Attorneys representing clients in the context of trust administrations must navigate an incredible minefield of ethical issues. Attorneys in this arena can represent the trustee or can represent the beneficiary of the trust. Likewise, the attorney may be called on to serve as the trustee himself.
The ethical challenges for attorneys in trust administrations are two-fold. First, the attorney has to consider the ethical challenges that affect the representation of his client(s), but second, he must also understand the ethical challenges that face his trustee clients as they seek to discharge their duties to the trust beneficiaries. In the following paper, I attempt to address many of these issues from various aspects and provide some practical advice for considering both your duties to your client and their duties to the beneficiaries of the trust.
My firm and I practice extensively in the areas of estate, trust, and guardianship litigation. Because the foundation of a trustee’s duties are so closely tied to the ethical considerations involved in his position, a discussion of the ethical challenges is, in many ways, also a discussion of “How Does a Trustee Avoid Litigation?” Accordingly, where appropriate, I have tried to include some practical litigation tips along with a discussion of the ethical issues.
Basic Fiduciary Duties
Although it likely goes without saying, any attorney working in the area of trust administrations must be continually focused on this simple truth:
“Trustees owe fiduciary duties to the beneficiaries of the Trust.” (2)
I realize that this seems like an incredibly basic statement of law, but the vast majority of trustee litigation crops out of a violation of this basic tenant. Among the basic fiduciary duties affecting trustees are the a) duty of impartiality, b) duty of good faith and fair dealing, and c) the duty to account. Every decision that a trustee makes must be evaluated in light of these fiduciary duties.
When trying to properly discharge the fiduciary duties of a trustee, your client should put some fairly concrete guidelines in place so that an objective observer would review the decision-making process and say, “The beneficiary may not have agreed with the ultimate decision, but it appears that the trustee made a fair decision that falls in line with the requirements of the trust.” Following are some suggestions for trustees:
1. Depending on the size and composition of the trust assets, the trustee should regularly (quarterly or semi-annually) review the financial statements and brokerage statements in person with the CPA’s and financial planners advising them. Make sure that your client has a firm grasp on the business of the trust.
2. Voluntarily make copies of the financial statements available to the trust beneficiaries at least once a year. (Duty to Account).
3. Communicate the reasons for controversial decisions in writing to the trust beneficiary(ies). This will create a record of the reasons for which decisions were made and help avoid questions as to whether decisions were arbitrary. It also helps to head off litigation and/or provide solid evidence should the beneficiary pursue litigation. (Duty of Good Faith and Fair Dealing).
4. Review decisions with counsel to ensure that multiple beneficiaries are being treated fairly. Even when a trust instrument allows for unequal distributions for beneficiaries, unfair or inequitable treatment between beneficiaries of the same class tends to drive significant fiduciary litigation. (Duty of Impartiality).
By making simple suggestions like these to your clients, you are setting them up to avoid potential ethical traps in administering the trust. Likewise, because trustee litigation is frequently born out of breaches of ethical duties, you are also setting them up to avoid or minimize litigation.
Who Do You Represent?
When looking at the question of who you, as the attorney, represent in a trust administration, be sure to remember the basic issues in this question. First, if you are representing the beneficiary of the trust, then it is fairly easy to identify your client. However, if you are representing the trustee of the trust, you need to remember that you, as the attorney, represent the trustee. You do not represent the trust itself. The trust is represented by and through its trustee. It is not represented itself. This distinction is made even more complex when an attorney is serving as the trustee himself.
A. Representing the Trust Beneficiary.
Representing the trust beneficiary brings far fewer ethical challenges than representing the trustee. However, in representing the beneficiary, there are a few issues with which you need to be concerned.
1. The trust may benefit a group or class of beneficiaries (e.g. “all of the decedent’s children for their lifetimes.”) When this is the case, you must remember the general ethical rules that relate to representing multiple parties. (3) Particularly, if you are representing multiple beneficiaries and a conflict develops between any two of the beneficiaries, then you need to withdraw as the attorney for both.
2. The beneficiary’s rights are going to be fairly well delineated in the trust agreement and by statute. It is obviously important to know what the Trust agreement provides, but if you are representing a trust beneficiary on an ongoing basis, probably the most important tool to utilize in advising your clients is the requirement for a trustee to account. (4) In most instances, the trust beneficiary can demand an accounting once a year, and the accounting in many instances will help to reveal any irregularities in the trustee’s handling of the trust assets. By forcing the trustee to account every time you can, you are putting yourself in the best position to be able to competently advise your client if a conflict arises as to the trustee’s management of the trust. Likewise, requiring regular accountings can help avoid any concerns over statute of limitations regarding the trustee’s actions.
B. Representing the Trustee.
Representing a trustee can involve fairly complex and varied ethical challenges. The potential issues that you may face as the trustee’s attorney can vary depending on whether your trustee is a corporate trustee vs. an individual trustee. It can also vary depending on the specific language in the trust agreement.
1. Corporate Trustees. Because the representation of corporate trustees is probably not a discussion for a “fundamentals” presentation, this paper focuses more on the representation of individual trustees. However, it is important to note that corporate trustees generally tend to have fairly well-established procedures for trying to discharge their ethical responsibilities to trust beneficiaries. As a result of those procedures, some corporate trustees are viewed as fairly rigid in their approach to working with their beneficiaries. Conversely, because the corporate trustees are perceived to have “deep pockets” if fiduciary litigation arises, those trustees are very concerned about avoiding any hint of ethical problems. When representing a corporate trustee, pay close attention to the ethical challenges associated with multiple beneficiaries of the same trust and preserving an appropriate amount of the trust for later generations if an earlier generation tends to spend lots of money.
2. Individual Trustees. Assisting individual trustees in navigating the ethical challenges can be difficult because trust agreements can vary widely in the duties that they impose. Likewise, individual trustees can often have personal feelings that impact their ability to discharge their duties, and the lack of accountability that can exist in some trusts can provide the opportunity for the careless trustee to cause himself problems.
a. Strange Trust Provisions. Some trust agreements can create unusual duties for the trustees. For example,
I am the trustee for an individual who has trusts created for his benefit by two different people. In the first trust, the settlor says that the trustees should make distributions “considering the beneficiary’s best interest.” In the second trust, there is no “best interest” standard, but the trustees are to exercise their discretion alone when making distributions for health, support, education, and maintenance.
A clear argument could be made that the “best interests” test imposes a more difficult duty on the trustees than the trust that does not have that requirement. The “best interests” standard as generally applied under the Probate Code considers factors not generally considered in a “health, support, education, and maintenance” standard. At the same time, the imposition of this somewhat personal duty makes it easier for a trustee to either grant or deny a beneficiary’s request on the premise, “This is (not) in his best interest.”
Regardless of the provisions contained in the trust agreement, your trustee needs to objectively evaluate the restrictions placed on them and evaluate each decision in light of those restrictions. If the trust beneficiary is prone toward conflict, be sure that your trustee has informed the beneficiary in writing of the reasons for the decisions.
b. Personal Feelings. Because individual trustees are often times family members or friends of the trust beneficiaries, there is a high danger of the trustee’s personal feelings about a particular situation conflicting with his fiduciary duties as trustee. For example,
Father dies leaving all of his assets in trust with his sister as the trustee for the benefit of his 3 children. As the children get older, the sister/trustee’s relationship with the oldest child becomes strained because the oldest child has decided to become a doctor rather than following in the trustee’s footsteps as a lawyer (imagine the insult!). As a result of the conflict, the trustee begins withholding trust distributions for educational expenses for medical school while paying for the other beneficiaries’ law school expenses.
This example paints a pretty clear picture of a trustee whose personal/family feelings have gotten in the way of her discharging her ethical duties as a trustee. She is favoring one beneficiary over another for personal reasons, which presents a clear ethical conflict.
c. Lack of Accountability. Unlike dependent probate administrations and guardianships of estates where the Court exercises pretty strict review over the annual accounting requirements, trusts typically do not have the same level of oversight, and in most cases, the trustees are not bonded should the trustee breach his fiduciary duty and cause harm to the trust. The lack of accountability can frequently lead to problems with individual trustees who tend to neglect their duties to properly manage and invest the assets of the trust and tend to want to pay themselves trustee fees that may be inappropriate. For instance:
I am involved in a trust litigation matter where the trustee paid himself $3,000 per month for 9 years. The trust benefitted Testator’s spouse for the remainder of her life, but upon her death, the trust pays out to named beneficiaries. I represent one of those beneficiaries who takes issue with the trustee fees, especially in light of the fact that the trustee made inappropriate distributions that violated the terms of the trust.
As a remainder beneficiary of the trust, my client had no right to demand an accounting during the lifetime of the primary beneficiary. Without any oversight, the trustee made distributions that he knew that he should not have made, and he paid himself a fairly extraordinary fee despite having made inappropriate distributions. Once the remainder beneficiary was eligible to demand an accounting and after she filed suit, the trustee quickly acknowledged that the beneficiary’s estate owed substantial sums of money back to the trust. However, had my client not investigated the trustee’s actions when she gained the right to do so, neither the trustee’s excessive fees nor his actions in making unauthorized distributions would have been exposed.
C. Lawyer as Trustee.
On a somewhat routine basis, the Texas Bar Journal reports on attorneys who were disciplined because they served as an executor or trustee for a family member, breached their duty as an executor or trustee, and then were suspended or disbarred as a result of their breach of fiduciary duty. While serving as a trustee ordinarily involves a high ethical duty, that duty is amped up even more when you consider that your law license could be jeopardized by breaching those ethical duties.
As a threshhold issue, a lawyer serving as trustee must keep in mind whether they are now serving as trustee for a client whom they previously represented in a different capacity. If so, then you may find yourself in a position of conflict if your former client/now trust beneficiary makes a request for a distribution from the trust that you deny.
Barring that issue, an attorney serving as trustee must be very careful to adhere to the fiduciary duties described at the outset of this paper. Consider the following:
1. Keep the beneficiaries informed.
2. Do not discriminate in your treatment of the beneficiaries.
3. Always be prepared to account, and account voluntarily before the beneficiary demands it.
4. Clearly and fully communicate your decisions to the beneficiaries so that there is a clear paper trial documenting the reasons for various decisions.
5. If you are serving as co-trustee with someone else, make sure to meet/communicate with your co-trustee regularly, and document those meeting and communications to show that you were deliberate in your decision-making.
6. Remember that you are the Trustee. You are not the attorney for the beneficiary. Those roles are very different and have a high probability of conflict. Although your trust beneficiary may want to ask you legal questions, be sure to preface your answers with, “I am not your lawyer,” or “you may need to talk to another attorney.”
Adhering to basic principles like this will not only ensure that you have discharged your ethical duties, but it also helps to defend against suits for breach of fiduciary duty.
“Parenting” Responsibilities as a Trustee
In many cases, a trustee is appointed to manage the assets for a minor child. In many other cases, the trustee is managing the trust assets for an adult child. The difference? The minor child has a legitimate excuse for not being capable of handling their own money.
Obviously, there are countless adults who are beneficiaries of trusts for reasons other than their own immaturity, but in my experience, there are also countless adults whose parents or grandparents left them money in trust because they were smart enough to realize that their child or grandchild would never be mature enough to handle their own finances. Serving as the trustee of a trust for one of these “failure to launch” adults presents some unique challenges because the duties of trustees frequently morph more into “parenting” duties than mere trustee duties. For example:
I am the trustee of a trust for a 35 year daughter of a wealthy oil company executive. The father passed away leaving all of his money in trust for his daughter who has a history of making poor decisions. She has two children from two different husbands, although she is not married to either of them now. She has trouble getting her children to school each day because she tends to, I believe, indulge in an active drug addiction. I have had to put the daughter on a monthly allowance, but she is constantly devising schemes to try to get me to give her more money. Because the trust agreement keeps everything in trust for her lifetime and the lifetimes of her children, I am constantly having to weigh the issues of distributions to the daughter now vs. impoverishing her children later.
As a part of my trustee duties to the daughter, I end up having to deal with her utilities on her house, child custody issues, divorce issues, delinquent toll road charges, car payments, food for her children, etc., etc., etc. Because she is so desperate for money and makes such poor decisions with her money, we have had to constantly change our approach to dealing with her so that we can address the issues of the day. For instance, we originally made a lump-sum distribution to her at the beginning of each month, but we started to notice that by the middle of the month, she was always out of money. So, we have had to change the distributions to weekly distributions every Monday morning. While it seems somewhat ridiculous that we have to go to these lengths to “parent” this woman and help her make better decisions for herself, we feel as though it furthers the purposes of the trust:
1. We are sticking to a stricter budget rather than making additional distributions every month, which helps to ensure the trust’s purposes for a longer period of time.
2. We are helping to ensure that the beneficiary has the resources available regularly to meet her needs, and
3. We are helping to ensure that the beneficiary always has money in her pocket so she can buy food for her children.
Although this “parenting” function can seem odd from a fiduciary standpoint, it is one of the issues that trustees frequently encounter. However, your trustee clients need to stay focused on maintaining an ethical balance when having to fill the varied roles. They cannot let their personal feelings cloud their judgment, and they need to be objective in their decision-making process.
Diminished Capacity Issues
Frequently, trust administrations involve issues of diminished capacity in one of two scenarios: a) the beneficiary of the trust has diminished capacity, or b) the trustee’scapacity becomes diminished while they are serving as trustee.
Beneficiary’s Diminished Capacity. The present or future incapacity of a beneficiary is frequently the reason that someone places assets in trust for the beneficiary rather than giving them the assets outright. The most classic example of this is a grandparent leaving money in trust for their minor grandchildren or a parent leaving assets in trust for a special needs adult child. In these situations, the trustee’s duties are governed by the trust instrument and the statutes, and they do not give rise to extraordinary ethical issues outside the scope of a normal trust administration.
Trustee’s Diminished Capacity. The more difficult situation involving diminished capacity arises when the trustee’s capacity becomes diminished. For example:
I am trustee of a substantial trust where the Settlor had originally named himself and his long-time lawyer as co-trustees. Settlor died in 2006, and the lawyer continued to serve along with a successor co-trustee. At the time of Settlor’s death, the lawyer was 86 years old, and the successor trustee began noticing that the lawyer was losing his ability to understand the issues of the trust or communicate with his co-trustee.
Clearly, this example illustrates a situation where the lawyer trustee should have resigned his position. However, because he did not want to admit that he was losing capacity, his successor co-trustee had to retain new counsel to determine the best alternative for moving forward. If you are the attorney representing a trustee in this type of scenario, you should remember the following:
1. Clearly, this situation puts an attorney in the uncomfortable position of having to approach their client and say, “it may be time for you to resign as trustee.” From an ethical perspective, this is probably the first place that you should start if you begin to feel as though your client is no longer capable of discharging his duties as trustee. It keeps the nature of the problem confidential and creates as little fall-out as possible.
2. If having a conversation with your client is not productive, the Texas Disciplinary Rules of Professional Conduct address specifically the issue of a client with diminished capacity (5). Under those Rules, an attorney having reason to believe that his client has become incapacitated has a duty to seek the imposition of a guardianship for the client so as to protect the client’s interest. (6) Because a trustee acting with diminished capacity could result in the trustee being subjected to significant liability, you as the trustee’s attorney should consider seriously the obligations that you have under the Disciplinary Rules of Professional Conduct.
The Two UPIA’s
In 2002, the Legislature enacted the two UPIA’s – the Uniform Prudent Investor Act (7) and the Uniform Principal and Income Act (8). Although an in-depth discussion of the two acts is not appropriate for either a fundamentals course or an ethics discussion, these two acts created fairly specific statutory requirements for trustees when investing trust assets and in allocating income and expenses within the trust.
In my example above regarding the trustee who paid himself $3,000 per month for 9 years, one of the big issues that he faced in that case was the fact that he had charged his trustees fees and the accountants fees every year against the trust principal rather than allocating equally between the trust income and the trust principal. As a result, he was sued for breach of fiduciary duty for his lack of prudence. While this issue may seem more “litigation” oriented, the wise attorney advising trustees must understand the basic issues between the two Acts so that he can competently advise his client in appropriately discharging his fiduciary duties.
As I said at the outset, all of the trustee’s duties are fiduciary in nature, which implicates their ethical duties in almost every action. Looking at these issues from an ethical perspective means looking at the potential litigation issues. Likewise, looking at the potential litigation issues necessarily means looking at the ethical issues. Maintaining a strong ethical perspective means that the trustee is going to likewise avoid many of the issues that could lead to him being sued over his actions as trustee.
1. Don D. Ford III is Board Certified in Estate Planning and Probate and is the founding partner of Ford + Bergner LLP, a boutique estate, trust and guardianship litigation firm with offices in both Dallas and Houston. For more information regarding the topics discussed in this paper, please visit the firm’s website at fordbergner.com.
6. In the 2010 proposed revisions to the Disciplinary Rules, Rule 1.02(g) was to be re-drafted as Rule 1.14, which would have eliminated the duty to seek a guardianship, but instead would have placed a duty on the attorney to provide information to a Court indicating that the Client may be incapacitated. Rather than seeking the guardianship himself, the attorney would have then stepped out of the process and let the Court investigate it. This procedure makes much more sense than an attorney seeking to procure the appointment of a guardian, which could lead to an adverse action against his client.