WHEN, IF EVER, SHOULD AN ATTORNEY SERVE AS A CLIENTS FIDUCIARY The - - PowerPoint PPT Presentation

WHEN, IF EVER, SHOULD AN ATTORNEY SERVE AS A CLIENT’S FIDUCIARY

The Attorney As Fiduciary: Permissible Actions & Problem Areas

By Kim D. Fetrow, Esquire Heckscher, Teillon, Terrill & Sager, P.C.

THE INITIAL APPOINTMENT

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Heckscher, Teillon, Terrill & Sager, P.C.

The Initial Appointment

• Model Rules Guidance – Ethical Consideration (EC) 5-6:

A “lawyer should not consciously influence a client to name him as executor, trustee, or lawyer in an instrument. In those cases where a client wishes to name his lawyer as such, care should be taken by the lawyer to avoid even the appearance of impropriety.”

• Generally: There is no per se prohibition against serving as

fiduciary under a trust/will the attorney drafted

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The Initial Appointment

• Current Guidance – Model Rules of Professional Conduct:
• Rule 1.1 – Competence
• Rule 1.2 – Advisor
• Rule 1.4 – Communication
• Rule 1.7 – Conflict of Interest: Current Clients
• Rule 1.8 – Conflict of Interest: Current Clients: Specific Rules

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• ABA Formal Opinion 02-426 (2002):
• Where a client has asked a lawyer to fill this role, the lawyer must

explain:

• (1) the lawyer’s ability to fill the role of a fiduciary;
• (2) the availability of others to fill the role;
• (3) the compensation for the fiduciary; and
• (4) potential conflicts of interest.

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The Initial Appointment

• Pennsylvania Ethics Informal Opinion 96-36
• If attorney wants to serve as trustee of trust he drafted, he must:
• (1) Be able to perform the duties of a trustee;
• (2) Provide options for other trustees the client could appoint;
• (3) Discuss his compensation as trustee how that compensation differs

from compensation to be paid to legal counsel, if any, representing the trustee; and

• (4) Discuss all potential conflicts of interests that may arise from serving

as trustee. Written by the Pennsylvania Bar Association Committee on Legal Ethics and Professional Responsibility Outline Page 8

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The Initial Appointment

• Other Jurisdictions:
• Rule 1.7 Informed Consent Differences:
• When does informed consent have to be in writing?
• New York’s Approach:
• § 2307-a requirements (statutory):
• Testator must be informed that:
• (1) Any person can serve as executor;
• (2) Any person, including an attorney-executor, is entitled to receive

executor commissions;

• (3) Without a proper disclosure, attorney-executor is entitled to only
• ne-half the commissions he or she would otherwise be entitled to

receive; and

• (4) If the attorney-executor needs legal services, either from himself
• r herself or from an affiliated attorney, such attorney is entitled to

compensation in addition to the executor commission. Outline Pages 8-12

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The Initial Appointment

• Takeaways and Best Practice:
• First: Understanding the specific rules of your jurisdiction
• Second: 2002 ABA Opinion and ACTEC Guidance (Chapter 4 of

Engagement Letters: A Guide For Practitioners – Estate Planning Lawyer Serving as Fiduciary):

• Even if you can serve as fiduciary, you should consider the following:
• (1) Firm policy and readiness (Trained staff? Malpractice coverage?)
• (2) Rule 1.4 discussion (including the advantages and disadvantages
• f attorney-fiduciaries and the alternatives)
• (3) Obtaining Rule 1.7 informed consent – conflicts disclosure
• (4) Which attorney, if any, the client wants to serve as fiduciary
• (5) Compensation disclosure

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The Initial Appointment

• Takeaways and Best Practice
• Even if you can serve as fiduciary, you should consider the following

(continued):

• (6) Discussion regarding attorney-fiduciary’s ability to serve and who

attorney-fiduciary can expect to hire in the course of serving as fiduciary

• (7) Disclose attorney-executor may select herself or someone from

her firm as lawyer for estate or trust

• (8) Possible wavier of bond/exculpatory provisions
• (9) Discussion regarding possible conflicts of interest (explained in

the next section)

• (10) Discussion about client’s expectations of attorney serving as

fiduciary

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STANDARD OF CARE & EXCULPATORY CLAUSES

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Standard of Care

• PAJUR PROBATE § 38:69: “The standard of care imposed on a

trustee is that which a man of ordinary prudence would practice in the care of his own estate; however, if a trustee has greater skills than a man of ordinary prudence or if he or she has obtained appointment by claiming such greater skills, then the standard of care imposed on the trustee will be that of a person with such greater skills.”

• Also consider “Special Skills” provisions, heightening the

standard of care:

• Does this apply to trust and estate lawyers serving as fiduciary?
• Expect that it does, and proceed accordingly

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Standard of Care

• Other Jurisdictions:
• Similar standards of care regardless of the jurisdiction
• Uniform Trust Code jurisdictions:
• e.g., New Jersey, Pennsylvania, Maryland and Washington,

D.C.

• Non-Uniform Trust Code jurisdictions:
• e.g., Delaware and New York
• Attorney-Fiduciaries:
• Proceed with caution and expect to be held to a higher standard of

care, especially if, prior to the appointment, you state you possess advanced skills

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Exculpatory Clauses

• Proceed with caution and focus on full disclosure
• Model Rule 1.8(h)(1):
• “A lawyer shall not (1) make an agreement prospectively limiting

the lawyer’s liability to a client for malpractice unless the client is independently represented in making the agreement…”

• ACTEC 2016 Commentaries:
• No per se prohibition on exculpatory clauses applying to attorney-

fiduciary

• However, the inclusion of the exculpatory clause must be at the

client’s request

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Exculpatory Clauses

• Effectiveness of Exculpatory Clauses, Generally:
• Generally, a reasonable exculpatory clause in a governing

instrument that does not purport to exculpate bad faith or reckless indifference will be upheld

• Exculpatory clauses will not be upheld if they violate public policy
• Attorney-Drafted Exculpatory Clauses:
• Uniform Trust Code:
• An exculpatory term drafted or caused to be drafted by the trustee is

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.” Outline Pages 18-19

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Exculpatory Clauses

• Uniform Trust Code, Continued:
• Factors court may consider in evaluating exculpatory clauses:
• (1) Relationship between trustee and settlor;
• (2) Whether settlor received independent advice;
• (3) Settlor’s sophistication;
• (4) Trustee reasons for inserting provision; and
• (5) Scope of the provision.
• Full Disclosure Required:
• “In no event should the drafting attorney casually dismiss as mere

boilerplate an exculpatory provision - neither in practice nor in response to client inquiry. That practice is unacceptable.” Loring and Rounds, A Trustee’s Handbook, §7.2.6 (7th ed. 1994)

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Standard of Care & Exculpatory Clauses

• Takeaways and Best Practice:
• (1) Anticipate higher standard of care for trust and estate attorney-

fiduciary

• (2) As a general rule, the attorney-scrivener should not seek the

inclusion of or benefit from an exculpatory provision; an exculpatory provision is not boilerplate

• (3) However, if special circumstances warrant an exculpatory

provision (e.g., risky assets; complex, difficult or contentious family relationships; etc.), the clause may be included if it is adequately communicated to the settlor, it is fair, and the lawyer advises that the client may seek independent advice

• (4) Attorney-fiduciary should expect to have the affirmative burden
• f proving the provision is enforceable

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DUAL FEES FOR ATTORNEY- FIDUCIARIES – LEGAL FEES AND FIDUCIARY COMMISSIONS

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Dual Fees

• Model Rules:
• Rule 1.5 – Fees
• Rule 1.7 – Conflict of Interest: Current Clients
• Rule 1.5 (Legal) Fee Factors:
• (1) Whether fee is fixed or contingent;
• (2) Time & labor required, novelty/difficulty of issue, skill involved;
• (3) Likelihood that acceptance of matter will preclude other

employment;

• (4) Customary fee for similar services in a given locale;
• (5) Amount involved and results obtained;
• (6) Time limitations imposed by client or circumstances;
• (7) Nature and length of relationship with client; and
• (8) Experience, reputation, and ability of lawyer.

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Dual Fees

• Fiduciary Commissions:
• Pennsylvania:
• Estates: What is “reasonable and just” 20 Pa. C.S. §3537
• Trusts: If trust instrument or other agreement is silent, what is

“reasonable under the circumstances” 20 Pa. C.S. §7768(a)

• Other Jurisdictions:
• Most focus on what is “reasonable” and “necessary”
• Be prepared for different standards or fee schedules depending on

whether the fiduciary is a trustee or executor

• Some jurisdictions, like Pennsylvania, may not offer any further statutory

guidance

• Other jurisdictions, like New York and Delaware, have statutory fee

schedules that provide more concrete guidance

• Even states with official fee schedules may only apply such schedules in

the absence of court discretion, e.g., New Jersey – N.J.A.C. 18:26-7.10.

• Know your local jurisdiction’s rules

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Dual Fees

• Pennsylvania Treatment of Dual Fees:
• Old Rule: No dual fees
• Modern Rule: Dual fees allowed; the standard for all fees (legal fees

and fiduciary commissions) is “what is reasonable and just under the circumstances.”

• Obtaining Dual Fees by Appointing Your Firm as Counsel:
• No per se prohibition; same rules apply – no duplicative fees
• 2002 ABA Opinion: “[T]here is no inherent conflict of interest under

Rule 1.7 when a lawyer appoints himself or his law firm to serve as legal counsel for himself as fiduciary, absent special circumstances…. When serving as fiduciary and as lawyer for the fiduciary, however, the amount of compensation paid the attorney and his firm for services in each capacity must be reasonable.”

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Dual Fees

• Other Jurisdictions’ “Reasonableness” Factors For Legal Fees:
• Similar factors appear in different jurisdictions, such as:
• Experience and knowledge of attorney
• Time spent
• Special circumstances
• Results obtained
• However, Consider Potential Conflicts of Interest:
• A New York trial court held that public policy was violated by a law firm’s requirement that

attorneys who also acted as executors surrender to the firm their commissions to the extent of any shortfall in the firm’s fee for serving as counsel to the estate. Gibbs v. Breed, Abbott & Morgan, 649 N.Y.S.2d 974 (1996).

• An attorney-executor has a duty to oppose a legal fee she thinks excessive
• The law firm policy creates a conflict because the attorney-executor may not oppose

unreasonable legal fees so she can retain her full executor commission

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Dual Fees

• Caution with Referral Fees:
• A Pennsylvania court held in Harrison Estate that

executor-attorney engaged in self-dealing and breached duty of loyalty by referring the estate administration to

• utside counsel and failing to reveal to beneficiaries that

his own firm would collect a referral fee; executor surcharged for amount of referral fee even though the fee was paid to his firm and not to him personally, and despite determination that total fee was not excessive.

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Dual Fees

• The Burden is on the Attorney-Fiduciary:
• Attorney-fiduciaries should be mindful to keep a detailed record of

services performed and in what capacity

• Without such records, courts may reduce or disallow fees
• For example, New York requires an affidavit which provides the

following information: “[T]he period during which services were rendered; the services rendered, in detail; the time spent; and the method or basis by which the requested compensation was determined.” N.Y.Ct. Rules, § 207.45 (2019)

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Dual Fees

• Takeaways and Best Practice:
• (1) Engaging in a comprehensive discussion regarding fees,

including:

• Whether the attorney-fiduciary may retain himself or a lawyer in his firm

as counsel to the attorney-fiduciary;

• The extent to which dual compensation is allowed;
• A comparison of fees if someone other than the attorney is appointed;

and

• Other options available to the testator/settlor.
• (2) Understanding state-specific “reasonableness” factors in

addition to Rule 1.5 fee factors

• (3) Keeping detailed records of duties performed in each capacity

and expect additional scrutiny on fees

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SAFEKEEPING FIDUCIARY PROPERTY

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Safekeeping Fiduciary Property

• Model Rule 1.15 Comment 5:
• [5] The obligations of a lawyer under this Rule are independent of

those arising from activity other than rendering legal services. For example, a lawyer who serves only as an escrow agent is governed by the applicable law relating to fiduciaries even though the lawyer does not render legal services in the transaction and is not governed by this Rule.

• Different Versions of Rule 1.15:
• Significant variation from jurisdiction to jurisdiction
• Important to understand your jurisdiction’s own Rule 1.15 because

it may differ significantly from the Model Rule

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Safekeeping Fiduciary Property

• Pennsylvania Rule 1.15
• Differs from the Model Rule
• History of frequent revisions
• Confusion regarding applicability of the Rule to funds held as a fiduciary
• Older versions of the Rule did not apply to fiduciary funds
• Current Rule applies to funds an attorney holds as a fiduciary, with

certain carvebacks

• Definitions:
• Fiduciary. A Fiduciary is a lawyer acting as a personal representative,

guardian, conservator, receiver, trustee, agent under a durable power of attorney, or other similar position.

• Fiduciary Funds. Fiduciary Funds are Rule 1.15 Funds which the

lawyer holds as a Fiduciary. Fiduciary Funds may be either Qualified Funds or Nonqualified Funds.

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Safekeeping Fiduciary Property

• Pennsylvania Rule 1.15, Continued
• PA Rule 1.15 applies not only to client funds the attorney holds in

connection with the attorney-client relationship, but also to property held by the lawyer in a purely fiduciary capacity, such as executor or trustee, including sub-rules requiring:

• Maintaining “complete records of the receipt, maintenance and disposition of

Rule 1.15 Funds”

• Notifying the client upon receipt of Rule 1.15 funds
• However, attorney-fiduciary may still invest fiduciary funds in standard

investment accounts (Rule 1.15(l)), not just IOLTA/non-IOLTA type bank accounts

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Safekeeping Fiduciary Property

• Pennsylvania Rule 1.15, Continued
• Rule 1.15(e) also states the “delivery, accounting and disclosure”
• f Fiduciary funds is still governed by “the law, procedure and

rules” applicable to the fiduciary instrument

• Broad scope of PA Rule 1.15 means disciplinary action can be

taken against Pennsylvania attorneys acting solely as fiduciary

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Safekeeping Fiduciary Property

• Jurisdictions Near Pennsylvania:
• Rules 1.15 of New York, New Jersey, Delaware, Maryland and

Washington, D.C. follow the more typical Model Rule, specifically excluding application of the Rule to funds held as a fiduciary

• For example, Washington, D.C.’s Rule 1.15 Comment 3 states:
• “Paragraph (a) concerns trust funds arising from ‘a representation.’ The
• bligations of a lawyer under this rule are independent of those arising

from activity other than rendering legal services. For example, a lawyer who serves as an escrow agent is governed by the applicable law relating to fiduciaries even though the lawyer does not render legal services in the transaction. Separate trust accounts may be warranted when administering estate monies or acting in similar fiduciary capacities.”

• This language is very similar to Comment 5 of the Model Rule

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Safekeeping Fiduciary Property

• Takeaways and Best Practice
• (1) Attorney-fiduciaries should be mindful of the specific standards

imposed on fiduciaries by their respective jurisdictions

• (2) Some attorneys, like those in Pennsylvania, must also be aware
• f how their jurisdiction’s Rules of Professional Conduct apply to an

attorney acting in a purely fiduciary capacity

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QUESTIONS?

DOC#01572803

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