Lawyer As Trustee Susan L. Repetti A. Trustee Exculpation Language 1. Background a. Trustees exercise substantial discretion in managing, investing, and distributing trust assets. Settlors may exonerate a trustee from personal liability for exercising discretion in performing certain acts through the use of an exculpatory clause. Such provisions are typically effective in protecting a trustee from liability for ordinary negligence. 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 7.2.6 (2007). b. A client s decision to name an independent, professional trustee generally results from one of the following considerations: (1) the client is reluctant to decide in advance the size of trust distributions to the client s descendants or the ages at which they should occur, not knowing what the future holds; or (2) the client is reluctant to use the Internal Revenue Code s health, education, support or maintenance standard under which a family member trustee is relieved of gift and estate tax concerns. That language could fuel a beneficiary s claim that the beneficiary is entitled to certain distributions. A family member trustee may be drawn into unpleasant conflicts with relatives. What the client wants is someone to take the client s place after death, applying sound judgment to unforeseen circumstances. Susan L. Repetti is a partner with Nutter, McClennen & Fish LLP in Boston. The author gratefully acknowledges the contributions of John A. McBrine, Esq., Nutter, McClennen & Fish, LLP. A complete set of the course materials from which this outline was drawn may be purchased from ALI-ABA by calling 1-800-CLE-NEWS and asking for customer service. (Have the order code SN003 handy). Or order online at www.ali-aba.org. ALI-ABA Estate Planning Course Materials Journal
ALI-ABA Estate Planning Course Materials Journal June 2008 c. 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. d. 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. e. Thus, the benefit to the client of the attorney s willingness to serve must be weighed against the danger of overreaching in the use of exculpatory language. 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. 2. Ethical Considerations a. The drafting attorney s use of an exculpatory clause may call into question the attorney s duty to represent the best interest of the client if the attorney is also named as trustee. Model Rule of Professional Conduct 1.8(h) provides that 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. b. The American College of Trust and Estate Counsel (ACTEC) Commentary on Model Rule 1.8 states that, at the client s request and under certain circumstances, a lawyer may properly draft an exculpatory provision in a document that appoints the lawyer as a fiduciary. www.actec.org/pubinfoark/comm/mrpc18.html. In such a situation, the drafting attorney should not insert an exculpatory clause without the informed consent of an unrelated client, as such clauses are often used when nonprofessionals or family members are appointed as fiduciaries. Id. c. A working group for a 1994 Fordham University Law School ethics conference recommended that professional fiduciaries should be prohibited from including exculpatory provisions when the drafting attorney serves as the fiduciary. Proceedings of the Conference on Ethical Issues in Representing Older Clients: Report of Working Group on Lawyer as Fiduciary, 62 Fordham L.Rev. 1055, 1058 (1994). The group reasoned that a drafting attorney that chooses to serve a dual role should not be excused from liability because attorneys are expected to have a higher degree of knowledge and training as fiduciaries. Id. 3. Restatement And Uniform Trust Code a. 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). b. 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:
Lawyer As Trustee (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 (vi) The scope of the provision inserted. c. 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. Id.; see also 3 Austin W. Scott & William F. Ftratcher, The Law of Trusts 222.4 (4th ed. 1988) (providing that although such a provision is not necessarily ineffective, it will not protect the trustee from liability when the trustee was already in a fiduciary relation to the settlor and inserted the provision without disclosing the existence and meaning of the provision to the settlor). d. Section 1008(b) of the Uniform Trust Code specifically addresses the presumption of abuse that exists when an exculpatory clause is drafted by the trustee. An exculpatory clause drafted by the trustee is presumptively invalid as an abuse of a fiduciary or confidential relationship unless the trustee proves that the exculpatory term is fair under the circumstances and that its existence and contents were adequately communicated to the settlor. See also Scott, supra (noting that when the drafting attorney is named as trustee and inserts an exculpatory provision, the trustee may be required to demonstrate that the settlor knowingly and freely consented to the provision). e. The comment to section 1008 acknowledges that subsection (b) conflicts with cases such as Marsman v. Nasca, 573 N.E.2d 1025 (Mass. App. Ct. 1991). In Marsman, the court held that an exculpatory clause was valid when the attorney who drafted the trust was also named as the trustee. Id. at 1033. The court refuted any presumption that an exculpatory clause suggested and drafted by the trustee is necessarily ineffective. Id. at 1032. Unless it is determined that the trustee has abused the fiduciary relationship in including the exculpatory clause, the court held, such clauses are generally recognized as valid. Id. f. Although exculpatory clauses are disfavored, they are typically valid absent a trustee s overreaching or abuse, such as breaches of trust that are committed in bad faith. See New England Trust Co. v. Paine, 317 Mass. 542 (1945). In Rutanen v. Ballard, 424 Mass. 723 (1997), the Massachusetts Supreme Judicial Court held that an ineffective exculpatory clause would not protect a trustee s breach of the fiduciary duty of selling unproductive trust property. In Rutanen, the drafting attorney who served as trustee did not bring the exculpatory clause to the settlor s attention or explain the effect of the clause. Id. at 733. The settlor, who was seventy years old, had had a stroke and was in questionable health, did not receive advice from independent counsel. Id. Because the court deemed the drafting attorney s insertion of the exculpatory clause improper, it would not protect the attorney from a breach of fiduciary duty as trustee. Id. 4. Independent Counsel And Disclosure
8 ALI-ABA Estate Planning Course Materials Journal June 2008 a. 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. See also Charles E. Rounds, Jr., Loring: A Trustee s Handbook 7.2.6 (2007). Such a measure would have protected the drafting attorney in Fred Hutchinson Cancer Research Center v. Holman, 732 P.2d 974 (Wash. 1987). In Holman, the court found that an exculpatory clause did not shield the drafting attorney from liability. Id. at 980. When the settlor did not receive independent advice concerning the meaning of the clause, the drafting attorney was barred from relying on the clause to limit his own liability. Id. b. The comment to section 1008(b) of the Uniform Trust Code states that a settlor s retention of independent counsel will rebut the presumption that an exculpatory provision is invalid. By disclosing an exculpatory clause to the independent counsel as the settlor s agent, the trustee is effectively providing disclosure to the settlor. Uniform Trust Code 1008(b) cmt. c. Many states have adopted the provisions of section 1008(b) of the Uniform Trust Code. (The following states have enacted legislation substantially similar to the Uniform Trust Code: Kansas, Wyoming, Nebraska, New Mexico, District of Columbia, Utah, Maine, Tennessee, New Hampshire, Missouri, Arkansas, Virginia, South Carolina, Oregon, North Carolina, Alabama, Florida, Ohio, Pennsylvania, and North Dakota). For example, section 7788 of the Pennsylvania Uniform Trust Act mirrors section 1008(b) by limiting the protection afforded by an exculpatory clause when the drafting attorney serves as trustee. 20 Pa. Cons. Stat. Ann. 7788. Section 7788 also establishes a rebuttable presumption that the exculpatory clause is invalid when the trustee drafted the trust. d. Certain states have adopted modified versions of section 1008(b). For example, Florida law provides that the existence and contents of an exculpatory provision drafted by the trustee must be communicated directly to the settlor. Fla. Stat. 736.1011. Unlike under section 1008(b), disclosure to the settlor s attorney under Florida law is not adequate disclosure to rebut the presumption of invalidity. Id. Likewise, Missouri law modifies section 1008(b) by stating that when the settlor was represented by independent counsel, an exculpatory provision will not be presumed to be invalid. Mo. Rev. Stat. 456.10-1008.2. The comment to section 1008(b) suggests the application of a similar conclusion, but state statutes such as Missouri s expressly provide for this rule. e. Short of a recommendation to seek independent counsel, the drafting attorney should provide full disclosure concerning any trustee exculpation provisions. Rounds, supra. For example, the drafting attorney could ask the settlor to sign a statement acknowledging the content of an exculpatory clause to provide evidence that the drafting attorney adequately disclosed the exculpatory clause to the client. f. In any case, the drafting attorney should be highly responsive to client inquiries regarding the use of exculpatory language and should not treat such a provision as mere boilerplate. Rounds, supra. g. Note: An ACTEC sample engagement letter available at www.actec.org/pubinfoark/comm/engtrch4.htm is an example of how to address, among other issues, the use of an exculpatory provision with a client when the client asks the drafting attorney to serve as trustee. The sample letter explains the use and effect of exculpatory language, and it presents the client with the choice of including or excluding the language.
Lawyer As Trustee B. Delegation Of Investment Responsibilities 1. Background a. Investment discretion was formerly treated as a nondelegable function of a trustee. In representing the former rule of nondelegation adopted by most states, section 171 of the Restatement (Second) of Trusts (ALI 1959) had provided that trustees could not delegate the duty to select investments. More recently, however, trustees have been permitted to delegate a certain degree of investment discretion to advisors as long as the trustee provides adequate supervision. See Uniform Prudent Investor Act 9. b. The Prudent Investor Rule of the Restatement (Third) of Trusts 171(ALI 1992) repealed and replaced the nondelegation rule of the Restatement (Second) of Trusts. Section 171 provides that a trustee may entrust others with those responsibilities that a prudent person might delegate. Section 171 further provides that, in determining whether, to whom, and in what manner to delegate fiduciary authority in the administration of a trust, and thereafter in supervising agents, the trustee is under a duty to the beneficiaries to exercise fiduciary discretion and to act as a prudent person would act in similar circumstances. 2. When To Delegate a. Of course, trustees must refrain from delegating the entire administration of a trust to others. Restatement (Third) of Trusts 227 cmt. j. (Prudent Investor Rule). Although trustees need not perform all investment aspects personally, they cannot unreasonably delegate such responsibilities. Id. For example, a trustee must personally define the investment objectives of the trust. Restatement (Third) of Trusts 171 cmt. h. A trustee must also establish the trust s investment strategies by either personally formulating the strategies or approving the plans developed by the investment professionals. Id. b. Trustees have an affirmative fiduciary obligation to seek whatever assistance is necessary to properly administer the trust. Restatement (Third) of Trusts 227 cmt. j. Trustees have the ability, and at times may even have the duty, to delegate investment functions. Id. Trustees must be prudent in delegating as well as in failing to delegate. Id. at cmt. d. Trustees must exercise the investment management skills they possess and seek assistance to the extent that their skills are inadequate to satisfy the investment needs of the trust. American College of Trust and Estate Counsel, Guide for ACTEC Fellows Serving as Trustees (Dec. 2006). A trustee s duties to make the trust property productive and to prudently administer the trust assets may require the trustee to seek out investment advice. George Gleason Bogert & George Taylor Bogert, The Law of Trusts and Trustees 556 (2d ed. 1980). c. The extent to which trustees delegate investment responsibilities will vary. Dominic J. Campisi & Andrew Zabronsky, Of Delegating and Double Dipping, 143 Tr. & est. 61,62 (Jan. 2004). In many cases, the power of a trustee to hire and compensate investment advisors may be expressly or impliedly permitted by the terms of a trust instrument. Bogert, supra. Prudence may require certain nonprofessional fiduciaries to delegate all investment duties to professional advisors. Campisi, supra. By contrast, corporate or more sophisticated trustees typically may not need to delegate such responsibilities, although even professionals may need to delegate certain investment needs for more complex estates or trusts. Campisi and Zabronsky, supra.
10 ALI-ABA Estate Planning Course Materials Journal June 2008 d. For example, in Will of Axe, 502 N.Y.S.2d 943 (N.Y. Sur. Ct. 1986), the court determined that because successor trustees did not have the same experience with investing substantial capital as the original trustees had, the successor trustees properly sought the assistance of the settlor s investment advisory firm in investing the trust assets. Likewise, in In re Arnold O., 719 N.Y.S.2d 174 (N.Y. App. Div. 2001), a trustee selected a professional investment firm to assist in the management of the trust assets. The New York Supreme Court, Appellate Division, found that the trustee s actions were entirely prudent. Id. at 177. The court reversed the trial court s denial of commissions to the trustee, concluding that the trustee bears the ultimate responsibility for investment decisions and in no event could [the trustee] delegate that legal responsibility to the investment firm. Id. The court also held that the financial advisors were properly compensated out of trust assets. Id. e. A wide variety of factors should be considered by a trustee in deciding whether and to what extent to delegate investment duties. The trustee must consider, among other factors, the knowledge, skill, and compensation of the trustee and agent, as well as the size of the trust, the complexity of the trust assets, and the strategies for managing assets. Restatement (Third) of Trusts 227 cmt. j (ALI 1992)(Prudent Investor Rule). Also, factors such as the terms of the trust, liquidity needs, and risk tolerance may influence whether a trustee will need assistance in investing in certain classes of assets. Campisi and Zabronsky, supra. Ultimately, trustees must evaluate their own investment abilities and delegate those duties they cannot properly perform to other advisors. Campisi and Zabronsky, supra. 3. Method Of Delegation a. In determining whether to delegate investment responsibilities to an agent and in selecting and monitoring agents, the trustee has a duty to act as a prudent investor. Restatement (Third) of Trusts 227 cmt. j (ALI 1992)(Prudent Investor Rule). As with any agent, the trustee has a duty to select investment agents with care, skill, and caution and to exercise prudence in monitoring and supervising the acts of the agents. Id. In selecting an agent, trustees may want to consider selecting trust companies and independent managers registered under the Investment Advisors Act. American College of Trust and Estate Counsel, Guide for ACTEC Fellows Serving as Trustees (2006). Trustees would be well advised to avoid delegating investment responsibilities to stockbrokers. Id. b. Under section 9(a) of the Uniform Prudent Investor Act, a trustee may delegate investment responsibilities that a prudent trustee of comparable skills could properly delegate under the circumstances. See also Uniform Trust Code 807 (adopting section 9 of the Uniform Prudent Investor Act). Section 9(a) further provides that trustees must exercise reasonable care, skill, and caution in (i) selecting an agent, (ii) establishing the scope and terms of the delegation, consistent with the purposes and terms of the trust; and (iii) periodically reviewing the agent s actions in order to monitor the agent s performance and compliance with the terms of the delegation. Uniform Prudent Investor Act 9; Uniform Trust Code 807. Under the Prudent Investor Act, an agent owes a duty to the trust to exercise care in complying with the delegation, and a trustee who complies with these three requirements will not be liable to the trust or the trust beneficiaries for the actions of the agent. Uniform Prudent Investor Act 9; Uniform Trust Code 807.
Lawyer As Trustee 11 c. Section 9 of the Act also provides that in deciding how to delegate investment functions, a trustee must weigh anticipated costs against benefits. For example, cost considerations dictate that when trust assets are invested in a variety of managed funds, the trustee need not continually evaluate each fund to comply with the requirement that a trustee review the agent s performance. Campisi and Zabronsky, spura, at 65. d. Bundling of fees is common. Several considerations should be kept in mind. For example, the decision to lower trustee fees may depend on the extent of the delegation and the circumstances of the trust. If the trustee s fee typically includes compensation for managing investments, the trustee should lower the fee when delegating investment responsibilities to an outside agent. Uniform Prudent Investors Act 9. Whereas a trustee that delegates all investment responsibilities to an outside advisor should not charge the full trustee fee, the issue of lowering the fee may be more uncertain if the trustee secures significantly greater returns as a result of delegation of certain aspects of the investment function. Similarly, if a trustee retains responsibility for asset allocation, the trustee may not need to reduce trustee fees for delegating certain functions. Campisi, supra, at 66. 4. Delegating Under State Law a. Trustees must first consider both the language of the trust instrument and state law in deciding whether and to what extent to delegate investment duties. Most states have adopted laws similar to section 9 of the Uniform Prudent Investor Act, which permits the delegation of investment responsibilities to agents. For example, the Massachusetts Prudent Investor Act, Mass. Gen. Laws ch.203c, 10, is typical of those statutes that allow a trustee to delegate investment functions if it is prudent to do so. The statute derives its language from the Uniform Prudent Investor Act and requires a trustee to exercise reasonable care, skill, and caution in choosing an agent, providing the scope of the delegation, and monitoring the agent s performance. Id. A trustee who follows these requirements will not be liable for the agent s actions; the agent submits to state jurisdiction and must exercise reasonable care to follow the terms of the delegation. Id. Although the Act does not relieve a trustee from responsibility for personally establishing investment objectives, the trustee may nonetheless delegate the manner in which the trust objectives are carried out. Id. b. Other states have adopted statutes that significantly expand the Act s requirements. For example, under Illinois law, trustees may appoint financial advisors and other agents to assist with various administrative duties. 760 Ill. Comp. Stat. 5/4.09. For a trustee to appropriately delegate investment functions under Illinois law, however, the trustee must inquire as to the experience, performance history, professional licensing or registration, if any, and financial stability of the agent. Id. At least 30 days before the delegation, the trustee is also required to provide written notice of the delegation to trust beneficiaries. Likewise, Georgia law provides that a trustee will not be liable to the trust for actions of an agent to whom investment responsibilities were delegated if the trustee takes reasonable steps to compel an agent to correct a breach of duty to the trust. Ga. Code Ann. 53-12-290. c. Many state statutes provide that a trustee will not be subject to liability for the agent s acts if a trustee exercises reasonable care, skill, and caution in selecting and monitoring the agent. However, other states are unwilling to relieve trustees from such liability. For example, unless the terms of
12 ALI-ABA Estate Planning Course Materials Journal June 2008 the trust specifically prohibit such a delegation, a Wisconsin statute permits the trustee to employ investment advisors to assist with the trustee s duties, even if they are associated with the fiduciary. Wis. Stat. 881.016. Although the trustee must use reasonable care in selecting and retaining the agent, the trustee will still be liable for the agent s actions. Id. Often, any advisor who accepts a delegation of investment responsibility can be held accountable to the trust for, among other things, failing to follow the established investment policy. See 20 Pa. Cons. Stat. Ann. 7206. To purchase the online version of this outline, go to www.ali-aba.org.