after the testator’s death can necessitate the expenditure of much more substantial amounts in attorney’s fees than was avoided during the testator’s life by the use of a pre-printed form1.

 1Aldrich v. Basile, 136 So. 3rd 530, 538 (Fla. 2014).