New Fiduciary Act Brings Both Progress and Uncertainty

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by Matthew S. Skotak

You may have previously read on this blog about digital assets, the impact they have on the administration of trusts and estates, the need for fiduciaries to access digital assets, and the privacy concerns that come along with such access. In order to address these issues, Colorado recently enacted the Revised Uniform Fiduciary Access to Digital Assets Act (“RUFADAA”). This new act became effective on August 10, 2016 and can be found at C.R.S. § 15-1-1501 et seq.

RUFADAA is a significant leap by the State of Colorado to catch up to the digital age.  Prior to the passage of the law, the pervasive use of electronic banking and investing has posed a problem for many fiduciaries. Without the receipt of paper statements, personal representatives, financial agents, trustees and conservators have had a difficult time locating an individual’s assets, sometimes leading to an exhaustive search of several banking and financial institutions before asserts are uncovered. Read more

Seeking Clarity in the Distribution of Mineral Interests from a Decedent’s Estate

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by Andy Lemieux, Elizabeth Meck, and Jessica Schmidt

As any practitioner who has dealt with the distribution of mineral interests from a decedent’s estate knows, dealing with these interests can be tricky and the process is not always clear. This is particularly true when old interests have not been distributed properly at the time of death. Thankfully, recent decisions in Colorado, as well as updates to certain provisions of the Colorado Probate Code, provide some clarity to this process.  A recent decision in Utah also provides clarity about who is entitled to the proceeds of production from oil and gas operations when life tenants and remaindermen are involved.

Specifically, Colorado just updated its statutes governing the process for the determination of heirship, found in the Colorado Probate Code at Colo. Rev. Stat. § 15-12-1301, et. seq.  A sub-committee of the Trust and Estate section of the Colorado Bar Association carefully reviewed the existing statutes, coordinated efforts with other sections of the bar, and with the approval of the Trust and Estate section, presented revisions to these statute sections as part of the omnibus bill, SB 16-133, in February 2016.  The committee’s goal was to address the issues Colorado practitioners have experienced in trying to distribute these interests from dormant or previously-unopened probate estates and to make the process to distribute previously undistributed property, including mineral interests, more clear.  SB 16-133 was signed by Governor Hickenlooper on May 4, 2016, thereby adopting the revisions recommended by the committee.  A copy of the Bill as enacted can be found here.

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Recent IRS Statistics

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by Kelly Dickson Cooper

For our litigation clients, a fiduciary’s failure to consider the tax impact of their actions can be the genus for litigation and anticipated tax savings can be the engine that drives a settlement.  For our fiduciary clients, it is important for them to ensure that transfer taxes are minimized for the benefit of their beneficiaries.  For our planning clients, tax planning is a key component in determining the best structure for their wealth transfer planning.  Given the importance of transfer taxes in our practice, we wanted to highlight a few items from the IRS 2015 Data Book relating to estate and gift tax returns:

Number of Tax Returns filed during 2015

  • 36,343 estate tax returns (545 from Colorado)
  • 237,706 gift tax returns (4,492 from Colorado)

Amounts Collected

  • Estate tax returns  – $17,066,589 collected
  • Gift tax returns – $2,052,428 collected

Percentage of 2014 Tax Returns Audited in 2015

  • 7.8% of all estate tax returns
    • Gross estate less than $5 million – 2.1% audit rate
    • Gross estate greater than $5 million but less than $10 million – 16.2% audit rate
    • Gross estate greater than $10 million – 31.6% audit rate
  • 0.9% of all gift tax returns

Results of Audits

  • 22% of estate tax returns examined had no change
  • 34% of gift tax returns examined had no change
  • 70 estate tax returns and 135 gift tax returns had unagreed recommended additional tax
  • 543 estate tax returns and 43 gift tax returns resulted in tax refunds

Personal and Family Lending: New Federal and Colorado Regulations

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by Desta K. Asfaw

There have been a number of recent changes to the mortgage lending laws.   Under current law in Colorado, certain private loans secured by residential real estate may be subject to compliance with strict licensing and other requirements.   Failure to comply could potentially result in misdemeanor charges and/or fines.

These new obstacles stem from provisions of the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (“SAFE Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), and the Colorado Mortgage Loan Originator Licensing and Mortgage Company Registration Act (“CMLO Act”).

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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.

Now There Are Tax Transcripts In Lieu of Estate Tax Closing Letters

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by Carol Warnick

The Internal Revenue Service (“IRS”) announced earlier this year that it would no longer routinely send out an estate tax closing letter and that such letters would have to be specifically requested by the taxpayer. The change in procedure was effective for all estate tax returns filed after June 1, 2015.

Previously, an estate tax closing letter was evidence to show that the IRS had either accepted an estate tax return as filed, or if there has been an audit, that final changes had been made and accepted. Receipt of an estate tax closing letter has never meant that the statute of limitations on the return has run, but it has given comfort to the estate administrator that he or she could make distributions and/or pay creditors knowing that the chances of further IRS review of the return was not likely. Many personal representatives and trustees have made it a practice to wait for such a closing letter before funding sub-trusts or making any significant distributions.

On December 4, 2015, the IRS announced that “account transcripts, which reflect transactions including the acceptance of Form 706 and the completion of an examination, may be an acceptable substitute for the estate tax closing letter.”   Such account transcripts will be made available online to registered tax professionals using the Transcript Delivery System (TDS). Transcripts will also be made available to authorized representatives making requests using Form 4506-T. They still must be requested, but may be easier to obtain than an estate tax closing letter.

For further instructions, here is the link to the information on the IRS website: http://tinyurl.com/plhb6f6.

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

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. 

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.