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What Does It Mean To Be A Trustee?

May 12, 2015/in Administration of Estate, Administration of Trust, Fiduciary Duties, Personal Representative, Removal of Fiduciary, Surcharge of Fiduciary, Trustee

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. 

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Who Gets the Embryo?

April 27, 2015/in Administration of Estate, Administration of Trust, Fiduciary Litigation, Legislation, Personal Representative, Testamentary Intent

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).

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2015 Cost of Living Adjustment of Certain Dollar Amounts Under Colorado Probate Code

April 13, 2015/in Administration of Estate, Legislation, Personal Representative

by Peter J. O'Brien

The Colorado Department of Revenue has published a list of cost of living adjustments for 2015 for certain dollar amounts under the Colorado Probate Code.  Probate practitioners should be aware of the change in figures related to the intestate share of a decedent's surviving spouse, supplemental elective-share, exempt property, lump sum exempt family allowance, installment amount exempt family allowance and collection of personal property by affidavit.

The 2015 figures are as follows:

Statute

Description

2015 Amount

C.R.S. § 15-11-102(2)

Intestate share of decedent's surviving spouse if no   descendant of the decedent survives the decedent, but a parent of the   decedent survives the decedent

$335,000, plus   fractional share pursuant to statute

C.R.S. § 15-11-102(3)

Intestate share of decedent's surviving spouse if all of   the decedent’s surviving descendants are also descendants of the surviving   spouse and the surviving spouse has one or more surviving descendants who are   not descendants of the decedent

$251,000, plus   fractional share pursuant to statute

C.R.S. § 15-11-102(4)

Intestate share of decedent's surviving spouse if one or   more of the decedent’s surviving descendants are not descendants of the   surviving spouse

$167,000, plus   fractional share pursuant to statute

C.R.S. § 15-11-202

Supplemental elective-share amount

$55,000

C.R.S. § 15-11-403

Exempt property

$32,000

C.R.S. § 15-11-405

Lump sum exempt family allowance

$32,000

Installment amount exempt family allowance

$2,667

C.R.S. § 15-12-1201

Collection of personal property by affidavit

$64,000

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Mediator’s Moment – Beginning at the End of the Matter

March 2, 2015/in Mediation

by Jean Stewart

Attorneys preparing for mediation would be well advised to spend some time drafting a Terms of Settlement sheet in advance of the mediation session.  This exercise presents the opportunity to be successful in multiple ways. 

First, one of the observations I have made in multiple mediations is that attorneys and their clients do not always have consensus on the client’s goals.  Reducing the “hoped-for” outcome to a simple set of reciprocal terms helps to identify the client’s real goals before the mediation begins and assists both the attorney and the client separate the grain from the chaff. 

Second, parties who have sorted their priorities into “must have” terms versus incidental, “sure, what the heck” terms have a tremendous advantage in mediation.  Instead of getting overheated in the tension of negotiations, they can stay focused on the real priorities they brought to the process and let go more easily of the peripheral issues they grew attached to during litigation or in the mediation itself.

Finally, at the conclusion of mediation, I almost always ask one of the attorneys present to take out his/her laptop and compose a Settlement Agreement for signature.  I am happy with a simple “Terms of Settlement” agreement although some counsel insist on drafting more elaborate contracts.  Regardless of the format, attorneys who have given real thought to the essential Terms of Agreement (even if only the ones they hope for) in advance of the mediation are more effective and efficient than attorneys who get distracted by the process of drafting.

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Premarital Agreements and the Second (Third, or Fourth . . .) Marriage

February 16, 2015/in Administration of Estate, Legislation, Will & Trust Construction

By Megan Meyers

For couples who marry later in life or who have children from a prior relationship, Premarital Agreements often incorporate waivers of spousal rights at death to ensure that previously created wealth is protected for children, grandchildren and charitable endeavors.  As Premarital Agreements continue to increase in popularity and acceptance for these couples, we have found there to be a fairly consistent misunderstanding common among clients – that is the relationship between the Premarital Agreement and the Will (or Revocable Trust). 

Many clients initially view the Premarital Agreement and the Will as interchangeable documents with similar contractual qualities and are primarily focused on the Premarital Agreement in the event of divorce.  Clients often do not initially understand the importance of including provisions in the Premarital Agreement regarding obligations at death between spouses, and simply state “we plan to just take care of that in our Wills”. 

We have found that it is extremely important to carefully walk through the differences between the Premarital Agreement and the Will with our clients.  Specifically, it is important to discuss that the Premarital Agreement is a contractual document which sets the minimum obligations that each spouse has to the other in the event of death, whereas the Will can be but one of many vehicles used to satisfy these Premarital Agreement obligations and which can provide additional benefits to the less-propertied spouse.  It is also important to note that the Will and other estate planning documents are changeable and in the full discretion of the other spouse during the marriage (provided that waivers of spousal rights are included in the Premarital Agreement).

Related to this issue of Premarital Agreement versus Will is that of the expectations and understanding of any adult children from a prior marriage.  These children may incorrectly view themselves as third party beneficiaries of the Premarital Agreement.  In other words – that the limitations on spousal rights at death which are included in the Premarital Agreement are limits that cannot be exceeded and that all other assets are protected for the benefit of the adult children from the first marriage.  While not all clients want to share these discussions with their adult children, it is important to ensure that clients understand that the Premarital Agreement merely sets the floor in terms of the obligations between spouses at death and that additional gifts may be made in the estate plan without any need to amend the Premarital Agreement.

The Premarital Agreement versus Will discussion also ties to the inevitable issues of capacity for these clients – particularly those who marry again later in life.  We have found that it is helpful to discuss and make explicit the expectations of these clients as to whether an agent or guardian appointed for the incapacitated spouse – particularly, the adult child – should have the authority to (i) amend or revoke the Premarital Agreement or (ii) pursue a dissolution of marriage action during a client’s incapacity. 

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

February 2, 2015/in Administration Expenses, Administration of Estate, Administration of Trust, Court Procedures, Fees, Fiduciary Duties, Fiduciary Litigation, Personal Representative, Trustee

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. 

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Fiduciary Law Blog Archive

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