ENGAGEMENT LETTERS: A GUIDE FOR PRACTITIONERS
IV. ESTATE PLANNING LAWYER SERVING AS FIDUCIARY
INTRODUCTION
These forms address ethical issues which arise when a client asks the estate planning lawyer to serve as a fiduciary. These ethical issues should be disclosed and discussed with the client. These forms should be adapted to fit each specific factual situation and applicable state law.
There are two forms in this section. The first deals with appointment of the lawyer as executor of the client's estate while the second deals with the appointment of the lawyer as the trustee of a trust. There are a number of specific ethical issues in these settings, including full disclosure to and discussion with the client of the alternative possibilities for fiduciary appointment, relative cost effectiveness of each of the alternatives, bonding requirements and exculpatory language in the dispositive document which will have an effect on the standard of care to which the fiduciary will be held for liability purposes. Care must be taken with these subjects since the fiduciary will have been the scrivener.
References to the ACTEC Commentaries (3d Edition):
(Note that the page numbers shown below refer to the printed version of the ACTEC Commentaries)
Lawyer Serving as Fiduciary and Counsel to Fiduciary, p. 59
Basis of Fees for Trusts and Estates Purposes, p. 104
Selection of Fiduciaries, p. 156
Appointment of Scrivener as Fiduciary, pp. 156-157
Exculpatory Clauses, p. 189
Prohibited Transactions, p. 191
ESTATE PLANNING LAWYER SERVING AS FIDUCIARY
CHECKLISTI. Does the lawyer or his or her law firm have a policy regarding lawyers serving as fiduciary?
If so, what is the policy?
A. Encourage?
B. Discourage?
C. Prohibit?II. Does the lawyer have adequate support staff to permit the lawyer to perform fiduciary services efficiently and cost effectively?
III. Does the lawyer's professional liability policy include or exclude lawyers serving as:
A. Personal representative?
B. Trustee?
C. Guardian or conservator?
D. Attorney-in-factIV. What should the engagement letter contain when the client requests the estate planning lawyer to serve as fiduciary?
A. Fact that 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.
F. Explanation of bonding requirements, including cost of bond, customary practice and relationship to professional liability insurance.V. Co-fiduciaries; advantages/disadvantages
A. Two heads better than one
B. Costs
C. Checks and balances
LETTER NOMINATING LAWYER AS EXECUTOR
(date)
Dear (Client):
At our recent estate planning conference, you requested that I serve as the executor of your will. I am willing to undertake this responsibility. However, in accepting this responsibility, I want to explain certain ethical considerations to you and obtain your written waiver of potential conflicts of interest that could develop in connection with my service as your executor.
Responsibilities of Executor
The executor of your will is charged with the responsibility to collect, manage, and protect your assets; to pay your just debts and funeral expenses; to prepare and file federal estate and income tax returns; to pay the income and estate taxes required to be paid by your estate; to pay expenses of the administration of your estate; and to distribute your estate in the manner directed by your Will.
Your executor should exercise good judgment, prudence, common sense, diligence, fairness, honesty, have reasonable skill and have experience in the management of the types of assets which your estate comprises, or the good sense to obtain assistance in the management of those assets.
Others Who Could be Nominated as Executor
Others who might serve as your executor include your spouse, one or more of your children, a bank or trust company, an investment advisor, your accountant, a relative, a personal friend, or a business associate.
Potential Conflicts of Interest
I can serve as your executor if that is your desire. Several potential conflicts of interest may arise from my service as your executor. One of these conflicts of interest relates to the probability that my law firm will serve as legal counsel for me as executor.
A lawyer's independence may be compromised when he or she acts as both executor and lawyer for the executor. The normal checks and balances which exist when two unrelated parties serve separately as executor and lawyer for the executor are absent. Unless the Probate Court is asked to intervene, there may not be an independent, impartial review to determine if the executor is exercising an appropriate level of care, skill, diligence, and prudence in the administration of your estate, and there may not be an independent, impartial evaluation as to whether or not the fees and expenses charged by the executor and the fees and expenses charged by the law firm are reasonable.
There may be other potential conflicts that may arise which I have not anticipated at this time.
Compensation to the Lawyer Nominated as Executor
Both the executor and the lawyer for the executor are entitled to compensation for services performed on behalf of the estate. When a lawyer has been nominated as executor, he or she can receive compensation for performing services as executor and as the lawyer for the executor as long as he or she charges only once for services rendered and as long as the total compensation for serving as both executor and lawyer for the executor is reasonable.
When I am requested by a client to serve as executor, it is my practice to charge [describe basis for fees/commissions as executor]. In addition to an executor's fee/commission, I would also be entitled to reimbursement for out-of-pocket expenses, including court costs and fidelity bond premiums.
When I am requested by a client to serve as executor, it is my practice to engage my law firm to represent me in my capacity as executor. It is our firm's practice to charge [describe basis for fees as lawyer]. In addition to these fees, our firm would also be entitled to reimbursement for all out-of-pocket expenses.
[OPTIONAL ADDITIONAL PARAGRAPH]
It has been my experience that where I have been requested to serve as executor, the combination of my executor's fees and the legal fee charged by my law firm are less than the combination of an executor's fee charged by a bank or trust company and the legal fee charged by our law firm.
Waiver of Bond; Use of Exculpatory Language
It is common for a Will to include language relieving the executor from the normal obligation to post an executor's bond with the court for the faithful performance of his or her obligations as well as language absolving the executor nominated in the Will from liability for actions not involving negligence, fraud, or bad faith. For example, a Will typically provides that the executor is not to be charged with losses resulting from the action or inaction of the executor in the exercise of reasonable care, diligence, and prudence.
[CHOOSE ONE OF THE FOLLOWING]
1. Where the Will nominates the lawyer who prepared the Will as executor, there is a potential conflict of interest for the lawyer incorporating into the Will language that relieves the lawyer from the obligation to post bond or which absolves the lawyer from liability for his or her own actions. I normally include language that relieves the executor from the obligation to post bond and language which exonerates the executor from liability for decisions made in the exercise of reasonable care, diligence, and prudence.
2. In Wills where I am nominated to serve as an executor, I normally do not include any language that relieves the executor of the obligation to post bond or which exonerates the executor from liability for decisions made as executor. Absent such language, under the laws of this state, I may/would be obliged to post a bond for the faithful performance of my duties as executor and I am obliged to exercise the degree of care, skill, prudence and diligence that a prudent person would use in the management of his or her own affairs. [NOTE: The "prudent person rule" differs from state-to-state. Be sure the rule is correctly stated for the jurisdiction in which the document is being drafted.] I estimate the annual performance bond premium will cost approximately $____________ annually.
It is your choice whether or not to waive the requirements of an executor's bond and whether to include or exclude language exonerating me from liability as your executor. Please advise me of your decision.
Consulting Independent Counsel
Because I have a conflict of interest in advising you with regard to the decision to nominate me as the executor of your trust and the inclusion or exclusion of language relieving me of any potential liability, you should consider discussing these matters with another lawyer. [NOTE: Counsel should consider the implications of Fred Hutchinson Cancer Research Center v. Holman, 732 P.2d 974 (Wash. 1987) where the court held that an exoneration clause did not protect the scrivener fiduciary against liability: "AAs the attorney engaged to write the decedent's will, [defendant] is precluded from reliance on the clause to limit his own liability when the testator did not receive independent advice as to its meaning and effect." 732 P.2d at 980.]
Nominating the Lawyer as Executor
If, after consideration of these issues, you want to nominate me as your executor, I would like you to acknowledge and waive the potential conflicts of interest I have explained to you. Please review the statement of nomination below. After you have considered this decision carefully, I ask that you sign the consent which follows this letter to indicate your request that I serve as your executor. Please return a signed copy of the consent to me. If you have any questions about anything discussed in this letter, please let me know.
Sincerely yours,
NOMINATION
We have voluntarily nominated ________________ as executor in our Wills. He/she is also the lawyer who prepared these instruments for us. He/she did not promote himself/herself or consciously influence us in the decision to appoint him/her as executor. In addition, he/she has disclosed to us the potential conflicts of interest which might arise as a result of his/her serving as executor, as described above, including an explanation of the responsibilities of the executor, a list of others who might be nominated as executor, the fees and expenses to be paid to the executor, the likelihood that our lawyer's law firm will also serve as attorney for the executor, an explanation of the risks and disadvantages of such dual service, and an explanation of the decision regarding the inclusion or exclusion of exculpatory language in our Wills.
We direct that our Wills [______ include ________ not include] language relieving our lawyer from the obligation to post a bond for the faithful performance of his/her duties executing and [_______ include _______ not include] language absolving the lawyer as executor from
liability for losses resulting from decisions made in the exercise of reasonable care, diligence, and prudence.
Dated:____________________ ________________________
HUSBAND
Dated:____________________ ________________________
WIFE
LETTER ACCEPTING NOMINATION OF LAWYER AS TRUSTEE
(date)
Dear (Client):
At our recent estate planning conference, you requested that I serve as the trustee of your trust. I am willing to undertake this responsibility. However, in accepting this responsibility, I want to explain certain ethical considerations to you, and obtain your written consent to potential conflicts of interest that could develop in connection with my service as your trustee.
Responsibilities of Trustee
The trustee of your trust is charged with the responsibility to manage, invest, reinvest and protect the trust assets; to prepare and file annual trust income tax returns; to pay taxes required to be paid by your trust and the expenses of the administration of your trust; and to distribute the trust income and assets in the manner directed by your trust agreement.
Your trustee should exercise good judgment, prudence, common sense, diligence, fairness, honesty, and have reasonable skill and experience in the management of the types of assets which your trust comprises, or the good sense to obtain assistance in connection with the management of those assets over the term of the trust.
Others Who Could be Appointed as Trustee
Others who might serve as your trustee include your spouse, one or more of your children, a bank or trust company, your accountant, an investment advisor, a relative, a personal friend or a business associate.
Potential Conflicts of Interest
I can serve as your trustee if that is your desire. Several potential conflicts of interest may arise from my service as your trustee. These conflicts relate to the probability that my law firm will also serve as legal counsel for your trust.
A lawyer's independence may be compromised when he or she acts as both trustee and lawyer for the trustee. The normal checks and balances which exist when two unrelated parties serve separately as trustee and lawyer for the trustee are absent. Unless a Court is asked to intervene, there may not be an independent, impartial review to determine if the trustee is exercising an appropriate level of care, skill, diligence, and prudence in the administration of your estate, and there may not be an independent, impartial evaluation as to whether or not the fees and expenses charged by the trustee and the fees and expenses charged by the law firm are reasonable.
Other potential conflicts may arise which cannot be anticipated at this time.
Compensation to the Lawyer Nominated as Trustee
Both the trustee and the lawyer for the trustee are entitled to compensation for services performed on behalf of the trust. When a lawyer has been nominated as trustee, he or she can receive compensation for performing services as trustee and as lawyer for the trustee as long as he or she charges only once for services rendered and as long as the total compensation for serving as both trustee and lawyer for the trustee is reasonable.
When I serve as trustee, it is my practice to charge [describe basis for fees/commissions as trustee]. In addition to this compensation, I would also be entitled to reimbursement for all out-of-pocket expenses.
It is also my practice to engage my law firm to represent me in my capacity as trustee. It is my firm's practice to charge [describe basis for fees as attorney]. In addition, my firm is entitled to reimbursement for all out-of-pocket expenses.
Waiver of Bond; Use of Exculpatory Language
When an individual fiduciary is appointed, it is not uncommon for a trust agreement to include language relieving the trustee from the obligation to post a trustee's bond for the faithful performance of his or her obligations and language absolving the trustee from liability for actions not involving gross negligence, fraud, or bad faith. Also, in many cases, a trust agreement will provide that the trustee is not to be charged with investment losses resulting from decisions made by the trustee if the trustee exercised reasonable care, diligence, and prudence in making investment decisions.
[CHOOSE ONE OF THE FOLLOWING]
1. When the trust agreement nominates the lawyer who prepared the trust agreement as trustee, there is a potential conflict of interest if the lawyer incorporates trust language that relieves the lawyer from the obligation to post bond or which absolves the lawyer from liability for his or her own actions. I normally include language that relieves the trustee from any obligation to post bond and language which exonerates the trustee from liability only for decisions made in the exercise of reasonable care, diligence, and prudence.
2. I typically do not include any language that relieves the trustee of any obligation to post bond or which exonerates the trustee from liability for decisions made as trustee. Absent such language, under the laws of this state, I may/would be obligated to post bond for the faithful performance of my duties as trustee and I am obligated to exercise the degree of care, skill, prudence and diligence that a prudent person would use in the management of his or her own affairs. [NOTE: The "prudent person rule" differs from state-to-state. Be sure the rule is correctly stated for the jurisdiction in which the document is being drafted.] I estimate the performance bond premium will cost approximately $________ annually.
It is your choice whether or not to waive the trustee's bond and whether I include or exclude language exonerating the trustee from liability as your trustee. Please advise me of your decision.
Consulting Independent Counsel
Because I have a conflict of interest in advising you with regard to the decision to nominate me as the trustee of your trust and the inclusion or exclusion of language relieving me of any potential liability, you should consider discussing these matters with another lawyer. [Note: Counsel should consider the implications of Fred Hutchinson Cancer Research Center v. Holman, 732 P.2d 974 (Wash. 1987), where the court held that an exoneration clause did not protect the scrivener fiduciary against liability: "AAs the attorney engaged to write the decedent's will, [defendant] is precluded from reliance on the clause to limit his own liability when the testator did not receive independent advice as to its meaning and effect." 732 P.2d at 980.]
Consent to Appointing the Lawyer as Trustee
If, after consideration of these issues, you want to appoint me as your trustee, I would like you to acknowledge and waive the potential conflicts of interest I have explained to you. Please review the statement of consent below. After you have considered this decision carefully, I ask that you please sign the consent which follows this letter to indicate your request and consent to my serving as trustee of your trust and that you return a signed copy of the consent to me. If you have any questions about anything discussed in this letter, please let me know. In addition, you should feel free to consult with another lawyer about the effect of signing this letter.
Sincerely yours,
__________________________
Lawyer
APPOINTMENT
We have voluntarily appointed ________________ as trustee of our trusts. He/she is also the lawyer who prepared these instruments for us. He/she did not promote himself/herself or consciously influence us in the decision to appoint him/her as trustee. In addition, he/she has disclosed to us the potential conflicts of interest which might arise as a result of his/her serving as trustee, as described above, including an explanation of the responsibilities of the trustee, a list of others who might be appointed as trustee, the fees and expenses to be paid to the trustee, the fact that our lawyer's law firm will also serve as attorney for the trustee, an explanation of the risks and disadvantages of such dual service, and an explanation of the decision regarding the inclusion or exclusion of exculpatory language in our trusts.
We direct that our trusts [______ include _______ not include] language relieving our attorney from the obligation to post a bond for the faithful performance of his/her duties and [_______ include ________ not include] language absolving the lawyer as trustee from liability for losses resulting from decisions made in the exercise of reasonable care, diligence, and prudence.
Dated:____________________ _________________________
CLIENT
_________________________
CLIENT
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