ESTATE PLANNING/PROBATE – FIDUCIARY RESPONSIBILITY AND

OBLIGATIONS AND RISKS ASSOCIATED THEREWITH

CLE Credit: 1.0, including 0.5 ethics Wednesday, June 21, 2017

2:25 p.m. - 3:25 p.m. East Ballroom A-B

Owensboro Convention Center Owensboro, Kentucky

A NOTE CONCERNING THE PROGRAM MATERIALS

The materials included in this Kentucky Bar Association Continuing Legal Education handbook are intended to provide current and accurate information about the subject matter covered. No representation or warranty is made concerning the application of the legal or other principles discussed by the instructors to any specific fact situation, nor is any prediction made concerning how any particular judge or jury will interpret or apply such principles. The proper interpretation or application of the principles discussed is a matter for the considered judgment of the individual legal practitioner. The faculty and staff of this Kentucky Bar Association CLE program disclaim liability therefore. Attorneys using these materials, or information otherwise conveyed during the program, in dealing with a specific legal matter have a duty to research original and current sources of authority.

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TABLE OF CONTENTS The Presenter .................................................................................................................. i The Responsibilities and Risks Associated with Individuals and Lawyers Serving as Fiduciary .......................................................................................... 1

Introduction .......................................................................................................... 1 Fiduciary Roles .................................................................................................... 1 Fiduciary Duties ................................................................................................... 2 Taxation Issues ................................................................................................... 7 Common Fiduciary Mistakes/Breaches of Trust ................................................... 8 Fiduciary Liability ............................................................................................... 12 The Individual Fiduciary ..................................................................................... 15 Considerations for Reducing Fiduciary Liability .................................................. 33 Conclusion/Additional Reading .......................................................................... 37

THE PRESENTER

Stephanie McGehee-Shacklette Berry & McGehee, PLLC

996 Wilkinson Trace, Suite B1 Bowling Green, Kentucky 42102-3409

(270) 783-5250 smcgehee@berryandmcgehee.com

STEPHANIE L. MCGEHEE-SHACKLETTE is a partner with the law firm of Berry & McGehee, PLLC in Bowling Green and practices primarily in the areas of estate planning, probate, elder law, business, and creditor representation. She received her B.A. from the University of Kentucky and her J.D. from the University of Kentucky College of Law. Ms. McGehee-Shacklette is a past chair of the South Central Kentucky Estate Planning Council, and is an active member in the Kentucky Bar Association's Elder Law and Probate and Trust Sections, as well as the American Bar Association's Real Property, Probate and Trust Law Section. She also serves on the Board of Directors for Junior Achievement of South Central Kentucky, and is a member the Bowling Green Chamber of Commerce. In addition, she is a member of the National Academy of Elder Law Attorneys and the Bowling Green-Warren County, Kentucky and American Bar Associations. Ms. McGehee-Shacklette is also recognized in the community for her public service work. She is the recipient of the 2006 Gwyneth B. Davis Outstanding Public Service Award; and the 2005 Pro Bono Publico Award from the Warren County Lawyers Care Program, in recognition of the free legal services she has provided to the region.

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THE RESPONSIBILITIES AND RISKS ASSOCIATED WITH INDIVIDUALS AND LAWYERS SERVING AS FIDUCIARY

Stephanie McGehee-Shacklette

I. INTRODUCTION

There is a growing need for fiduciaries in our society. Increased wealth has led to both the need and desire for trusts, allowing grantors/donors a means by which to control and restrict the flow of the funds to their beneficiaries. As our wealth has increased, so has its complexity, and along with that, the complexity of the tax laws. The ever-present dilemma for grantors is who to appoint as the fiduciary. For many reasons, individuals are preferred. My clients almost always would prefer a competent, knowledgeable and trust-worthy individual to serve as fiduciary over a bank or corporate trustee. However, finding an individual who can handle the myriad of personal, administrative, tax and legal issues is a difficult task. Often, clients look to one of their trusted advisors, perhaps a financial advisor, accountant or lawyer to serve in this fiduciary role.

II. FIDUCIARY ROLES

A fiduciary is "a person having duties involving good faith, trust, special confidence and candor towards another."1 This is a relationship with which lawyers are very familiar, as lawyers stand in a fiduciary relationship with their clients. Fiduciaries are present in various aspects of the legal world, most commonly in the form of executors, administrators, trustees, and guardians/conservators.2 Other fiduciary roles we may encounter include agents under a power of attorney3 or Social Security Representative Payees.4 Other fiduciary or quasi-fiduciary roles include Trust Advisor/Trust Protector and Investment Advisors. While the focus of this paper is on executors, administrators and trustees, the fiduciary responsibilities and risks described herein are applicable to all fiduciary relationships.

1 Black’s Law Dictionary 431 (Abridged 6th Ed. 1991). 2 Branham v. Stewart, 307 S.W.3d 94, 99 (Ky. 2010). 3 Priestley v. Priestley, 949 S.W.2d 594 (Ky. 1997); Deaton v. Hale, 592 S.W.2d 127 (Ky. 1979). 4 Reid K. Weisbord, "Social Security Representative Payee Misuse," 117 Penn St. L. Rev. 1257 (Spring, 2013).

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III. FIDUCIARY DUTIES

Fiduciaries have five general duties: (1) the duty to act and carry out the terms of the governing instrument; (2) the duty of loyalty to the beneficiaries of the fiduciary relationship; (3) the duty to be generally prudent; (4) the duty to give personal attention and to not delegate; and (5) the duty to account to the beneficiaries of the fiduciary relation.5 Additionally, the trustee has many additional duties that are "offshoots" of these general duties.6 Certain of these general and specific duties are further described herein below. A. Duty to Administer

1. Kentucky Principal and Income Act.

A fiduciary shall administer a trust or estate in accordance with the terms of the trust or the will; may administer a trust or estate by the exercise of a discretionary power of administration given to the fiduciary by the terms of the trust or will; or shall administer a trust in accordance with the Kentucky Principal and Income Act if the terms of the trust or will do not contain a different provision or do not give the fiduciary a discretionary power of administration; and shall add a receipt or charge a disbursement to principal to the extent that neither the terms of the trust nor the Kentucky Principal and Income Act provides a rule for allocating the receipt or disbursement to or between principal and income.7

2. Uniform Trust Code

"Trustee shall administer the trust in good faith, in accordance with its terms and purposes and the interests of the beneficiaries."8

B. Duty of Loyalty

• Uniform Trust Code "A trustee shall administer the trust solely in the interests of the beneficiaries."9

5 Charles E. Rounds, Jr. & Charles E. Rounds, III, Loring and Rounds: A Trustee Handbook, §6.1 (2012 Edition). 6 Id. §6.2. 7 KRS 386.452(1). 8 KRS 386B.8-010. 9 KRS 386B.8-020.

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C. Duty of Impartiality

1. Uniform Trust Code.

"If a trust has two or more beneficiaries, the trustee shall act impartially in investing, managing and distributing the trust property, giving due regard to the beneficiaries' respective interests."10

2. Kentucky Principal and Income Act.

"A fiduciary shall administer a trust or estate impartially, based on what is fair and reasonable to all of the beneficiaries, except to the extent that the terms of the trust or will clearly manifest a contrary intention."11

D. Duty to Protect Trust Property

• Uniform Trust Code "A Trustee shall take reasonable steps to take control of and protect the trust property."12 "A Trustee shall take reasonable steps to compel a former trustee or other person to deliver trust property to the trustee, and to redress a breach of trust known to the trustee to have been committed by a former trustee."13

E. Duty to Inform and Report

• Uniform Trust Code "A trustee shall keep the qualified beneficiaries of the trust reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests. Unless unreasonable under the circumstances, a trustee shall promptly respond to a qualified beneficiary's request for information related to the administration of the trust."14

10 KRS 386B.8-030. 11 KRS 386.452(2). 12 KRS 386B.8-090. 13 KRS 386B.8-120. 14 KRS 386BB.8-130.

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F. Duty to Account

• Uniform Trust Code "A trustee shall keep adequate records of the administration of the trust."15

G. Duty to Be Generally Prudent

1. Uniform Trust Code (Prudent Investor Rule).

"A trustee shall administer the trust as a prudent person would, by considering the purposes, terms, distributional requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution."16 "All trustees acting under this chapter with respect to investments shall have the authority and duties as set forth in KRS 286.3-277"17 (see below).

2. Kentucky Financial Services Code, Subtitle 3. Banks and Trust

Companies.

286.3-277. Standards for bank or trust company acting as fiduciary. (1) Notwithstanding the provisions of any other law, a bank empowered to act as a fiduciary or trust company, when investing, reinvesting, purchasing, acquiring, exchanging, selling, and managing property held in a fiduciary capacity, shall act as a prudent investor would, in light of the purposes, terms, distribution requirements, and other circumstances of the fiduciary account. (2) The standard described in subsection (1) of this section requires the exercise of reasonable care, skill, and caution, and is to be applied to investments not in isolation but in the context of the account portfolio and as part of an overall investment strategy, which should incorporate risk and return objectives reasonably suitable to the account.

15 KRS 386B.8-100(1). 16 KRS 386B.8-040. 17 KRS 386.9-010.

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(3) In making and implementing investment decisions, the bank or trust company has a duty to diversify the investments of the account unless, under the circumstances, it is prudent not to do so. (4) In addition, the bank or trust company shall: (a) Conform to fundamental fiduciary duties of loyalty and impartiality; (b) Act with prudence in deciding whether and how to delegate authority and in the selection and supervision of agents; and (c) Incur only costs that are reasonable in amount and appropriate to the investment responsibilities of the account. (5) The duties of the bank or trust company under this section are subject to the rule that in investing the funds of the account, the bank or trust company: (a) Has a duty to the beneficiaries of the account to conform to any applicable statutory provisions governing investment by fiduciaries; and (b) Has the power expressly or impliedly granted by the terms of the account or applicable instrument and has a duty to the beneficiaries of the account to conform to the terms of the account directing or restricting investments by the bank or trust company. (emphasis added).

3. Fiduciaries other than trustees – legal investments.

386.020. Authorized investments of trust funds – Fiduciary to account for profits – Section not applicable to trustees (1) Any fiduciary holding funds for loan or investment may invest them in: (a) Bonds or other interest-bearing obligations of the federal government; (b) Bonds, state warrants, and other interest-bearing obligations of this state; (c) Obligations issued separately or collectively by or for federal land banks, federal intermediate credit banks, and banks for cooperatives under the Act of Congress known as the Farm Credit Act of 1971, 85 Stat. 583, 12 U.S.C. sec. 2001 and amendments thereto; (d) Notes and bonds secured by mortgage or trust deed insured by the federal housing administrator, obligations issued or insured by the

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federal housing administrator, and securities issued by national mortgage associations; (e) Obligations representing loans and advances of credit that are eligible for credit insurance by the federal housing administrator, and the fiduciary may obtain such insurance; (f) Loans secured by real property or leasehold, that the federal housing administrator insures or makes a commitment to insure, and the fiduciary may obtain such insurance; (g) Real estate mortgage notes, bonds, and other interest-bearing or dividend-paying securities, including securities of any open-end or closed-end management type investment company or investment trust registered under the Federal Investment Company Act of 1940 or units of common trust funds managed by the fiduciary, which would be regarded by prudent businessmen as a safe investment. The fact that the fiduciary is providing services to the foregoing investment company or trust as investment advisor, custodian, transfer agent, registrar, or otherwise shall not preclude the fiduciary from investing in the securities of such investment or trust; (h) Real estate, after obtaining the approval of the District Court for such investment; (i) Life insurance, endowment, and annuity contracts issued by legal reserve companies authorized to do business in this state, after obtaining the approval of the District Court for such investment. Said fiduciary may select any optional settlement provided in a policy maturing by death or as an endowment; (j) Notes, other interest-bearing obligations, and purchases of participations in such instru-ments, that are guaranteed in whole or in part by the United States of America or by any agency or instrumentality thereof; (k) Certificates of deposit and savings accounts of any state or national bank whose deposits are insured by the Federal Deposit Insurance Corporation and whose main office is in this state, including itself, if such fiduciary is a bank. Any portion of such investments that is not insured by the Federal Deposit Insurance Corporation shall be fully secured by: 1. An irrevocable letter of credit issued by the United States of America or by an agency or instrumentality thereof; 2. A pledge of securities named in this subsection as collateral;

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3. A surety bond; or 4. A combination of such irrevo-cable letters of credit, securities, and surety bonds; and (l) United States government securities or United States government agency securities, the payment of the principal and interest on which the full faith and credit of the United States is pledged, said investments being made under the terms of a repurchase agreement between the fiduciary and any state or national bank whose main office is in this state, including itself, if such fiduciary is a bank. (2) Fiduciaries holding funds for loan or investment may make loans with the securities named in subsection (1) of this section as collateral. (3) The fiduciary shall account for all interest or profit received. (4) This section shall not apply to trustees.

4. DISCLAIMER.

This is the tip of the iceberg. All of Title XXXIII "Administration of Trusts and Estate of Persons Under Disability" should be carefully studied, as well as applicable case law.

IV. TAXATION ISSUES

The fiduciary duty to "act prudently" requires that fiduciaries be educated regarding the various taxation rules and regulations that may apply to the specific situation. This is particularly complex regarding trusteeships. First and foremost, trustees should be able to identify the type and purpose of the trust over which they serve. Each trust is unique. Various Income Tax, Estate and Gift Tax, and Generation Skipping Transfer Tax and other tax rules and regulations may apply, depending on the type and purpose of the trust. For example, the trustee should be able to differentiate the following trusts: A. Simple v. Complex Trust

To be a simple trust, the trust instrument must (1) require that all income be distributed currently; (2) not provide that any amounts are to be paid, permanently set aside, or used for charitable purposes; and (3) not distribute amounts allocated to the corpus of the trust. A simple trust gets a deduction for the amount of income that must be distributed in the current year.18 The beneficiaries must include the required distribution in their gross income, whether actually distributed or not. Any trust not meeting the requirements of a simple trust is a complex trust, and the Rules set forth in IRC §661 apply. Any trust that allows for

18 IRC §651(a).

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the accumulation of income or the distribution of principal is a complex trust.

B. Grantor v. Non-Grantor Trust

A grantor trust is a trust in which some or all powers or ownership benefits are retained by the trust grantor. In a grantor trust, trust income is taxed to the grantor on the grantor's tax return and not the trust income tax return.19 Non-grantor trusts may be entitled to several tax advantages for which grantor trusts are not eligible. Generally, Grantor trusts are included in the grantor's gross estate, while non-grantor trusts are not.

C. Domestic v. Foreign

A domestic trust is one in which a court of the United States is able to exercise primary supervision over the administration of the trust, and one or more United States persons have the authority to control all substantial decisions of the trust.20 Any trust not meeting these requirements is a foreign trust.21

D. Other Special Trust Tax Rules

Additionally, special tax rules apply to certain trusts, such as Electing Small Business Trusts (ESBTs), Qualified Subchapter S Trusts (QSSTs), GST/Dynasty Trusts, Charitable Split Interest Trusts, and Qualified Personal Residence Trusts (QPRTs), among many others.

V. COMMON FIDUCIARY MISTAKES/BREACHES OF TRUST

A violation by a trustee of a duty the trustee owes to a beneficiary is a breach of trust.22

A. Breach of Duty of Loyalty – Examples

1. Trustee buying/leasing trust property to self. 2. Trustee lending trust funds to self.

19 IRC §671. 20 IRC §7701(a)(30)(E). 21 IRC §7701(a)(31)(b). 22 KRS 386B.10-010(1).

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3. Trustee using property for personal benefit. 4. Trustee employing himself to do specialized work for the trust. 5. Fiduciary employing someone related to him to do work for the

trust. 6. Trustee engaging in business that competes with the trust. 7. Trustee dealing with parties interested in trust (beneficiaries,

creditors, etc.). 8. Trustee commingling trust property/personal property. 9. Fee overpayment.

B. Breach of Duty of Impartiality – Examples

1. Favoring one beneficiary over the other. 2. Communicating with one or more beneficiaries over the others.

C. Other Breaches – Examples

1. Failing to keep accurate accounts/records. 2. Failing to seek court instruction in administration. 3. Misinterpreting/misunderstanding the trust document. 4. Failing to communicate with beneficiaries. 5. Failing to secure assets/valuables. 6. Early distribution. 7. Failing to delegate when needed and/or failure to use reasonable

care in choosing and supervising professionals. 8. Failing to fund or properly fund sub-trusts created by the main

trust. D. Top Mistakes by Fiduciaries

Sebastian V. Grass, Jr. identified the following top mistakes made by fiduciaries:23

23 Sebastian V. Grass, Jr. "Checklist of Trustee Duties and Common Mistakes Made by Trustees, Fin. Plan. J. (December 19, 2006).

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1. Failing to follow the trust terms and/or the settlor's intent. 2. Failing to prepare and file an inventory. 3. Failing to administer the trust timely. 4. Commingling trust assets and fiduciary's assets. 5. Failing to invest trust assets and to comply with the Prudent

Investor Rule. 6. Failing to keep beneficiaries informed and provide accounts. 7. Poor and/or unsubstantiated accounting records. 8. Failing to make distributions or making distributions with

unreasonable delay. 9. Failing to retain professional services when needed and/or failing

to use reasonable care in choosing professionals. 10. Failing to follow the advice of professionals. 11. Improperly delegating authority to agent. 12. Failing to seek court assistance in document interpretation. 13. Payment of trustee fees without proper documentation. 14. Payment of excessive trustee fees. 15. Making unauthorized loans, or loans without adequate interest or

collateral, or loans to someone without the ability to repay. 16. Self-dealing and conflicts of interest – purchases and loans from

trust estate, hiring spouse or relatives to provide services, "retaliating or 'getting even' against a beneficiary through the trustee role."

17. Failing to cooperate with co-trustees. 18. Failing to exercise discretion. 19. Failing to prepare and file trust income tax returns. 20. Failing to prepare and file decedent's final income tax return,

estate tax return and/or gift tax return. 21. Failing to fund or properly fund sub-trusts created by the main

trust.

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22. Violating court orders. 23. Incurring excessive account or legal expenses due to failing to

keep accurate records. 24. Using trust funds to pay for personal attorney's fees for breach of

trustee's duty.

Likewise, Douglas D. Wilson identifies these "5 costly mistakes:"24

25. Commingling estate/trust account with personal accounts. 26. Purchasing items from the estate/trust. 27. Failing to communicate with beneficiaries. 28. Failing to secure valuables. 29. Distributing property before all estate/trust obligations are

satisfied. E. Multiple Breaches

One mistake often leads to multiple breaches of trust. For example, if a trustee improperly distributes principal to an income beneficiary, the trustee has breached both the duty to act prudently and the duty to administer the trust pursuant to its terms.25

Breaches of the duty of loyalty are also usually one part of a multiple breach scenario. A classic (and common) breach of the duty of loyalty is the trustee's borrowing from the trust with inadequate interest and/or lack of collateral. In this case, the trustee may be found to have breached at least three duties: (1) the duty of loyalty; (2) the duty to act prudently; and (3) the duty to segregate the trust funds from the trustee's funds. As noted by Rounds and Rounds, "The breach of the duty of loyalty never travels alone, and it always constitutes a breach of fiduciary duty."26

24 Douglas D. Wilson, "Have You Agreed to Be an Executor or Trustee?" Bottom Line Personal (June 15, 2016). 25 Rounds & Rounds, supra note 5, §7.2.2. The text goes on to say, however, that "A negligent breach of trust…does not necessarily rise to the level of a breach of fiduciary duty." Id. 26 Id. §7.2.1.

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VI. FIDUCIARY LIABILITY

A. Remedies for Breach of Trust

KRS 386B.10-010 Remedies for Breach of Trust

(1) A violation by a trustee of a duty the trustee owes to a beneficiary is a breach of trust. (2) To remedy a breach of trust that has occurred or may occur, the court may: (a) Compel the trustee to perform the trustee's duties; (b) Enjoin the trustee from committing a breach of trust; (c) Compel the trustee to redress a breach of trust by paying money, restoring property, or other means; (d) Order a trustee to account; (e) Appoint a special fiduciary to take possession of the trust property and administer the trust; (f) Suspend the trustee; (g) Remove the trustee under KRS 386B.7-060; (h) Reduce or deny compensation to the trustee; (i) Subject to KRS 386B.10-110, void an act of the trustee, impose a lien or a constructive trust on trust property, or trace trust property wrongfully disposed of and recover the property or its proceeds; or (j) Order any other appropriate relief.

B. Personal Liability

KRS 386B.10-020. Damages for breach of trust.

(1) A trustee who commits a breach of trust is liable to the beneficiaries affected for the greater of: (a) The amount required to restore the value of the trust property and trust distributions to what they would have been had the breach not occurred; or (b) The profit the trustee made by reason of the breach.

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(2) Except as otherwise provided in this subsection, if more than one (1) trustee is liable to the beneficiaries for a breach of trust, a trustee is entitled to contribution from the other trustee or trustees. A trustee is not entitled to contribution if the trustee was substantially more at fault than another trustee or if the trustee committed the breach of trust in bad faith or with reckless indifference to the purposes of the trust or the interests of the beneficiaries. A trustee who received a benefit from the breach of trust is not entitled to contribution from another trustee to the extent of the benefit received.

KRS 386B.10-030. Damages in absence of breach.

(1) A trustee is accountable to an affected beneficiary for any profit made by the trustee arising from the administration of the trust, except the reasonable fee charged by the trustee, even absent a breach of trust. (2) Absent a breach of trust, a trustee is not liable to a beneficiary for a loss or depreciation in the value of trust property or for not having made a profit.

C. Liability for Co-Trustee's Breach of Trust

As stated in KRS 386B.10-020(2), co-trustees are jointly and severally liable when the co-trustees were jointly involved in the breach. However, in some circumstances, non-participating trustees can also be liable for their co-trustees' breach. The Comment to Section 1002 of the Model Uniform Trust Code provides that: "Joint and several liability also is imposed on a nonparticipating co-trustee who…failed to exercise reasonable care (1) to prevent a co-trustee from committing a serious breach of trust, or (2) to compel a trustee to redress a series breach of trust."

D. Liability for Attorney's Fees and Costs

KRS 386B.10-040. Attorney's fees and costs. "In a judicial proceeding involving the administration of a trust, the court, as justice and equity may require, may award costs and expenses, including reasonable attorney's fees, to any party, to be paid by another party or from the trust that is the subject of the controversy."

E. Contractual/Tort/Environmental Liability

KRS 386B.10-100. Limitation on personal liability of trustee.

(1) Except as otherwise provided in the contract, a trustee is not personally liable on a contract properly entered into in the trustee's fiduciary capacity in the course of

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administering the trust if the trustee in the contract disclosed the fiduciary capacity. (2) A trustee is personally liable for torts committed in the course of administering a trust, or for obligations arising from ownership or control of trust property, including liability for violation of environmental law, only if the trustee is personally at fault. (3) A claim based on a contract entered into by a trustee in the trustee's fiduciary capacity, on an obligation arising from ownership or control of trust property, or on a tort committed in the course of administering a trust, may be asserted in a judicial proceeding against the trustee in the trustee's fiduciary capacity, whether or not the trustee is personally liable for the claim. (4) The question of liability as between the trust estate and the trustee individually may be determined in a proceeding for accounting, surcharge, or indemnification or other appropriate proceeding.

F. Tax Liability

In some circumstances, tax liability may be imposed upon the fiduciary by the IRS. Additionally, personal liability may be imposed by beneficiary for any injury incurred as a result of the fiduciary's failure to pay taxes.27

G. Criminal Liability

1. Embezzlement and conversion.

A fiduciary's misappropriation of trust funds may constitute crimes of embezzlement and/or conversion.

2. Liability for violation of securities laws (insider trading).

Rounds and Rounds cautions, "The trustee as owner of the title to the trust portfolio has ample opportunity to run afoul of the criminal laws pertaining to the issuance, acquisition, and transfer of security. Accordingly, the trustee should have near at hand a copy of A Fiduciary's Guide to Federal Securities Laws."28

27 See generally id. §7.3.4.1. 28 Id. §7.3.4.2; id. §7.3.4.2 n.167.

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The areas where a fiduciary may run into trouble include insider trading violations, securities registration errors or omissions, and ownership disclosure error or omissions.29

3. Criminal liability for environmental law violations.

Trustees may face criminal liability for violation of various federal and state environmental laws.30

H. Liability for Predecessor Trustee Breach of Trust

While a successor trustee is not normally liable for the acts of his predecessor, the successor trustee must ensure that the predecessor has accounted for all of the trust property. Failure to bring a cognizable claim against a predecessor trustee may be a breach of trust on the part of the successor trustee.31

VII. THE INDIVIDUAL FIDUCIARY

A. General Concerns with Individuals Serving as Fiduciary

"Trust administration is not for every personality and every ethic. It is not for the wheeler-dealer and the dabbler. A trust is a legally complicated relationship requiring sustained attention, often over a period of many years, with myriad tasks, of which some are clerical in nature (e.g., keeping track of dividends) and some are not (e.g., making discretionary distributions). Stewardship of another's property in and of itself is serious business, and yet it is only of the trustee's many non-delegable functions."32 1. Competency issues.

a. Do they have the necessary expertise and experience for the particular trust? Do they have investment experience?

b. How is their age and health?

2. Personal skills.

a. Do they have good judgment? Are they honest? Will they be able to act impartially? Are they a good recordkeeper? Are they organized?

b. How is their age and health?

29 See generally id. §7.3.4.2. 30 See generally id. §7.3.4.2. 31 Id. §7.2.4. 32 Id. §3.2.

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3. Conflicts of interest.

a. Are they a beneficiary or potential distributee of trust property? Are they related to the beneficiaries of the trust?

b. Do they engage in any businesses that compete with the

trust? 4. Geographic location.

Is the individually geographically close to the beneficiaries? If not, will this be an impediment to this particular trust?

5. Willingness.

Is the chosen person willing to serve as fiduciary? B. The Family Member as Trustee

1. The family situation.

Is there a lot of family tension? Is it a second marriage? 2. Tax issues to consider.

a. Beneficiary-Trustees.

Beneficiary-Trustees must have an ascertainable standard for distributions or else the beneficiary-trustee will have to include the assets in the beneficiary's estate for estate tax purposes.33 Consider an independent co-trustee for distributions outside of ascertainable standard. Beneficiary-Trustees should not be given the power to make a distribution to another beneficiary that is not limited by an ascertainable standard. Such a distribution may constitute a gift by the beneficiary-trustee to the other beneficiary.34 Beneficiary-Trustees may not receive spendthrift protection. Creditors may be able to attach as much of the trust property as the beneficiary-trustee could distribute to himself.35

33 IRC §2041. 34 Treas. Reg. §25.2511-1(g)(2). 35 Restat. 3d of Trusts, §60 (2012).

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b. General power of appointment issues.

An individual trustee should not be given a power of distribution that satisfies the trustee's legal obligations. The power to make distributions for the support of a dependent of the trustee creates a general power of appointment in the trustee.36

c. Non-U.S. person as trustee.

A non-U.S. person serving as trustee may cause the trust to be a foreign trust for income tax purposes.

d. Non-resident as trustee.

Appointing a resident of another state as trustee may subject the trust to state income taxation in that state. State income tax laws of each state should be considered when appointing a trustee who is domiciled in another state than that of the settlor or trust.

C. Lawyer serving as Fiduciary

1. Pros.

a. Lawyer may have designed the estate plan, so he or she should understand the plan and the client's goals and intent.

b. Lawyers should have a comprehensive knowledge of the

client's financial assets, goals and desires. 2. Cons.

a. Competency of the lawyer for the job. b. Potential conflict(s) of interest. c. Liability (Is the risk worth the reward?).

3. Attorney duty to communicate with clients.

SCR 3.130(1.4) Communication

(a) A lawyer shall: (1) promptly inform the client of any decision or circumstance with respect to which the client's

36 Treas. Reg. §20.2041-(1)(c)(1).

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informed consent, as defined in Rule 1.0(e), is required by these Rules; (2) reasonably consult with the client about the means by which the client's objectives are to be accomplished; (3) keep the client reasonably informed about the status of the matter; (4) promptly comply with reasonable requests for information; and (5) consult with the client about any relevant limitation on the lawyer's conduct when the lawyer knows that the client expects assistance not permitted by the Rules of Professional Conduct or other law. (b) A lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.

As part of representing clients in estate and trust matters, attorneys must communicate with their clients regarding the necessity of fiduciaries for the plans that they are drafting, e.g., executors and trustees. The discussion should include the function of the fiduciaries, the tasks they must perform, the skills that they should have, and the types of fiduciaries available (e.g., corporate fiduciaries, professional individuals, and family members). This discussion should further describe the pros and cons of each, as well as the fees and costs associated with each type of fiduciary.37 At some point during this discussion, the client may inquire, or the attorney may offer, whether the attorney might serve as fiduciary. This part of the conversation invokes another ethical rule – business transactions with clients, which is addressed in SCR 3.130(1.8). This rule states, in part, as follows: SCR 3.130(1.8) Conflict of interest: current clients; specific rules

(a) A lawyer shall not enter into a business transaction with a client or knowingly acquire an

37 ABA Comm. on Ethics and Professional Responsibility, Formal Opinion 02-426 (May 31, 2002), pp. 2-3. ©2002 by the American Bar Association. Reprinted with permission. Copies of ABA Formal Ethics Opinions are available from shopABA.org. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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ownership, possessory, security or other pecuniary interest adverse to a client unless:

(1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client; (2) the client is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel on the transaction; and (3) the client gives informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer's role in the transaction, including whether the lawyer is representing the client in the transaction. (b) A lawyer shall not use information relating to representation of a client to the disadvantage of the client unless the client gives informed consent, except as permitted or required by these Rules. (c) A lawyer shall not solicit any substantial gift from a client, including a testamentary gift, or prepare on behalf of a client an instrument giving the lawyer or a person related to the lawyer any substantial gift unless the lawyer or other recipient of the gift is related to the client. For purposes of this paragraph, related persons include a spouse, child, grandchild, parent, grandparent or other relative or individual with whom the lawyer or the client maintains a close, familial relationship.

Comment 8 of the Supreme Commentary to SCR 3.130(1.8) states as follows:

This Rule does not prohibit a lawyer from seeking to have the lawyer or a partner or associate of the lawyer named as executor of the client's estate or to another potentially lucrative fiduciary position. Nevertheless, such appointments will be subject to the general conflict of interest provision in Rule 1.7 when there is a significant risk that the lawyer's interest 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. In obtaining the client's informed consent to the

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conflict, the lawyer should advise the client concerning the nature and extent of the lawyer's financial interest in the appointment, as well as the availability of alternative candidates for the position.

2. Competency.

At this point, the attorney must decide whether he or she wants to go further down this road with the client. Before doing so, however, the attorney must first determine whether the attorney has the competency needed for the job. As in all things, this is not a one-size-fits-all proposition. The attorney must decide whether, given the particular situation at hand, the attorney has the skills, resources and insurance coverage necessary. The attorney should take into consideration, for example, the complexity of the estate or trust involved, any special assets the estate or trust may have, and the tax issues involved. The attorney should also consider whether he or she has the temperament to deal with the family members. The attorney should consider whether he or she has the organizational skills and staff support to take on this task. While fiduciary competence necessary, the lawyer must also keep in mind his or her duties of legal competency set forth in SCR 3.130(1.1). SCR 3.130(1.1) Competence: "A lawyer shall provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation." Comment 1 of the Supreme Court Commentary to SCR 3.130(1.1) states as follows:

In determining whether a lawyer employs the requisite knowledge and skill in a particular matter, relevant factors include the relative complexity and specialized nature of the matter, the lawyer's general experience, the lawyer's training and experience in the field in question, the preparation and study the lawyer is able to give the matter and whether it is feasible to refer the matter to, or associate or consult with, a lawyer of established competence in the field in question. In many instances, the required proficiency is that of a general practitioner. Expertise in a particular field of law may be required in some circumstances.

Comment 7 to the ABA Model Rule of Professional Conduct 8.4 (Misconduct) is also instructive, as it explains that lawyers have a heightened duty when taking on certain roles: "Lawyers holding public office assume legal responsibilities going beyond those of

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other citizens. A lawyer's abuse of public office can suggest an inability to fulfill the professional role of lawyers. The same is true of abuse of positions of private trust such as trustee, executor, administrator, guardian, agent and officer, director or manager of a corporation or other organization." KRS 386B.8-06, also hints that lawyers may be held to a higher standard than other individuals serving as trustee: "A trustee who has special skills or expertise, or is named trustee in reliance upon the trustee's representation that the trustee has special skills or expertise, shall use those special skills or expertise." If the attorney does not have all of the skills necessary for a particular engagement, then the attorney should disclose this fact to the client, and either decline the appointment or explain to the client how the attorney would address those deficiencies, which may include, for example, delegating those functions to others. The client may be concerned about what tasks would be delegated and to whom such tasks may be delegated. The attorney should also discuss the fees that would be involved in such delegations and how that would affect the attorney's fees as the fiduciary.

3. Conflicts of interest.

The conflict of interest hurdle may be the most difficult barrier for the attorney to cross in accepting an appointment as a fiduciary. Conflicts of interest come in many flavors, at different times, and in various contexts. a. At the time of the appointment of the attorney as the

fiduciary.

The first conflict of interest that the attorney must overcome occurs during the initial communication with the client about the attorney's availability to serve as a fiduciary.

i. ABA Formal Opinion 02-426 counsels:

When exploring the options [of fiduciary] with his client, the lawyer may disclose his own availability to serve as a fiduciary. The lawyer must not, however, allow his potential self-interest to interfere with his exercise of independent professional judgment in recommending to the client the best choices for fiduciaries. Where there is a significant risk that the lawyer's independent professional judgment in advising the client in the selection of a

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fiduciary will be materially limited because of the potential amount of the fiduciary compensation or other factors, the lawyer must obtain the client's informed consent and confirm it in writing.38

ii. SCR 3.130(1.7) Conflict of interest: current clients:

(a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if: (1) the representation of one client will be directly adverse to another client; or (2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client, a former client or a third person or by a personal interest of the lawyer. (b) Notwithstanding paragraph (a), a lawyer may represent a client if: (1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client; (2) the representation is not prohibited by law; (3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and (4) each affected client gives informed consent, confirmed in writing. The consultation shall include an explanation of the implications of the common representation and the advantages and risks involved.

38 ABA Formal Opin. 02-246, supra n.37, at pp. 3-4.

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iii. ACTEC Commentary to MRPC 1.7:

The American College of Trusts and Estates Counsel (ACTEC) publishes commentary of the Model Rules of Professional Conduct which provides helpful guidance for attorneys serving in the fiduciary role. With respect to MRPC 1.7, the ACTEC Commentaries state as follows:

[A] lawyer should be free to prepare a document that appoints the lawyer to a fiduciary office so long as the client is properly informed, the appointment does not violate the conflict of interest rules of MRPC 1.7, and the appointment is not the product of undue influence or improper solicitation by the lawyer. The designation of the lawyer as fiduciary will implicate the conflict of interest provisions of MRPC 1.7 when there is a significant risk that the lawyer's interests in obtaining the appointment will materially limit the lawyer's independent pro-fessional judgment in advising the client concerning the choice of an executor or other fiduciary . . . . For the purposes of this Commentary, a 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.39

39 ACTEC Commentaries, Fifth Edition (2016).

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iv. SCR 3.130(1.0) Terminology: "(e) 'Informed consent' denotes the agreement by a person to a proposed course of conduct after the lawyer has communicated adequate information and explanation about the material risks of and reasonably available alternatives to the proposed course of conduct."

ABA Formal Opinion 02-426, Note 9 advises that "the lawyer should confirm the client's decision in writing or urge the client to obtain independent advice from other trust advisers or family members. These or similar measures would be desirable if, for example, the lawyer is appointed sole trustee of a trust that grants him broad powers to distribute selectively among beneficiaries who are estranged or whose interests are in substantial conflict, or when the lawyer has had no prior contact with the client."40 It is recommended that such informed consent be in writing. In some cases, the client should obtain independent counsel.

b. At the time of the acceptance of the fiduciary appointment

by the attorney. In some cases, the lawyer may become the fiduciary at the time of the appointment by the client. For example, the attorney might be the initial trustee of an irrevocable trust created by the client. In other cases, the attorney may accept the appointment after the death or disability of the client, becoming the successor trustee of a revocable trust created by the client. In any case, before accepting the trusteeship (or other fiduciary position), the lawyer should evaluate any potential conflict of interest he or she may have. The lawyer must consider the beneficiaries of the trust or estate, as well as the creditors of the trust or estate. If the lawyer concurrently represents any interested parties in the trust or estate while serving as the fiduciary, those conflicts must be resolved in accordance with SCR 3.130(1.7). The lawyer must consider whether the concurrent representation is waivable or non-waivable. For example, if the lawyer is representing a beneficiary or creditor with respect to a claim against a trust or estate, the lawyer could not serve as fiduciary of the trust or estate even with

40 ABA Formal Opin. 02-246, supra n.37, at n.9.

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consent, because the lawyer could not provide competent and diligent representation to both clients. On the other hand, if the lawyer represents a beneficiary or a creditor in an unrelated matter, the representation may be permissible. According to ABA Formal Opinion 02-426, "the fiduciary's fulfillment of his duty to deal fairly and impartially with all beneficiaries might be perceived by the client-beneficiary as conflicting with her own interest. If the lawyer nevertheless reasonably believes that he will be able to provide competent and diligent representation to the beneficiary and is able to obtain the client's informed consent, Rule 1.7(b) would permit the representation."41 ABA Formal Opinion 02-426 cautions, however, that "[e]ven though it would be permissible under the Model Rules for the fiduciary to represent one of several beneficiaries in unrelated matters with consent of the client, in some circumstances, the lawyer nevertheless should not do so. For example, if the lawyer serves as sole trustee of a trust with discretionary power to distribute principal or income unequally among the beneficiaries, his decision to distribute principal only one beneficiary excluding the others might well be questioned."42

c. During the trusteeship by the lawyer.

i. Representing interested persons.

The lawyer should vigilantly monitor his trans-actions with beneficiaries and creditors of the trust during his tenure as trustee. One can imagine that as one or more beneficiaries, having established a relationship with the lawyer in his role as trustee, may want to retain the lawyer for other legal services.

ii. Self-dealing.

The issue of lawyers self-dealing with estates has been addressed in a Kentucky Ethics Opinion. KBA E-217 concludes that a lawyer who is serving as an executor/administrator of an estate, or as the attorney for the executor/administrator, may not purchase assets from the estate.

41 Id. at 8. 42 Id. at 9.

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Notably, the Opinion states: "The purchase of assets of an estate by an attorney for the estate or an attorney acting as executor/administrator is fraught with obvious appearances of impropriety and potential breaches of fiduciary duty."43 The bottom line on self-dealing: Just don't do it, even if the governing document says you can.

iii. Hiring yourself or your law firm to represent the

trust or estate.

This issue is also addressed in ABA Formal Ethics Op. 02-426:

In jurisdictions where the attorney represents only the fiduciary, and not the trust or estate as an entity or its beneficiaries, "the Model Rules do not prohibit the fiduciary from appointing himself or his firm as counsel to perform legal work during the administration of the estate or trust because the dual roles do not involve a conflict of interest. The obligations of the lawyer or his firm as counsel to the fiduciary do not differ materially from the obligations of the lawyer as fiduciary. The principal responsibility of the lawyer for a fiduciary is to give advice to assist the fiduciary in properly performing his fiduciary duties. The lawyer for a personal representative or trustee may owe a limited duty of care to the legatees and creditors of the estate or to the beneficiaries of the trust the fiduciary serves. This duty, however, is no greater than the duty that the personal representative or trustee himself owes beneficiaries of the estate or trust."44

The first question then, is whether Kentucky is a jurisdiction where the attorney represents only the fiduciary. KBA E-401 (1997) answers this question in the affirmative, stating

43 Kentucky Bar Association Ethics Opin. KBA E-217 (May 1999). 44 Id. at 5.

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"this Committee agrees with ABA Formal Opinion 94-380, and adopts the majority view; that is, that a lawyer who represents a fiduciary does not also represent the beneficiaries. We reject the view that a lawyer who represents a fiduciary also owes fiduciary obligations to the beneficiaries that in some circumstances will override obligations otherwise owed by the lawyer to the fiduciary, such as the obligation of confidentiality. We also reject the view that when a lawyer represents a fiduciary in a trust or estate matter, the client is not the fiduciary, but is the trust estate."45

The second issue the attorney needs to address are the fees to be charged by virtue of this dual representation, discussed below.

d. Fees.

Fees are an essential topic to be discussed in this unique arrangement. Does the lawyer intend to receive both fiduciary fees and attorney fees? First, if the lawyer-fiduciary is also the scrivener of the governing document (i.e., trust or will), then this is a matter that should have been discussed with the client before the appointment, and with the client having given informed consent in writing. See discussion, supra. The fee issue is addressed extensively in ABA Formal Opinion 02-246:

45 Kentucky Bar Association Ethics Opin. KBA E-401 (1997). Please note, however, that this Ethics Opinion is limited to attorneys for the fiduciary of trusts and estates. It does not extend to attorneys for guardians: "Branham also argues that since a guardian is a fiduciary, a Kentucky Bar Association ethics opinion (KBA E-401, issued September 1997) stating that the attorney represents the fiduciary, not the estate or beneficiaries, is applicable. But this ethics opinion specifically addresses "the lawyer's responsibilities to the beneficiaries of estates and trusts" and does not specifically apply to a minor's guardian or next friend. This ethics opinion is not binding on us in this context; and we think that Stewart raises a valid point that guardians are only obligated to work for the benefit of one person (the ward), rather than trustees or executors who may owe duties to beneficiaries with conflicting interests. So despite Branham's arguments to the contrary, we hold that the attorney retained by an individual in the capacity as a minor's next friend or guardian establishes an attorney-client relationship with the minor and owes the same professional duties to the minor that the attorney would owe to any other client." Branham v. Stewart, 307 S.W.3d 94, 101 (Ky. 2010). See also Pete v. Anderson, 413 S.W.3d 291 (Ky. 2013).

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When a lawyer serves concurrently as both fiduciary and counsel for the fiduciary, issues may arise regarding the reasonable-ness of the compensation that the lawyer and his firm receive in the dual capacities. Rule 1.5(a), which sets standards for determining the reasonableness of lawyer's fees does not in specific terms cover compensation that a lawyer may receive as a fiduciary. Nevertheless, the fiduciary compensation the lawyer and his firm receive for his time and labor is relevant in determining what amount of legal fees is reasonable under Rule 1.5(a).46

SCR 3.130(1.5) Fees

(a) A lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses. The factors to be considered in determining the reasonableness of a fee include the following: (1) the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly; (2) the likelihood that the acceptance of the particular employment will preclude other employment by the lawyer; (3) the fee customarily charged in the locality for similar legal services; (4) the amount involved and the results obtained; (5) the time limitations imposed by the client or by the circumstances; (6) the nature and length of the professional relationship with the client; (7) the experience, reputation, and ability of the lawyer or lawyers performing the services; and

46 ABA Formal Opin. 02-246, supra n.37, at 6-7.

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(8) whether the fee is fixed or contingent. (b) The scope of the representation and the basis or rate of the fee and expenses for which the client will be responsible shall be communicated to the client, preferably in writing, before or within a reasonable time after commencing the representation, except when the lawyer will charge a regularly represented client on the same basis or rate. Any changes in the basis or rate of the fee or expenses shall also be communicated to the client. (c) A fee may be contingent on the outcome of the matter for which the service is rendered, except in a matter in which a contingent fee is prohibited by paragraph (d) or other law. Such a fee must meet the requirements of Rule 1.5(a). A contingent fee agreement shall be in a writing signed by the client and shall state the method by which the fee is to be determined, including the percentage or percentages that shall accrue to the lawyer in the event of settlement, trial or appeal; litigation and other expenses to be deducted from the recovery; and whether such expenses are to be deducted before or after the contingent fee is calculated. The agreement must clearly notify the client of any expenses for which the client will be liable whether or not the client is the prevailing party. Upon conclusion of a contingent fee matter, the lawyer shall provide the client with a written statement stating the outcome of the matter and, if there is a recovery, showing the remittance to the client and the method of its determination. (d) A lawyer shall not enter into an arrangement for, charge, or collect: (1) any fee in a domestic relations matter, the payment or amount of which is contingent upon the securing of a divorce or upon the amount of alimony, maintenance, support, or property settlement in lieu thereof, provided this does not apply to liquidated sums in arrearage; or

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(2) a contingent fee for representing a defendant in a criminal case. (e) A division of a fee between lawyers who are not in the same firm may be made only if: (1) the division is in proportion to the services performed by each lawyer, or, each lawyer assumes joint responsibility for the representation; (2) the client agrees to the arrangement and the agreement is confirmed in writing; and (3) the total fee is reasonable. (f) A fee may be designated as a non-refundable retainer. A non-refundable retainer fee agreement shall be in a writing signed by the client evidencing the client's informed consent, and shall state the dollar amount of the retainer, its application to the scope of the representation and the time frame in which the agreement will exist.

KRS 395.150. Compensation of representatives:

(1) The compensation of an executor, administrator or curator, for services as such, shall not exceed five percent (5%) of the value of the personal estate of the decedent, plus five percent (5%) of the income collected by the executor, administrator or curator for the estate. (2) Upon proof submitted showing that an executor, administrator or curator has performed additional services in the administration of the decedent's estate, the court may allow to the executor, administrator or curator such additional compensation as would be fair and reasonable for the additional services rendered, if the additional services were: (a) Unusual or extraordinary and not normally incident to the administration of a decedent's estate; or

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(b) Performed in connection with real estate or with estate and inheritance taxes claimed against property that is not a part of the decedent's estate but is included in the decedent's estate for the purpose of asserting such taxes.

KRS 395.155. Computation of personal representative's commission:

For the purpose of computing commissions whenever any portion of the dividends, interests, rents or other amounts payable to an executor, administrator, trustee, guardian, conservator, curator or other personal representative or fiduciary is required by any law of the United States or other governmental unit to be withheld for income tax purposes by the person, corporation, organization or governmental unit paying the same, the amount so withheld shall be deemed to have been collected.

KRS 386B.7-080. Compensation of trustee:

(1) If the terms of a trust do not specify the trustee's compensation, a trustee is entitled to compensation that is reasonable under the circumstances. (2) If the terms of a trust specify the trustee's compensation, the trustee is entitled to be compensated as specified, but the court may allow more or less compensation if: (a) The duties of the trustee are substantially different from those con-templated when the trust was created; or (b) The compensation specified by the terms of the trust would be unreasonably low or high.

KRS 386B.7-090. Reimbursement of expenses:

(1) A trustee is entitled to be reimbursed out of the trust property, with interest as appropriate, for:

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(a) Expenses that were properly incurred in the administration of the trust; and (b) To the extent necessary to prevent unjust enrichment of the trust, expenses that were not properly incurred in the administration of the trust. (2) An advance by the trustee of money for the protection of the trust gives rise to a lien against trust property to secure reimburse-ment with reasonable interest.

The Comment to Section 708 of the Model Uniform Trust Code states as follows: "This Code does not take a specific position on whether dual fees may be charged when a trustee hires its own law firm to represent the trust. The trend is to authorize dual compensation as long as the overall fees are reasonable. For a discussion, see Ronald C. Link, "Developments regarding the Professional Responsibility of the Estate Administration Lawyer: The Effect of the Model Rules of Professional Conduct," 26 Real Prop. Prob. & Tr. J. 1, 22-38 (1991)." ABA Formal Opinion 02-246 notes that "when the lawyers and his firm are fully compensated for his time and labor through fiduciary compensation, the same time and labor cannot properly be given full weight under Rule 1.5(a)."47 The ACTEC Commentaries provide the following guidance: "Most states allow a lawyer who serves as a fiduciary and as the lawyer for the fiduciary to be compensated for work done in both capacities. However, it is inappropriate for the lawyer to receive double compensation for the same work." A 1962 Kentucky Ethic Opinion, KBA E-14, allows one member of a law firm to serve as executor, administrator or trustee, with another member of a law firm serving as the attorney for the attorney-fiduciary. This opinion also addresses the double fee issue. KBA E-14 states,

"The question, however, does present a situation wherein it is assumed that it may be possible for two members of a firm to collect double for their services. Fees for the settlement of an estate should not be any greater nor less, because the service

47 ABA Formal Opin. 02-246, supra n.37, at n.18.

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has been performed by one or more individuals. A lawyer's fee should never exceed the value of the services rendered."

In short, there is no double-dipping. If the full fiduciary fee is taken, the attorney's fee is subject to reduction.

e. Liability. i. The problem with fees.

Double-dipping may cause a problem in the event that the lawyer breaches a fiduciary duty. ABA Formal Opinion 02-246 warns that "When lawyers serve in dual roles of fiduciary and counselor, courts generally have held that their overcharging and other improprieties violate excessive fee, conflict and other rules of professional conduct in addition to Rule 8.4 [misconduct]. When lawyers serve solely as fiduciaries, courts usually limit infractions to those under 8.4."48

ii. Malpractice insurance.

Most attorney malpractice policies only cover services performed by an attorney for others in his or her capacity as a lawyer. The attorney should inquire as to the availability and cost of fiduciary coverage. If an attorney is considering acting in dual capacities as fiduciary and attorney for the fiduciary, the attorney should clarify whether the fiduciary coverage includes coverage for the dual capacities.

VIII. CONSIDERATIONS FOR REDUCING FIDUCIARY LIABILITY

A. Consider Delegation or Directed Trustees

The difference between Delegation and Directed Trusteeship:

1. Trustee power to delegate.

a. The trustee.

"A trustee may delegate duties and powers that a prudent trustee of comparable skills could properly delegate under the circumstances. The Trustee shall exercise reasonable care, skill, and caution in (a) selecting an agent; (b) establishing the scope and terms of the delegation,

48 ABA Formal Opin. 02-246, supra n.37, at n.16.

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consistent with the purposes and terms of the trust; and (c) periodically reviewing the agent's actions in order to monitor the agent's performance and compliance with the terms of the delegation."49

"A trustee who complies with subsection (1) of this section is not liable to the beneficiaries or to the trust for an action of the agent to whom the function was delegated."50

b. The agent.

"In performing a delegated function, an agent owes a duty to the trust to exercise reasonable care to comply with the terms of the delegation."51 "By accepting a delegation of powers or duties from the trustee of a trust that is subject to the law of this Commonwealth, an agent submits to the jurisdiction of the courts of this state."52

2. Directed trustee.

a. Trustee.

"If the terms of a trust confer upon a person other than the settlor of a revocable trust power to direct certain actions of the trustee, the trustee shall act in accordance with an exercise of the power unless the attempted exercise is manifestly contrary to the terms of the trust or the trustee knows the attempted exercise would constitute a breach of a fiduciary duty that the person holding the power owes to the beneficiaries of the trust."53

b. Holder of power to direct (trust protector/trust advisor).

"A person, other than a beneficiary, who holds a power to direct is presumptively a fiduciary who, as such, is required to act in good faith with regard to the purposes of the trust and the interests of the beneficiaries. The holder of a

49 KRS 386B.8-070(1). 50 KRS 386B.8-070(3). 51 KRS 386B.8-070(3). 52 KRS 386B.8-070(4). 53 KRS 386B-8-080(2).

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power to direct is liable for any loss that results from breach of a fiduciary duty."54 The Comment to Section §808 of the Model Uniform Trust Code states: "Subsections (b)-(d) [of §808] ratify the use of trust protectors and advisers…'Advisers' have long been used for certain trustee functions, such as the power to direct investments or manage a closely-held business. 'Trust protector,' a term largely associated with offshore trust practice, is more recent and usually connotes the grant of greater powers, sometimes including the power to amend or terminate the trust. …. [S]ubsection (b) imposes only minimal oversight responsibility on the trustee. A trustee must generally act in accordance with the direction. A trustee may refuse the direction only if the attempted exercise would be manifestly contrary to the terms of the trust or the trustee knows the attempted exercise would constitute a serious breach of fiduciary duty owed by the holder of the power to the beneficiaries of the trust."

B. Consider an Exculpatory Clause, Carefully

An exculpatory clause is designed to shield the fiduciary from liability for ordinary negligence. Generally, an independent, professional fiduciary will require an exculpatory clause before agreeing to serve as fiduciary. Grantors may also want to include exculpatory clauses for the benefit of related individual trustees to provide a measure of comfort. Obviously, an attorney serving as a fiduciary would be wise to require one as well. However, if the attorney-fiduciary is also the drafter of the governing document, the attorney must acknowledge the conflict of interest that exists in advising a client to include an exculpatory clause and must handle that conflict ethically. The attorney should also be aware of the presumption of abuse for the inclusion of such a clause. KRS 386B.10-080. Exculpation of trustee.

(1) A term of a trust relieving a trustee of liability for breach of trust is unenforceable to the extent that it: (a) Relieves the trustee of liability for breach of trust committed in bad faith or with reckless indifference to the purposes of the trust or the interests of the beneficiaries; or (b) Was inserted as the result of an abuse by the trustee of a fiduciary or confidential relationship to the settlor. (2) An exculpatory term drafted or caused to be drafted by the trustee is invalid as an abuse of a fiduciary or

54 KRS 386B.8-080(4).

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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. The requirements of this subsection are satisfied if the settlor was represented by independent counsel at the time the exculpatory term was drafted or caused to be drafted.

SCR 3.130(1.8)(h)(1): "A lawyer 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." The ACTEC Commentaries to MRPC 1.8 state that

"[u]nder 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 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."55

C. Consider a Corporate Fiduciary

While clients may not like the idea of corporate trustee (oft-cited reasons being high fees, money-making venture, lack of family knowledge, lack of care and compassion), in many cases it may be the best (or only) option. There are many benefits to using a corporate trustee. Corporate trustees are professionals at managing and investing assets. They also have the resources to handle all of the fiduciary duties, without the need to delegate. Corporate fiduciaries also have a better understanding of their fiduciary responsibilities and duties than most individuals. Corporate trustees are also more likely to be objective than individuals, especially family members who may allow their personal feelings or conflicts to cloud their judgment. Corporate trustees can also survive indefinitely. Naming an individual trustee creates obstacles and interruptions in the event of a death or disability. Additionally, an impaired individual trustee could have a devastating effect on trust assets, while corporate trustees have checks and balances in place to minimize the damage an impaired trust officer could do.

55 ACTEC Commentaries, Fifth Edition (2016).

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Safeguards can be inserted into a trust document to deal with a corporate trustee who later becomes undesirable. For example, the document may allow the beneficiaries or a trust protector the ability to remove and replace the corporate trustee with another corporate trustee.

IX. CONCLUSION/ADDITIONAL READING

Lawyers should use extreme caution in considering and agreeing to serve in a fiduciary role. Lawyers are already subject to fiduciary duties and are at high risk for liability. Adding another layer of potential liability should be carefully undertaken. The attorney should evaluate not only the ethical rules of the legal profession, but also the applicable fiduciary rules. When advising clients, attorneys should explore with the client all of the fiduciary options available, explaining the pros and cons of individual vs. corporate trustees, and the respective fees costs associated therewith. Thankfully, there are many resources on this topic to guide the wary lawyer. In addition to the materials cited herein, the following resources are also excellent summaries of the myriad issues involved in fiduciary responsibilities and risks for attorney:

• Mary Radford, "Ethical Consideration in Serving as and Representing

Executors, Trustees, and other Fiduciaries," The ALI CLE Estate Planning Course Materials Journal (August 2016).

• Amy K. Kanyuk, "Perils and Potential Profit of a Lawyer Serving as

Trustee," Est. Plan. J. (February 2014).

• Edward D. Spurgeon and Mary Jane Ciccarello, "The Lawyer in Other Fiduciary Roles: Policy and Ethical Consideration," 62 Fordham L. Rev. 1357 (1994).

• The Fiduciary Matters Subcommittee of the ACTEC Practice Committee,

"What It Means to Be a Trustee: A Guide for Clients," ACTEC Journal (Summer 2005) (available to the public online at: http://www.actec.org/ assets/1/6/ACTEC_What__It_Means_to_be_a_Trustee.pdf)

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