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). 

Using a Private Judge in Trust and Estate Litigation

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by C. Jean Stewart

In 1981 the Colorado Legislature approved a measure allowing parties to litigation to hire a former judge to serve on their case instead of the judge assigned by the district.  C.R.S. §13-3-111 and Rule 122, CRCP.  In some states, California, for example, this system is called “private judging.”  In Colorado, it is simply called “appointed judges.”  Under the new ICCES filing system the title is “judge pro tem.” 

After the appointment, all of the costs of the case, including the “appointed judge’s fees and costs,” must be paid by the parties “at no cost to the state.”  The appointed judge, or the parties, may later return the case to the original judge and the appointment terminates.

Cases with appointed judges are not procedurally different than routine court cases in Colorado; they are neither more nor less private.  Pleadings are filed in the normal course and records are maintained as part of the routine court files; the Rules of Civil or Probate Procedure apply as appropriate and decisions are appealable.  However, each case will constitute a single or small caseload for the appointed judge and consequently will receive heightened attention and speedier resolution.

All parties in the case must agree on the selection of an appointed judge.  The parties may request that their case be heard by a jury and the case may even be heard in the same courthouse where originally filed, if space and time are available, although cases can also be heard in rented space or in conference rooms made available at no cost by one of the parties’ attorneys.

To have a private judge appointed, the parties must submit a motion to the Colorado Supreme Court that includes all of the statutory requirements, complies with C.R.C.P., Rule 122, sets forth the parties’ request for and agreement to the appointment, and includes the proposed judge’s signed approval of the motion. The actual appointment is accomplished on an Order Appointing Judge that must be signed by the Chief Justice. The estimated fees and costs of using any appointed judge must be referenced in the Motion for Appointed Judge and deposited in advance of the appointment into an “escrow” account.

Counsel for the parties should plan a joint conference call with the proposed appointed judge to discuss the nature of the appointment, the anticipated time commitment, and any special circumstances as early as possible after it is anticipated that an appointment may be sought. Because of the nature of any case involving an appointed judge, all contacts should include notice to all parties and counsel in the case. There should be no actual or attempted ex parte communication.

Robin Williams Got It Right

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by Kelly Cooper

The popular press is always full of cautionary tales about celebrities and their estate plans (see our previous post on Philip Seymour Hoffman).  These stories make it seem that more celebrities get estate planning wrong then get it right.  However, it appears that Robin Williams did take several steps to get his estate plan right before his untimely death. 

Williams created a revocable living trust.  Since trust documents are not part of the public record like a will, we may never know who Williams gave his assets to and how those assets will be handled (in a trust, outright gifts, etc.).  The living trust will help protect Williams’ legacy and his family’s privacy (assuming there is no litigation or disclosure by those with knowledge of the plan).

In addition, living trusts help to avoid probate if they are properly funded.  In California, where Williams lived, the probate process can be expensive due to fees for the attorney and executor that are based on the value of the assets going through probate in addition to appraisal fees and court costs.  If Williams transferred all of his personal assets to the living trust prior to his death, he will have helped to avoid these expenses.

Williams also appears to have created a trust to hold his real estate in California (estimated equity of $25 million) and another trust to benefit his children (value unknown).  While it is not known whether Williams created these trusts to help reduce his estate tax costs, it is possible that he did so.  This uncertainty is because the terms of these trusts remain private.

I hope that Williams’ family benefits from his planning and foresight and that other celebrities take notice.

Should an undue influencer be responsible for paying the legal fees incurred to rectify the undue influence?

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by Kelly Cooper

In a recent unpublished decision, the Colorado Court of Appeals held that a niece who unduly influenced her uncle was not responsible for the payment of the uncle's legal fees, which were required to rectify the undue influence and return the property to the uncle.

Specifically, the niece was accused of unduly influencing her uncle to give her pieces of real estate during his life. A jury found that the niece did unduly influence her uncle and that she breached her fiduciary duty to her uncle. As a result, the court ordered that the real estate be transferred back to the uncle. In addition, the jury awarded $315,000 in legal fees against the niece to make the uncle whole.

On appeal, the niece argued that she should not be responsible for the payment of attorney's fees because Colorado follows the American rule that parties in a dispute must pay their own legal fees. The uncle, through his conservator, argued that an award of legal fees was appropriate in this case under the breach of fiduciary duty/trust exception to the American rule. This exception was first recognized by the Colorado Court of Appeals in 1982. See Heller v. First Nat'l Bank of Denver, 657 P.2d 992 (Colo. App. 1982). The Colorado Supreme Court recognized the exception in 1989. See Buder v. Satore, 774 P.2d 1383 (Colo. 1989).

Despite the recognition of this exception, the Colorado Court of Appeals found that the Colorado Supreme Court has cautioned it against liberally construing any of the exceptions to the American rule.

In finding that the exception did not apply to this case of undue influence, the Colorado Court of Appeals held that the niece's breach of fiduciary duty did not closely resemble a breach of trust. In addition, the Court of Appeals found that the niece breached her duty as an individual, rather than any fiduciary duty to manage property, and that abusing personal influence is not similar to mismanaging property as a fiduciary.

The citation for the case is: In the Interest of Phillip Delluomo, Protected Person, 2012CA2513.

Letters of Wishes: Helpful or Hurtful?

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by Kelly Cooper and Desta Asfaw

Most of the trusts we see instruct the trustee to consider making distributions for “health, education, maintenance and support.”  While the typical HEMS standard provides certainty in regard to taxes, it does not provide the trustee with any insight into what types of distributions the settlor wanted the beneficiaries to receive from the trust.  In addition, many trusts give the trustee broad discretion in regard to distributions (through the use of the words, “sole” or “absolute”), which puts even more pressure on the trustee to figure out if the settlor would have agreed to make distributions.  Typically, a trustee has little to no guidance from the settlor about his or her desires for the beneficiaries or his or her purposes in creating the trust (other than tax deferral or avoidance).

One solution to this problem is for the settlor of the trust to send to the trustee a non-binding letter of wishes.  Letters of wishes include personal information about the settlor and the beneficiaries, their relationships, the beneficiaries’ abilities and limitations and the settlor’s specific concerns or desires regarding each beneficiary.  Letters of wishes give the trustee more insight into the state of mind of the settlor when exercising discretion, which is helpful when exercising discretion in regard to distributions.

While letters of wishes are generally recognized in the estate planning community, there is very little law regarding the effect of a letter of wishes on a trustee’s discretion, whether reliance on a letter of wishes provides any liability protection to a trustee or if a letter of wishes must be disclosed to the beneficiaries.  If a settlor provides opinions and concerns about the beneficiaries in a letter of wishes that may be hurtful to the beneficiaries, the trustee will then be faced with the difficult decision – do you provide a copy of the letter of wishes to the beneficiaries?  If a claim for breach of the trustee’s fiduciary duty should arise, it may be that the trustee is left with no choice but to make the letter available to the beneficiaries.  In Colorado, there is no case law regarding letters of wishes so it is unknown if the letters of wishes must be disclosed to beneficiaries under C.R.S. § 15-16-303 or whether a trustee can rely on a letter of wishes when making a distribution decision.

Even with the uncertainty relating to the disclosure and use of letters of wishes, any peek into the settlor’s mind and his or her intent regarding distributions will be helpful to a trustee.  If a letter of wishes is admitted into evidence during a dispute, the letter could also prove to be compelling evidence for a judge reviewing a trustee’s exercise of discretion.

What Do Probate Judges Do?

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by C. Jean Stewart

Since I last posted an article on this blog, I was elected president of the National College of Probate Judges at its fall conference in Nashville, Tennessee. The College is the only national organization focusing exclusively on probate matters.  Its mission, to support, educate and provide resources to state and local judges who handle probate matters contributes to the efficient administration of justice in the probate courts in the United States.  Because I feel strongly about the role probate judges have historically played and continue to play in the fabric of the American court system, I embark on this role with both enthusiasm and resolve.

While the term “probate” historically referred only to the limited process of proving a testamentary document to be the decedent’s last will, probate has come to refer to a group of case types that include not only the administration of decedent’s estates, but also trust administration (a growing area), appointment of guardians and conservators (in some states the terms used are: guardian of the person and guardian of the property), disposition of last remains, declarations of death, civil mental health commitments and treatment of the mentally ill or addicted, and in some jurisdictions, the adoption of children. 

Some or all of the probate judges in 15 states are elected or selected to serve only in probate jurisdiction; in another 33 states judges of general jurisdiction have jurisdiction over probate cases, along with their civil and criminal dockets.  In 3 states, such as Colorado, there is a hybrid system where one or more localities have specialized judges while other areas rely on general jurisdiction judges for probate decisions.

Probate judges hear complex trials (including jury trials) arising from fiercely-contested cases, many of which are sensationalized and reported in the local or national press, such as the claim brought by Ryan O’Neal in the Farrah Fawcett estate litigation that was decided yesterday by a California jury.    Probate judges also hear many uncontested proceedings focused on the deteriorating physical and mental condition of injured, ill, and incapacitated citizens who rely on the courts to protect their rights while insuring that they receive appropriate care and support under the supervision of the probate court.  

The National College of Probate Judges plays an important role in assisting probate judges address these challenging and often emotionally-charged cases with educational seminars, publication of resources and materials (such as the National Probate Court Standards) and providing opportunities for collegial interactions with colleagues.  I look forward to working with judges around the United States during this coming year to assist with their important mission. 

Probate and Trust Issues in Colorado’s Upcoming Legislative Session

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by Kelly Cooper

Colorado’s General Assembly will reconvene on January 8, 2014.  At this time, it appears that at least two probate and trust related issues will be the subject of debate by the Assembly.

The first is a proposed change to the Colorado Civil Unions Act that would permit partners to a civil union to file joint income tax returns if they are permitted to do so by federal law.  Under the current proposal being considered by the Colorado Bar Association, there would be changes to both the Civil Unions Act and Colorado’s income tax statutes.  This is partly in response to the issuance of Revenue Ruling 2013-17 by the Internal Revenue Service, which permits married same sex couples to file joint federal income tax returns. 

The second is a proposal to codify a testamentary exception to Colorado’s attorney-client privilege.  The necessity and proposed scope of the testamentary exception are currently being discussed by a subcommittee of the Statutory Revisions Committee of the Trust & Estate Section of the Colorado Bar Association and will likely be discussed later this week at Super Thursday meetings.

The Colorado Supreme Court has previously recognized that the attorney-client privilege generally survives the death of the client to further one of the policies of the attorney-client privilege – to encourage clients to communicate fully and frankly with counsel.  The Colorado Supreme Court has also held that a “testamentary exception” to the privilege exists, which permits an attorney to reveal certain types of communications when there is dispute among the heirs, devisees or other parties who claim by succession from a decedent so that the intent of the decedent can be upheld.

Keeping up to date with ICCES

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by Jody H. Hall, Paralegal 

The latest updates and enhancements to ICCES (Integrated Colorado Courts E-Filing System) were released on October 19, 2013.  The release bulletin, which can be found on the ICCES Home page, is attached here for your easy reference. 

We found a couple of items of specific interest to those of us that work in the probate and trust arena:

  • The new event type of Amended Trust Registration Statement will allow us to file updated information on those trusts requiring to be registered under C.R.S. 15-16-101, including the termination of these trusts, without the system automatically charging a filing fee (as required by the originating event type Trust Registration Statement) or having to be manipulated by the Court. 
  • The Court will also now have use of two new party types for Probate Cases: Professional Conservator and Professional Guardian. 

We recommend that you (and/or others in your office) read the entire bulletin and implement those practices that will help you stay up to date with the most current information on e-filing in Colorado – the Court Clerks, as well as other interested parties in your case, will appreciate you for it.

Fiduciary Solutions Symposium Recap

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by Kelly Cooper

Last week, we held our first Fiduciary Solutions Symposium.  We want to thank each of you that came and participated.  We enjoyed seeing all of you and getting a chance to catch up with you over breakfast.

For those of you that couldn’t attend, here is a brief recap.  When we discussed topics that we wanted to present at the Symposium, we kept coming back to the constantly evolving and changing nature of our practices.  Whether it is taxes, ADR or changes in state laws, things never stay the same.  As a result, we decided to discuss a variety of topics and the trends we are seeing each day in our practices.  It was difficult to narrow down the topics to two hours of content, but we ended up discussing the following issues:

  • Digital Assets
  • Social Media and Use in Litigation
  • Gun trusts
  • Civil Unions/Same Sex Marriage and related tax issues
  • Reformation and modification of trusts and decanting
  • Apportionment and allocation of taxes and expenses in administration
  • Baby boomers and the “Silver Tsunami”
  • Migratory Clients and Differing State Laws
  • Trends in Alternative Dispute Resolution
  • Assisted Reproductive Technology

 We had so much fun that we are taking the show on the road and will be in Salt Lake City on November 12th.  We hope to see you there.