Category Archives: Surcharge of Fiduciary

July 5, 2017

Electronic Wills

by Morgan Wiener

As regular readers of this blog know, one of our favorite topics is digital assets, including estate planning for digital assets.  Today, we’re taking a slightly different focus and discussing developments in digital estate planning, more commonly known as electronic wills.

One of the more recent developments in estate planning is the concept of electronic wills. In general, an electronic will is one that is signed and stored electronically. Instead of signing a hard copy document in ink, the testator electronically signs the will, and it is also signed by witnesses and notarized electronically.  Not surprisingly, companies like LegalZoom are very interested in this topic.

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June 6, 2016

Recent IRS Statistics

by Kelly Dickson Cooper

For our litigation clients, a fiduciary’s failure to consider the tax impact of their actions can be the genus for litigation and anticipated tax savings can be the engine that drives a settlement.  For our fiduciary clients, it is important for them to ensure that transfer taxes are minimized for the benefit of their beneficiaries.  For our planning clients, tax planning is a key component in determining the best structure for their wealth transfer planning.  Given the importance of transfer taxes in our practice, we wanted to highlight a few items from the IRS 2015 Data Book relating to estate and gift tax returns:

Number of Tax Returns filed during 2015

  • 36,343 estate tax returns (545 from Colorado)
  • 237,706 gift tax returns (4,492 from Colorado)

Amounts Collected

  • Estate tax returns  – $17,066,589 collected
  • Gift tax returns – $2,052,428 collected

Percentage of 2014 Tax Returns Audited in 2015

  • 7.8% of all estate tax returns
    • Gross estate less than $5 million – 2.1% audit rate
    • Gross estate greater than $5 million but less than $10 million – 16.2% audit rate
    • Gross estate greater than $10 million – 31.6% audit rate
  • 0.9% of all gift tax returns

Results of Audits

  • 22% of estate tax returns examined had no change
  • 34% of gift tax returns examined had no change
  • 70 estate tax returns and 135 gift tax returns had unagreed recommended additional tax
  • 543 estate tax returns and 43 gift tax returns resulted in tax refunds

May 12, 2015

What Does It Mean To Be A Trustee?

by Carol Warnick

We are constantly surprised to realize that the normal, average trustee who is not a professional fiduciary doesn’t really understand what is required of him or her and often makes serious mistakes.  You would expect that someone taking over the role of being a trustee would inquire or do some type of research as to what is expected, but unfortunately many new trustees don’t seem to take the responsibility seriously enough, often with disastrous consequences.

The trustee stands in a special relationship with the grantor of the trust as well as to the beneficiaries.  This relationship is unique and the trustee should keep that in the forefront of his or her mind.  By appointing someone as trustee, the grantor is depending upon the trustee to both honor the provisions of the trust to the best of his or her ability, but also to respond to the needs  of the beneficiaries and to maintain their confidence and trust.  The trustee must be careful not to do anything which would benefit the trustee to the detriment of the beneficiaries or to ignore the duties and obligations of a trustee.  Thus the word “trust” inside the term “trustee” should not be taken lightly. 

The obligations of a trustee are defined not only by the trust agreement, but also by state law, some of which is statutory and some of which is common law.  State laws may differ from state to state, but some basic premises hold true wherever  a trust is being administered.  In general, these duties of a trustee are important and can result in litigation, removal, and potentially surcharge if the trustee ignores them.  

Some of the general duties of a trustee are set forth below, as taken from “What It Means to Be A Trustee:  A Guide for Clients,” published in the ACTEC Journal, Volume 31, No. 1, Summer 2005. 

  • Duty to Administer Trust by Its Terms.  The trust, including amendments,  provides a roadmap for the trustee and unless its terms are ambiguous, the trustee must follow its terms.  As mentioned above, state law will govern many areas where the trust is silent, so the trustee must be versed in the state law where the jurisdiction is administered. 
  • Duty of Skill and Care.  Skill, prudence and diligence — this is a high standard of performance — higher that one would be expected to follow if administering one’s own assets. 
  • Duty to Give Notice.  The trustee must be familiar with the language of the trust as well as state law to determine when he or she must give notice to beneficiaries, or perhaps a co-trustee.  Some examples requiring notice to certain individuals are resignation, delegation or designation of a successor trustee, rights of beneficiaries to withdraw principal at certain times, the naming of a professional investment advisor, of delegation of the investment function.
  • Duty to Furnish Information and to Communicate.  The trustee must keep the beneficiaries informed about the administration of the trust.  This may include information about investment performance, actions of the trustee or anything else reasonably requested by the beneficiary. 
  • Duty to Account.  The laws of most states require that the beneficiaries be given regular accountings reflecting the liabilities, receipts and disbursements of the trust.  The form and frequency varies from state to state or the language of the trust document. 
  • Duty Not to Delegate.  Generally, the trustee has the duty not to delegate acts requiring judgment and discretion (typically the trustee was chosen because he or she exhibited good judgment and sound exercise of discretion) unless specifically given that authority in the trust document or by statute.  The trustee may hire agents such as attorneys, accountants, investment advisors, etc. but the trustee should not blindly follow their advice.  The exception to that would be a Directed Trust, which is beyond the scope of this article
  • Duty of Loyalty.  The trustee has a duty to administer the trust solely in the interest of the beneficiaries.
  • Duty to Avoid Conflict of Interest.  The trustee should not use trust property for personal gain and should not use the trust assets in a manner that benefits the trustee personally.  The exception to this is when self-dealing provisions are written into the trust for the benefit of trustees who are also beneficiaries of the trust.  Even if such provisions are present, a trustee needs to be especially careful of self-dealing transactions and should consider appointing an independent trustee (if the trust or state law allows it) strictly for the purpose of authorizing such transactions. 
  • Duty to Segregate Trust Property.  The trustee must not co-mingle personal funds or any other non-trust funds with the assets of the trust.
  • Duty of Impartiality.  The trustee must treat all the beneficiaries impartially unless the trust itself instructs otherwise.  This becomes complicated when the trustee must balance the interests of the income beneficiaries with the interests of the remainder beneficiaries of a trust. 
  • Duty to Invest.  The trustee has a duty to invest the assets appropriately.  Unless otherwise specified, that includes a duty to diversify assets.
  • Duty to Enforce and Defend Claims.  The trustee must take reasonable steps to defend claims against the trust and to enforce claims the trust may have against others.  Part of the decision-making process in determining what is reasonable needs to be an assessment of the costs  of enforcing or defending versus the costs to the trust of not taking action on the claim.
  • Duty of Confidentiality.  The affairs of the trust should be kept confidential except with those who are by law “interested persons” such as the beneficiaries and co-trustees. The trustee should not disclose to third parties the identify or interests of the beneficiaries or the nature of trust assets, unless requested to do so by a beneficiary who may need certain information disclosed to a third party.  This duty of confidentiality also extends to personal things about beneficiaries that may come to the knowledge of the trustee in the process of administering the trust.

Any trustee paying close attention to the duties listed above will stand a much better chance of making the trustee experience a positive one and will be much more likely to avoid problems or lawsuits from beneficiaries. 

April 28, 2014

Should an undue influencer be responsible for paying the legal fees incurred to rectify the undue influence?

by Kelly Cooper

In a recent unpublished decision, the Colorado Court of Appeals held that a niece who unduly influenced her uncle was not responsible for the payment of the uncle's legal fees, which were required to rectify the undue influence and return the property to the uncle.

Specifically, the niece was accused of unduly influencing her uncle to give her pieces of real estate during his life. A jury found that the niece did unduly influence her uncle and that she breached her fiduciary duty to her uncle. As a result, the court ordered that the real estate be transferred back to the uncle. In addition, the jury awarded $315,000 in legal fees against the niece to make the uncle whole.

On appeal, the niece argued that she should not be responsible for the payment of attorney's fees because Colorado follows the American rule that parties in a dispute must pay their own legal fees. The uncle, through his conservator, argued that an award of legal fees was appropriate in this case under the breach of fiduciary duty/trust exception to the American rule. This exception was first recognized by the Colorado Court of Appeals in 1982. See Heller v. First Nat'l Bank of Denver, 657 P.2d 992 (Colo. App. 1982). The Colorado Supreme Court recognized the exception in 1989. See Buder v. Satore, 774 P.2d 1383 (Colo. 1989).

Despite the recognition of this exception, the Colorado Court of Appeals found that the Colorado Supreme Court has cautioned it against liberally construing any of the exceptions to the American rule.

In finding that the exception did not apply to this case of undue influence, the Colorado Court of Appeals held that the niece's breach of fiduciary duty did not closely resemble a breach of trust. In addition, the Court of Appeals found that the niece breached her duty as an individual, rather than any fiduciary duty to manage property, and that abusing personal influence is not similar to mismanaging property as a fiduciary.

The citation for the case is: In the Interest of Phillip Delluomo, Protected Person, 2012CA2513.

February 17, 2014

Letters of Wishes: Helpful or Hurtful?

by Kelly Cooper and Desta Asfaw

Most of the trusts we see instruct the trustee to consider making distributions for “health, education, maintenance and support.”  While the typical HEMS standard provides certainty in regard to taxes, it does not provide the trustee with any insight into what types of distributions the settlor wanted the beneficiaries to receive from the trust.  In addition, many trusts give the trustee broad discretion in regard to distributions (through the use of the words, “sole” or “absolute”), which puts even more pressure on the trustee to figure out if the settlor would have agreed to make distributions.  Typically, a trustee has little to no guidance from the settlor about his or her desires for the beneficiaries or his or her purposes in creating the trust (other than tax deferral or avoidance).

One solution to this problem is for the settlor of the trust to send to the trustee a non-binding letter of wishes.  Letters of wishes include personal information about the settlor and the beneficiaries, their relationships, the beneficiaries’ abilities and limitations and the settlor’s specific concerns or desires regarding each beneficiary.  Letters of wishes give the trustee more insight into the state of mind of the settlor when exercising discretion, which is helpful when exercising discretion in regard to distributions.

While letters of wishes are generally recognized in the estate planning community, there is very little law regarding the effect of a letter of wishes on a trustee’s discretion, whether reliance on a letter of wishes provides any liability protection to a trustee or if a letter of wishes must be disclosed to the beneficiaries.  If a settlor provides opinions and concerns about the beneficiaries in a letter of wishes that may be hurtful to the beneficiaries, the trustee will then be faced with the difficult decision – do you provide a copy of the letter of wishes to the beneficiaries?  If a claim for breach of the trustee’s fiduciary duty should arise, it may be that the trustee is left with no choice but to make the letter available to the beneficiaries.  In Colorado, there is no case law regarding letters of wishes so it is unknown if the letters of wishes must be disclosed to beneficiaries under C.R.S. § 15-16-303 or whether a trustee can rely on a letter of wishes when making a distribution decision.

Even with the uncertainty relating to the disclosure and use of letters of wishes, any peek into the settlor’s mind and his or her intent regarding distributions will be helpful to a trustee.  If a letter of wishes is admitted into evidence during a dispute, the letter could also prove to be compelling evidence for a judge reviewing a trustee’s exercise of discretion.

December 9, 2013

Probate and Trust Issues in Colorado’s Upcoming Legislative Session

by Kelly Cooper

Colorado’s General Assembly will reconvene on January 8, 2014.  At this time, it appears that at least two probate and trust related issues will be the subject of debate by the Assembly.

The first is a proposed change to the Colorado Civil Unions Act that would permit partners to a civil union to file joint income tax returns if they are permitted to do so by federal law.  Under the current proposal being considered by the Colorado Bar Association, there would be changes to both the Civil Unions Act and Colorado’s income tax statutes.  This is partly in response to the issuance of Revenue Ruling 2013-17 by the Internal Revenue Service, which permits married same sex couples to file joint federal income tax returns. 

The second is a proposal to codify a testamentary exception to Colorado’s attorney-client privilege.  The necessity and proposed scope of the testamentary exception are currently being discussed by a subcommittee of the Statutory Revisions Committee of the Trust & Estate Section of the Colorado Bar Association and will likely be discussed later this week at Super Thursday meetings.

The Colorado Supreme Court has previously recognized that the attorney-client privilege generally survives the death of the client to further one of the policies of the attorney-client privilege – to encourage clients to communicate fully and frankly with counsel.  The Colorado Supreme Court has also held that a “testamentary exception” to the privilege exists, which permits an attorney to reveal certain types of communications when there is dispute among the heirs, devisees or other parties who claim by succession from a decedent so that the intent of the decedent can be upheld.

September 24, 2013

Fiduciary Solutions Symposium Recap

by Kelly Cooper

Last week, we held our first Fiduciary Solutions Symposium.  We want to thank each of you that came and participated.  We enjoyed seeing all of you and getting a chance to catch up with you over breakfast.

For those of you that couldn’t attend, here is a brief recap.  When we discussed topics that we wanted to present at the Symposium, we kept coming back to the constantly evolving and changing nature of our practices.  Whether it is taxes, ADR or changes in state laws, things never stay the same.  As a result, we decided to discuss a variety of topics and the trends we are seeing each day in our practices.  It was difficult to narrow down the topics to two hours of content, but we ended up discussing the following issues:

  • Digital Assets
  • Social Media and Use in Litigation
  • Gun trusts
  • Civil Unions/Same Sex Marriage and related tax issues
  • Reformation and modification of trusts and decanting
  • Apportionment and allocation of taxes and expenses in administration
  • Baby boomers and the “Silver Tsunami”
  • Migratory Clients and Differing State Laws
  • Trends in Alternative Dispute Resolution
  • Assisted Reproductive Technology

 We had so much fun that we are taking the show on the road and will be in Salt Lake City on November 12th.  We hope to see you there.

May 28, 2013

Payment of College Expenses for Beneficiaries – To Pay or Not to Pay?

By Kelly Cooper

Fiduciary clients regularly ask me what expenses can be paid out of a trust.  Generally, this requires an examination of the terms of the trust and the applicable law.  However, even after considering the terms of the trust and applicable law, trustees are often stuck in this grey area trying to determine what expenses may be paid.  As a result, I am always on the lookout for cases that might provide guidance for trustees in exercising their discretion.  Recently, a case from New York caught my eye.  Matter of McDonald, 100 A.D. 1349 (N.Y. App. Div. 4th Dep’t 2012).

In this case, the grandfather created a trust for his twin granddaughters and appointed his daughter (the twins’ mother) to serve as trustee.  As trustee, the mother refused to pay for the twins’ college expenses and to purchase a car for their use.  The twins filed suit and asked the court to remove their mother as trustee and to award attorney fees.

The trial court removed the mother as trustee, bypassed the named successor trustee and appointed an attorney (who was not named in the trust) to serve as successor trustee.  The trial court found that the mother had failed to observe the terms of the trusts and had abused her fiduciary responsibilities and awarded attorney fees to the twins.  The mother appealed and the trial court was unanimously reversed.

In reversing and finding in favor of the trustee, the appellate court cited to Section 50 of the Restatement of Trusts and identified the following factors:

The terms of the trust.  The relevant terms of the trust were stated as follows: “[t]he Trustee shall pay or apply to or for the use of each such living grandchild of mine so much of the income, accumulated income and principal of such share at any time and from time to time as the Trustee deems advisable in [the Trustee’s] sole discretion not subject to judicial review, to provide for such grandchild’s maintenance, support, education, health and welfare, even to the point of exhausting the same.”  The trust also provided for fractional distributions to the twins at ages 30 and 32 and termination of the trust at age 35.

Other resources.  The court noted that one of the twins’ college expenses were paid in full by public benefits and that the other twin had failed to even complete the necessary applications for public college benefits and tuition assistance.  Further, the twins both had New York 529 College Savings accounts and the balances in those accounts were sufficient to pay college expenses.

Friction.  The appellate court noted that there was friction between the mother and her teenaged daughters, but found that mere friction or disharmony between a trustee and a beneficiary is not sufficient grounds to remove a trustee.   The appellate court quoted another New York case, stating, “If it were, an obstreperous malintentioned beneficiary could cause the removal of a competent trustee through no fault on the latter’s part.”