THE DRAFTING ATTORNEY: ACTING AS FIDUCIARY AND WHEN TO RECOMMEND ANOTHER

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1 THE DRAFTING ATTORNEY: ACTING AS FIDUCIARY AND WHEN TO RECOMMEND ANOTHER February 14 th, 2011 CBA Trust Committee Christopher Shouldice J.P.Morgan, Chicago, IL

2 I. DRAFTING ATTORNEY AS FIDUCIARY A. Can I Act? 1. An individual is generally free to select and appoint whomever he or she wishes to a fiduciary office (e.g., trustee, executor, attorney-in-fact). None of the provisions of the MRPC deals explicitly with the propriety of a lawyer preparing for a client a will or other document that appoints the lawyer to a fiduciary office. As a general proposition lawyers should be permitted to assist adequately informed clients who wish to appoint their lawyers as fiduciaries as long as a) Client is properly informed Client is properly informed if the client is provided with information regarding the role and duties of the fiduciary, the ability of a lay person to serve as fiduciary with legal and other professional assistance, and the comparative costs of appointing the lawyer or another person or institution as fiduciary. The client should also be informed of any significant lawyer-client relationship that exists between the lawyer or the lawyer's firm and a corporate fiduciary under consideration for appointment. (See ACTEC Commentaries on Model Rule 1.7) b) Appointment does not violate conflict of interest rules of MRPC 1.7 The designation of the lawyer as fiduciary will implicate the conflict of interest provisions of the Model Rules when there is a significant risk that the lawyer's interests in obtaining the appointment will materially limit the lawyer's independent professional judgment in advising the client concerning the choice of an executor or other fiduciary. (See ABA Formal Opinion : Lawyer Serving as Fiduciary for an Estate or Trust ) c) Appointment is not the product of undue influence or improper solicitation B. Ethical Consideration American College of Trust and Estate Council (ACTEC): 1. Draft an engagement letter when the client requests the drafting attorney to serve as a fiduciary that includes a) Fact that the client independently selected lawyer as fiduciary b) Disclosure of potential conflicts of interest c) Advantages and disadvantages of lawyer serving as fiduciary d) Compensation to be paid lawyer as fiduciary and lawyer s law firm for legal services e) Explanation of exculpatory language and available options with respect to its use (See ACTEC, Engagement Letters: A Guide for Practitioners, Supplemental Checklist for the Estate Planning Lawyer (2 nd Edition 2007)

3 II. ATTORNEY FOR FIDUCIARY A. Designation of Drafting Attorney as Attorney for Fiduciary Involves essentially the same issues as does the appointment of the drafting attorney as fiduciary. 1. Rule of Thumb Although the appointment of a named fiduciary is generally necessary and desirable, it is usually unnecessary to designate any particular lawyer to serve as counsel to the fiduciary or to direct the fiduciary to retain a particular lawyer. 2. If You Must Before drawing the document, the drafting attorney should advise the client: a) that it is neither necessary nor customary to include such a direction. b) A client who wishes to include such a direction in a document should be advised as to whether or not such a direction is binding on the fiduciary under the governing law. c) In most states such a direction is usually not binding on a fiduciary, who is generally free to select and retain counsel of his or her own choice without regard to such a direction. (See ACTEC Commentaries on Model Rule 1.7) 3. Illinois View Lawyer engaged to prepare a trust for a client may, at the client's direction, include a provision directing the trustee administering the trust to retain the lawyer for legal services, so long as a) Adequate disclosure (including disclosing that the trustee also would have the right to discharge the lawyer as its lawyer) is made b) Client consents to the representation c) The lawyer concludes that his representation of the client will not be adversely affected by including such a provision. Op , 2000 WL (2000). B. Lawyer Serving as Fiduciary AND Counsel to Fiduciary Some states permit a lawyer who serves as a fiduciary to serve also as lawyer for the fiduciary. GENERAL VIEW: DON T DO IT! 1. Why would I? It may be appropriate where there has been a long-standing relationship between the lawyer and the client. 2. When can I and how? Generally, a lawyer should serve in both capacities only if the client insists and is aware of the alternatives, and the lawyer is competent to do so. A lawyer who is asked to serve in both capacities should inform the client regarding the costs of such dual service and the alternatives to it. 3. Checks and balances? A lawyer undertaking to serve in both capacities should attempt to ameliorate any disadvantages that may come from dual service, including the potential loss of the benefits that are obtained by having a separate fiduciary and lawyer, such as the checks and balances that a separate fiduciary might provide upon the amount of fees sought by the lawyer and vice versa. (See ACTEC Commentaries on Model Rule 1.2)

4 III. EXCULPATORY CLAUSES A. Background 1. When a drafting attorney inserts an exculpatory clause in an instrument for which the attorney is also the named trustee, however, the propriety of inserting the clause must be closely examined as there is at best an appearance of impropriety and conflict of interest. Charles E. Rounds, Jr., Loring: A Trustee s Handbook (2007). 2. Clients who have worked with an attorney for many years and have observed the attorney s performance and analytical ability may decide that the attorney is the best person to play the role of trustee, especially when the attorney is familiar with a client s closely held business or family dynamics. 3. To be willing to take on all of the responsibilities and risks that go with trusteeship, however, the attorney, like any professional trustee, will usually want the protection of trust exculpatory language, protecting the attorney from responsibility for adverse results not caused by the trustee s own conduct. 4. State law does not prohibit drafting attorneys from acting as trustees, but does require that clients be fully informed of the inclusion and meaning of exculpatory clauses, as well as applicable fees. B. Ethical Considerations: 1. Model Rules of Professional Conduct 1.8(h) Attorneys shall not make an agreement prospectively limiting the lawyer s liability to a client for malpractice unless the client is independently represented in making the agreement. 2. (ACTEC) Commentary on Model Rule 1.8 Under some circumstances and at the client's request, a lawyer may properly include an exculpatory provision in a document drafted by the lawyer for the client that appoints the lawyer to a fiduciary office. (An exculpatory provision is one that exonerates a fiduciary from liability for certain acts and omissions affecting the fiduciary estate.) The lawyer ordinarily should not include an exculpatory clause without the informed consent of an unrelated client. An exculpatory clause is often desired by a client who wishes to appoint an individual nonprofessional or family member as fiduciary. 3. Restatement And Uniform Trust Code (Maj. Of States) Comment d of Section 222 of the Restatement (Second) of Trusts (ALI 1959) provides that an exculpatory clause is ineffective if it is inserted in the trust instrument as the result of an abuse [by the trustee] of a fiduciary or confidential relationship between the trustee and the settlor at the time the trust is drafted. See also Uniform Trust Code 1008(a)(2) (noting that exculpatory language is unenforceable to the extent that it results from the trustee s abuse of a fiduciary or confidential relationship to the settlor).

5 In determining whether an exculpatory provision is ineffective because of such an abuse, comment (d) to section 222 indicates that several factors may be considered, including: (i) The extent of the existing relationship between the settlor and trustee; (ii) Whether the trustee inserted the provision; (iii) Whether the settlor received independent advice; (iv) The settlor s understanding of business and fiduciary matters; (v) The trustee s reasons for inserting the clause; and (i) The scope of the provision inserted. Comment d expressly provides that [t]he mere fact that the trustee draws the trust instrument and suggests the insertion of a provision relieving the trustee of liability does not necessarily make the provision ineffective. Section 222, comment d of the Restatement (Second) of Trusts (ALI 1959) recommends that a drafting attorney who serves as trustee insist that the settlor seek independent and competent advice concerning trustee exculpation provisions.

6 IV. Recommending Fiduciaries A. What are my duties? 1. Model Rule 1.4(b): Required to discuss frankly with the client her options in selecting an individual to serve as fiduciary. a) INFORMATION REASONABLY NECESSARY TO ENABLE CLIENT TO MAKE INFORMED DECISION. Discussion should cover information reasonably adequate to permit the client to understand the tasks to be performed by the fiduciary; the fiduciary s desired skills; the kind of individuals or entities likely to serve most effectively, such as professionals, corporate fiduciaries, and family members, and the benefits and detriments of using each, including relevant costs. (See ABA Formal Opinion : Lawyer Serving as Fiduciary for an Estate or Trust ). b) (ACTEC) Commentary on Model Rule 1.7: The lawyer advising a client regarding the selection and appointment of a fiduciary should make full disclosure to the client of any benefits that the lawyer may receive as a result of the appointment. In particular, the lawyer should inform the client of any policies or practices known to the lawyer that the fiduciaries under consideration may follow with respect to the employment of the scrivener of an estate planning document as counsel for the fiduciary. The lawyer may also point out that a fiduciary has the right to choose any counsel it wishes. If there is a significant risk that the lawyer's independent professional judgment in the selection of a fiduciary would be materially limited by the lawyer's self interest or any other factor, the lawyer must obtain the client's informed consent, confirmed in writing. B. Who should I recommend? (Family Trustee, Professional Trustee, or Both? The Pros and Cons) 1. Family Trustee a) Pros: b) Cons: Familiarity. Knows the grantor, her intentions, and family situation Affordability. Willingness to assume role with little or no charge Trust/Confidence. Lack of Competence. Family member may lack the requisite expertise and time commitment to deal with the investments, bookkeeping, tax planning and other administrative responsibilities. Savings? The family trustee can seek professional assistance with some of the custody, bookkeeping, investment and accounting responsibilities, but since one of the reasons for naming a family trustee is often cost savings it may be that these extra charges will significantly outweigh initial expectations. Impartiality. A family trustee may be placed in a difficult personal position with other members of the family when discretionary

7 2. Professional Trustee a) Pros: b) Cons: decisions need to be made, especially when the trustee also has a beneficial interest in the trust. Assortment of Options. Choices include banks, trust companies, accountants, private trustees and law firms. Well Versed. The private trustee is usually experienced in the complexities of trust administration, including investments, taxation, property management, legal conflicts, and risk management. Impartiality. Continuity of Operation. A professional trustee, such as a bank, will always ensure that the trust s annual tax return is filed on time, assets are correctly invested to meet the trust s purpose, discretionary distributions are properly made, etc. Fees. Professional trustees charge fees for their services that are usually based on the size of the fund, and in some instances, the income produced. 3. Co-trustees a) Pros: b) Cons: Best of Both Worlds? The family trustee can provide insight with respect to the family needs and dynamics, while the professional trustee can provide the requisite administrative expertise and objectivity. Direction. A potential disadvantage of this arrangement can arise when all co-trustees do not agree on a decision whether it be for a distribution, investment, etc. Depending on what state you live in, the law may require a majority rule, document driven, or unanimous consent. C. How do I reduce risk? Best Practice 1. Recommend 3. Encourage the client to set up interviews with three different companies/individuals.

8 2. Screening Considerations. Things to consider may include a) How the professional trustee is organized to handle the client's trust business. b) How much time/attention the fiduciary has to fulfill his or her duties. c) The depth of the investment research capabilities and being able to deliver competent investment advice, including advice regarding assets allocation issues. d) The importance placed upon the personal relationship. e) The frequency of portfolio review concerning potential risk. f) How investment performance is measured. g) How discretionary powers to payout income or principal are exercised. h) Accounting system, including the frequency of the reports/statements and the extent to which the reports/statements are clear and understandable. i) Tax return preparation and competent tax counsel j) Competitiveness of fees 3. Engagement Letter. Use an engagement letter that outlines the client s options regarding the appointment of fiduciaries and gives the client alternatives to naming the lawyer as trustee. The letters should also explain that if appointed as trustee, the attorney and his or her firm may be entitled to both trustee fees and legal fees authorized by statute and/or the trust instrument. (See ACTEC, Engagement Letters: A Guide for Practitioners (June 1999).

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439 ALI-ABA Course of Study Representing Estate and Trust Beneficiaries and Fiduciaries July 17-18, 2008 San Francisco, California The Prudent Investor in Hindsight By Christopher P. Cline Wells Fargo