Principal and Income Allocations — Attention to Detail

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by Carol Warnick

I recently had the occasion to pull out some old CLE materials from 2001 after Colorado’s adoption of the New Uniform Principal and Income Act (UPIA).  That caused me to reflect on what has happened in the thirteen years since passage of the act in Colorado.  Unfortunately, there still seem to be individual trustees as well as attorneys and accountants who do not appreciate that the provisions of this act must be considered in determining such basic things as what is income and what is principal, unless that is clearly spelled out in the document.

Determinations of income and principal, in conjunction with the distribution provisions of the document, are critical to determining what each trust beneficiary is to receive.  The basic thrust of the UPIA is that the document will trump the UPIA rules, but the UPIA provides a set of default rules to make such determination if the trust is silent.  It also contains special rules for such things as depreciation expense, how to handle receipts from depleting assets such as mineral interests, and giving the trustee the power to adjust between income and principal under certain circumstances.     

A common mistake is to allocate principal and income based upon a recollection of what the UPIA says, or worse, how it was allocated for a previous client.  The first thing the trustee should do is to read the trust document because if the issue is discussed there, there is no need to look further.  However, most documents don’t go into the level of specificity in all areas as the UPIA does and therefore the practitioner must rely on the UPIA.  It is also important to read the correct state’s UPIA statutes as states have varied in their adoption of portions of the original uniform law.  Depreciation, for example, is one area that is treated differently by a variety of states. 

More and more trusts are spanning multiple generations and require trustees to manage trust assets for decades.  It is important to remember that a decision made today may be reviewed years later with 20/20 hindsight, when the cost of the trustee’s decision will have been compounding for years.  This means that decisions involving even low dollar amounts now can be subject to close scrutiny years later.  Trustees and their agents need to be fully aware of the provisions of the UPIA and make sure to follow them. 

The Fall of Colorado’s Same Sex Marriage Ban

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By Kelly Cooper

Starting on Monday, marriage licenses were issued in Colorado to couples regardless of sexual orientation.

This change came because the U.S. Supreme Court refused to hear cases from Indiana, Oklahoma, Utah, Virginia and Wisconsin.  What do these five states have in common?  Each of them had banned same sex marriage and had those bans declared unconstitutional by a U.S. Court of Appeals. 

In refusing to hear these cases, the U.S. Supreme Court has upheld three U.S. Courts of Appeal’s decisions declaring the same sex marriage bans unconstitutional and making same sex marriages legal in Indiana, Oklahoma, Utah, Virginia and Wisconsin. 

The impact of the U.S. Supreme Court’s refusal to hear these cases has reached far beyond the borders of those five states.  This is because every state in the U.S. is subject to the decisions made by one U.S. Court of Appeals.  For example, Colorado is situated in the 10th Circuit and the 10th Circuit U.S. Court of Appeals declared Utah’s ban on same sex marriage unconstitutional.  Since Utah and Colorado are both bound by 10th Circuit’s decisions, it is likely that Colorado’s same sex marriage ban would also be declared unconstitutional by the 10th Circuit.  As a result, various county clerks began issuing marriage licenses to same sex couples in Colorado.

Current status: There are 19 states that permit same sex marriages plus the District of Columbia.  Due to the U.S. Supreme Court’s decision not to hear these cases, five more states’ bans on same sex marriage will fall bringing the total number of states permitting same sex marriage to 24.  Due to the U.S. Supreme Court’s decision, an additional six states’ same sex marriage bans are effectively overruled, including Colorado’s.  The other five states are Wyoming, Kansas, North Carolina, South Carolina and West Virginia.  This will bring the total number of states allowing same sex marriage to 30.

 We can expect more developments and changes in this area in the near term, so stay tuned.

Your Fiduciary Duty of Loyalty

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by Elizabeth Meck

The Fiduciary Law Blog recently posted an article in which we observed that “fiduciary” is a vague term encompassing many different people and several different relationships. Under Colorado law, a fiduciary includes, without limitation, a trustee of any trust, a personal representative, guardian, conservator, receiver, partner, agent, or “any other person acting in a fiduciary capacity for any person, trust, or estate.” Colo. Rev. Stat. § 15-1-103(2).

Any fiduciary must abide by the duties and obligations generally known as “fiduciary duties,” which are among the highest duties under the law. This post is the first in a short series in which we will discuss the fiduciary duties applied to trustees, when it may be appropriate for a trustee to delegate certain duties, and a trustee’s potential liability for breaching these important duties.

In the context of a trust, and as stated in the Restatement (Second) of Trusts § 2, a fiduciary relationship with respect to property arises out of the manifestation of an intention to create the fiduciary relationship and subjects the trustee “to equitable duties to deal with the property for the benefit of another person.”

The trustee’s most basic function is to hold title to and manage trust property pursuant to the terms of the trust instrument, which he must do with the utmost loyalty, good faith and honesty. Generally, the fiduciary duties applicable to a trustee are: the duty of loyalty, the duty to exercise care and skill in managing the trust assets and administering the trust, and the duty to remain impartial to all beneficiaries. This post will focus on the duty of loyalty.

The duty of loyalty, perhaps the broadest of the fiduciary duties, has been described as “inherent” in the trust relationship. George Gleason Bogert & George Taylor Bogert, The Law of Trusts and Trustees § 543 (2d rev. ed. 1980). This duty requires the trustee to remain loyal to the beneficiaries of the trust in all aspects of trust administration. Restatement (Second) of Trusts § 170.1 Fundamental to the duty of loyalty is the obligation to adhere to the terms of the trust instrument itself and to undertake all actions in accordance with applicable law. Restatement (Third) of Trusts § 76; Restatement (Second) of Trusts § 169.

As defined in Scott on Trusts, the trustee’s fiduciary duty of loyalty is the “duty of a trustee to administer the trust solely in the interest of the beneficiaries.” Austin W. Scott & William F. Fratcher, Scott on Trusts § 170 (4th ed. 1987) (emphasis added). A trustee, therefore, “is not permitted to place himself in a position where it would be for his own benefit to violate his duty to the beneficiaries.” Id. Under the duty of loyalty, the trustee must refrain from engaging in any act of self-dealing or conflicts of interests that may result in increased benefit to himself. Such transactions would constitute a breach of the trustee’s duty of loyalty, may expose the trustee to personal liability, and may be voided by the beneficiaries. See Restatement (Second) of Trusts § 170 cmt. b.

Further, the duty of loyalty requires the trustee to “communicate to [all beneficiaries] all material facts” in connection with the administration of the trust. Restatement (Second) of Trusts § 170. Failure to inform beneficiaries of important decisions or material facts may not only constitute a breach of the duty of loyalty, but frequently creates feelings of distrust toward the trustee. It is important, therefore, for the trustee to remain transparent, which we discussed in a prior blog post.

The duty of loyalty applies to the administration of a non-charitable trust as well as charitable trusts. This is the case even though a charitable trust may exist perpetually. A trustee of a charitable trust must administer the trust solely in the interests of effectuating the trust’s charitable purposes. See Restatement (Second) of Trusts § 379 cm. a.

As stated above, the duty of loyalty is broad and requires the trustee to regularly ensure that he is acting solely in the best interest of the beneficiaries. It is wise for any trustee to step back occasionally to make sure that his actions as trustee are taken in accordance with the duty of loyalty.

In the next blog entry in this series, we will discuss the duty of the trustee to exercise care and skill in the management of trust assets and administration of the trust.

1For further discussion on the duty of loyalty, see Austin W. Scott & William F. Fratcher, Scott on Trusts §§ 169-186 (4th ed. 1987); and George Gleason Bogert & George Taylor Bogert, The Law of Trusts and Trustees § 543-543(V) (rev. 2d rev. ed. replacement vol. 1993).

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.

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.

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.

Charities are Beneficiaries Too!

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by Jody H. Hall, Paralegal

“No, you cannot have it.  The trust is a private document” – Well, maybe, but not to the exclusion of the beneficiaries, and I mean ALL of the beneficiaries, named in that testamentary instrument.

Prior to returning to Colorado a few months ago, I worked in the Legal Department for a national charity where the responsibility of my team (totaling more than 8 attorneys, paralegals and staff) was to represent the charity’s interests in trust and estate matters around the country.

Coming from a background as a trusts and estates paralegal for well-respected law firms, I was absolutely shocked at the number of times that attorneys or fiduciaries (both professional and individual) would respond in the negative to a request for a copy of the will or trust or financial information regarding the gift of which we had just received notice.  There seemed to be this prevailing attitude that, because we were a non-profit organization, we would simply take whatever we were given or what was left over and be grateful for it, even in large trusts or estates where the designated gift was a portion or entirety of the residuary estate.  Unfortunately there was not a consistent understanding that if Charity XYZ and Cousin Sue are each to receive one-half of the residuary estate, they need to be treated equally.

Most charities do not intend to be adversarial or difficult.  Any money spent on legal fees reduces the ultimate charitable gift of the donor; however, they have a fiduciary obligation to the ultimate beneficiaries of their particular mission to ensure they receive everything to which they are ENTITLED!  In Colorado, that means a copy of the terms of the trust which affect the interest; other jurisdictions require a complete copy of the instrument, including codicils and/or amendments.  Almost every jurisdiction requires providing at least some information about the assets or accountings.

As with many things in life, upfront communication is usually the best policy.  My experience working for a “professional beneficiary” has reinforced and taught me several things about good estate and trust administration communications.  Provide an initial notification as soon as possible at the beginning of the trust or estate administration.  Provide periodic updates.  If there are assets that may take some time to sell, litigation or any other factors that may delay the distribution, let your contact know and they will calendar their system accordingly.  I know that I was less likely to question or challenge things when I received regular contact from the attorney or fiduciary.

So if the Decedent has been deceased for several years and you are just now sending a check for several hundreds of thousands of dollars as their first notification of the gift under a will or trust, do not be surprised if the charity requests additional information (including, but not limited to, the testamentary documents, an inventory or list of assets and an accounting) before signing a waiver or release.  After all, charities are beneficiaries too!

Description or Condition?

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by Kelly Cooper

Lawyers that regularly litigate in the probate world always have an improbable story to tell.  Here is one of those stories that ended up in front of the North Dakota Supreme Court last year: 

A couple, Lee and Robyn, were engaged and planned to be married on July 18, 2009.  On June 26, 2009, Lee and Robyn signed a prenuptial agreement that required Lee to make gifts to Robyn and her daughter upon his death. 

Also on June 26, 2009, Lee executed a Will that contained the provisions to comply with the requirements of the prenuptial agreement.  The Will gave property to Robyn, describing her as “my wife, Robyn.”  The Will also stated, “My spouse’s name is Robyn Risovi and all references in this Will to “my spouse” are to her only.”  However, a footnote followed stating, “This Will has been prepared in anticipation of the upcoming marriage of …Lee Paulson and Robyn Risovi set for July 18, 2009.” 

Lee died on July 15, 2009 – three days before the wedding. 

Before you read any further, answer this question: should Robyn receive the gifts under the Will even though she was not yet Lee’s wife?

Technically, one of the questions before the North Dakota Supreme Court was whether the term “wife” being used to describe Robyn in the Will resulted in a conditional gift or whether the term “wife” was a merely a description.  In addition, the North Dakota Supreme Court had to determine whether the prenuptial agreement, which was not effective since the marriage did not occur before Lee’s death, had any impact on the interpretation of the word “wife” in the Will. 

The North Dakota Supreme Court held that the Will was unambiguous, the term “wife” was only descriptive, and ordered distribution to Robyn.  The Court held the prenuptial agreement had no effect on the interpretation of the Will for a variety of reasons.

This is just one more example of the ways that the best laid plans are derailed by unexpected events.