Probate and Trust Litigation Avoidance: A Roadmap to Safeguarding Institutional Fiduciary and Wealth Management Operations through Risk Minimization Practices

By John F. Lang, Esq.

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       It is said that “no good deed goes unpunished.”  The objective of fiduciary litigation avoidance is to make your firm the exception to that saying.

       Fiduciaries include trustees, executors, administrators, investment agents, protectors, guardians, Uniform Gift to Minors Act custodians, signatories on trust accounts, and companies that provide wealth management, investment advisory, employee pension fund management, charitable endowment management, and other fiduciary services.

       Fiduciary litigation risk may result from fiduciaries not performing fiduciary duties in the best interests of the beneficiaries to whom or to which fiduciary duties are owed.  These duties are governed by, but are not limited to, the terms of the controlling documents and the provisions of applicable state and federal statutes, rules, and regulations.  The law heightens the duties owed by fiduciaries beyond the duty of reasonable care and the prudent person standard.  It requires those persons and companies charged with carrying out fiduciary duties to exemplify the highest levels of trust, undivided loyalty, good faith, confidence, disclosure, and honor.

       Beneficiaries and their legal representatives increasingly scrutinize fiduciary conduct.  They do so especially in times of economic turmoil.  The scope of fiduciary risk is often underestimated.  Those who employ and manage fiduciaries may themselves be considered fiduciaries.  Depending on the circumstances, a fiduciary who has not personally engaged in improper conduct may be liable for a co-fiduciary’s fiduciary breaches of which there was notice; a senior executive may be liable for the fiduciary breaches of someone whom the executive supervises; and a fiduciary company may be liable for the incompetence of a firm to which fiduciary work had been outsourced.

       Due to the heavy burdens that the law places on fiduciaries, fiduciary litigation is far easier to commence than to defend.  If fiduciary litigations are not avoided, they can impose very high costs upon institutional fiduciaries and wealth management companies.  Fiduciary abuses of discretion may include failures to fund mandated expenses, failures to curb excessive expense, refusals to make required distributions,  mishandling of trust and estate assets, and instances of self-dealing.  Expenses incurred and losses sustained due to a fiduciary’s wrongful actions or failures to act may subject the fiduciary to harsh financial penalties and removal.   In addition to the costs of adverse litigation results, there are the organizational costs generated regardless of a case’s outcome.  Such costs may result from time-consuming internal inquiries, witness preparation and testimony, compliance with burdensome document discovery demands, disruption of business activities, diversion of key personnel from their regular duties, and the company’s efforts to respond to or avoid negative publicity.

       Fiduciary litigation should not be accepted as just another cost of doing business.  It should be avoided whenever possible.  There is no “one size fits all” solution to minimizing litigation risk.  The best outcome is not a decisive victory in court.  It is never having to go to court.  Complete elimination of risk is impossible.   However, the establishment of an effective fiduciary litigation avoidance program that qualified professionals manage significantly minimizes this risk.

       The following discussion provides general background information relevant to structuring or enhancing such a program.  Any litigation avoidance program will, of course, need qualified counsel to customize it to the laws of the relevant jurisdictions and to the unique circumstances of the fiduciary company involved.


       The strongest pillar of institutional fiduciary risk management is the business culture of the fiduciary company.  A risk-averse culture values ethics, morality, duty to customers, and teamwork.  It fosters an understanding of fiduciary duties and encourages the timely reporting of problems.  It has a conservative appetite for risk in fiduciary investments.  It constantly strives to improve operations through proactive fiduciary risk management policies and a teamwork approach to developing solutions to problems that arise.  Fiduciary companies should ensure that risk management values are shared by remote domestic or international branch office staff, as well as personnel in their main office.  Risk management procedures should have special provisions for integrating new groups of personnel that come into the company as the result of mergers or business unit acquisitions.

      Similar safeguards should be applicable when fiduciary functions are being outsourced.  This could be an Achilles heel for the most conservative and well-managed organization.  Extensive due diligence should be performed before entrusting an outside entity with fiduciary responsibilities.  Contracts with such entities should include suitable warranties.  The outside entity should also be required to demonstrate sufficient fiduciary liability insurance coverage.

       Other pillars of fiduciary risk management include maintaining sufficient fiduciary liability insurance and fidelity bonds, having adequate reserves, and practicing prudent portfolio and market risk management.  Enlightened human resources practices, such as due diligence in hiring (including background checks as permitted by the relevant jurisdictions), fair compensation, assistance with substance abuse problems, confidential channels of communication for reporting problems, and exit interviews should complement these practices.  Of utmost importance is confirmation that all personnel have the specific qualifications and experience needed for the particular duties assigned to them.

       Fiduciary companies should educate personnel regarding fiduciary risk avoidance practices.  Companies should distribute to their staff procedural manuals with fiduciary risk avoidance content.  The fiduciary regulatory landscape is ever-changing, personnel changes are inevitable, and it is important to learn from challenges previously encountered.  Therefore, companies should  present and update fiduciary educational programs at least annually for each category of personnel.  Depending upon the company and seniority and duties of those in attendance, programs may include written materials, lectures, webinars, workshops, and possibly role-playing exercises.  Attendance should be mandatory and companies should maintain attendance records.  This approach not only minimizes the likelihood of problems occurring, but is of value to the defense of a company in any possible future fiduciary litigation.


     A.  Follow rigorous intake procedures

       The best way to prevent certain troublesome fiduciary engagements from becoming litigation threats is simply to decline to undertake prospective engagements that are more trouble than they are worth.  Companies must be very selective in accepting new fiduciary undertakings, especially when replacing prior fiduciaries.  Prudence requires a thorough due diligence inquiry regarding the circumstances leading to the proposed change in fiduciaries.

       When prospective fiduciaries meet with the grantor, settlor, or creator of a trust, or that person’s representatives, they should not only discuss what the trust instrument says, but they should also obtain information regarding, and make a record of, the purposes and goals of the trust.  The prospective fiduciaries should also be certain that they have, to the extent feasible, copies of all documents expressing such wishes and goals.  Where the grantor is deceased, there may still be a memorandum created by the draftsperson of the trust memorializing the wishes of the creator of the trust.  On occasion, the creator of the trust may have written a “letter of wishes” or appeared in a “legacy video.”

      Fiduciaries should personally meet with beneficiaries and their advisors at the beginning of the prospective fiduciary relationship and explain the terms of the trust or other instrument governing the fiduciary relationship, make necessary disclosures, and discuss how fees and commissions will be determined and the sources from which they will be paid.  Distinctions between the treatment of principal and income should be explained.  At these initial meetings, it may be productive to ask beneficiaries what they see as risk factors, especially if there were problems with prior fiduciaries or if some estranged relative threatened litigation.

       For some high net worth families, it may be appropriate to have a family retreat over a long weekend where qualified professionals moderate a candid exchange among the stakeholders regarding how planning decisions can best meet their needs while minimizing later conflict.  If seemingly insoluble conflicts are identified, it may be worthwhile to explore whether certain potential conflicts can be resolved in the planning stage to avoid potential subsequent disputes or litigation.  Informal mediation and conflict resolution techniques may be employed.

       Poor estate planning creates a fertile field for litigation and, therefore, an evaluation of present trust and estate planning may have to be a condition of the engagement.  Terms in the trust instrument may be poorly defined.  Fiduciary obligations ands limitations may not be clear.  Persons with conflicting interests may have been designated as co-fiduciaries.  Optimum tax planning may have been undermined.  There may be conflicts between the needs of income beneficiaries and principal beneficiaries.  These are issues that need to be identified, and cured, if possible, before a fiduciary engagement is accepted.

       Fiduciaries need to be on the alert for inherent problems arising from the provisions of the governing instrument, the expressed goals of the settlor or testator, and the composition of the trust or estate assets.  Even if the assets for which the fiduciary will be responsible are not diversified, that does not mean that the composition of the assets has to remain frozen if that creates unacceptable risk.  The governing instrument may appear to permit or authorize a lack of diversification and concentration in a particular asset or category of assets.  But that is not the same as mandating a lack of diversification and may still invite potential litigation if the concentrated assets decline in value.  In certain cases, it may be appropriate to memorialize an understanding that, if required by unanticipated circumstances, the stakeholders will not object to a proceeding to ask a court to trust provisions to permit necessary diversification.

       In some situations it may be appropriate for the fiduciary to propose to the beneficiaries a plan of restructuring and seek their agreement to the plan.  In other situations a restructuring may just not be possible, given the terms of the governing instruments.  That may still not be a defense if some foreseeable loss of asset value occurs.  It may have been possible to have gotten a consensus solution among all the stakeholders and then approach a court to modify the provisions of the governing instrument.  Risk avoidance means exploring every possible path to safeguarding the interests of the beneficiaries.  Even where, for some reason, it is not possible to diversify securities held by an estate or trust, it may still be worthwhile to explore with a qualified investment advisor whether hedging techniques may be appropriate to protect the beneficiaries.

       As the fiduciary undertaking proceeds, it is equally important for a fiduciary company to maintain strong lines of communication with the beneficiaries, manage their expectations, and monitor their changed circumstances.  It is also important to maintain relationships with beneficiaries’ key advisors, closest relatives, and designated representatives.  Periodic review procedures should be established, including provision for meetings with the stakeholders and their representatives.  It is usually worth the modest investment to nip an emerging problem in the bud, rather than risk a full-blown crisis at a later date.

       As the foregoing steps are implemented, companies should arrange for witnesses to be present as understandings and agreements are reached.  These agreements and understandings should then be memorialized.

     B.  Perform periodic reviews

       Circumstances, relationships, and assets are always changing.  and periodic reviews are a must.  An investment portfolio must be reviewed periodically.  How often may depend on market conditions.  There may be a minimum period for review, but there should be flexibility for more often reviews as circumstances may dictate.  There should be periodic communications with beneficiaries, with records being kept and with an alertness for incipient problems and controversies.  All kinds of assets find their way into estates and trusts, but extremely few, if any, should not be subject to review, visits, inspection, verification, or audit.  For example: a collection of valuable oil paintings may need to be inspected to ensure that they continue to be stored under suitable conditions; a wholly-owned business may need to have its performance and management reviewed; an income stream from an entertainment venture may require a periodic audit; or an overseas charity funded by a trust may have to be scrutinized to ensure that the distributed funds are not being diverted or misused.

   Rigorous procedures should be in effect for reviewing fiduciary relationships when transitioning long-term customers to new fiduciary personnel.  New risks may have emerged since the inception of the relationship.  While unpleasant to contemplate, a departing trust officer may have neglected to inform a successor of some negative development.  To be forewarned is to be forearmed.

     C.  Practice comprehensive trust administration

      In addition to acquiring knowledge regarding the stakeholders in the fiduciary relationship, the fiduciary must also know the factors that will control the provision of fiduciary services.  These factors vary and may include: (a) provisions of a will, trust, or other fiduciary instrument; (b) applicable contracts and agreements; (c) applicable laws and regulations; (d) possible court orders; (e) the overall nature and intent of the estate plan of which the fiduciary undertaking is a part; (f) the nature and value of estate or trust assets; and (g) all changes to the foregoing.

      Trust and estate assets may take many forms.  Where not barred by the applicable statute of limitations, a decedent’s estate may possess the right to bring a lucrative legal action for damages the decedent sustained.  Or an estate may have the right to collect an outstanding loan.  For example, a trust created by a famous author may possess valuable rights to commercially exploit the author’s name or/or likeness.  There may be a priceless unpublished manuscript waiting to be found.  Failure to identify, locate, and obtain fair value for trust or estate assets is an invitation to litigation.

      Trust asset investment strategy needs to avoid a “one size fits all” approach.  There are trusts with different purposes and beneficiaries with different needs.  Trusts also differ with respect to the size of their investment portfolios, their contemplated duration, the likely tax consequences of investment decisions, and the nature of the assets.  A trust or estate may have unusual assets, the management of which may require highly specialized knowledge or skills.  For example, the assets could be works of art, shares of stock in a cutting edge technology company, or real estate in a foreign country.  Or the value of the assets may be particularly sensitive to changing economic and regulatory climates.  A fiduciary company should satisfy itself, before accepting a fiduciary undertaking, that it is fully capable of managing and/or disposing of whatever assets may be involved.

      There must be seamless teamwork among the financial company’s legal, compliance, auditing, risk management, asset management, marketing, and human resources personnel.  Fiduciary undertakings involving special needs trusts, employee pension plans, and funds held for nonprofit organizations require personnel with specialized expertise.  The decanting of trusts should be closely scrutinized.

      Contracts for the provision of financial services should be drafted to: (a) give the strongest reasonable legal protection to the financial institution consistent with its fiduciary obligations to beneficiaries; (b) require that the company be given notice of court orders and material changes in the relevant instruments; (c) include exculpation and indemnification clauses with attorney fee advancement provisions, and (d) have broad alternative dispute resolution procedure requirements.  Because of material variances in state laws and taxation policies, care should always be taken in choosing or changing a location for a trust and in drafting governing law provisions.  All of a company’s fiduciary personnel should be required to execute confidentiality or nondisclosure agreements protecting both company and beneficiary information.

      Fiduciaries must manage assets for the exclusive benefit of the beneficiaries in accordance with applicable laws, regulations, and the terms of trust instruments or controlling agreements.  Companies should have investment and asset management policy statements that guide fiduciaries.  This guidance also should focus on initial and continuing disclosure obligations, investment guidelines, determination of the amounts and sources for fees to be charged, and any limitations on the types of assets that the companies are qualified to manage.  Verification procedures should be designed to ensure that assets are diversified where appropriate, managed prudently in view of changing market conditions, and managed in accordance with the controlling documents.

      A committee should oversee the investment and management of fiduciary assets.  Minutes should be taken at its meetings.  Oversight personnel should include legal, compliance, and investment professionals.  An independent unit should audit the fiduciary unit to ensure compliance with company investment policy.

     D.  Create and retain detailed records

      Maintenance of strong records is a must.  It has practical value if disputes arise and, more importantly, it is a legal obligation of fiduciaries.

      Written communications with beneficiaries should be preserved and oral communications should be memorialized with a note to the file or a written message to the customer.  Requests, responses, cautions, consents, disclaimers, rationales for actions, and other points covered at meetings with beneficiaries should be reduced to writing.  The need for the maintenance of written documentation applies to all important to actions taken by the fiduciary, such as diversification in order to reduce market risk or appraisals to ensure the most favorable disposition of assets.  There should be documentation of the rationale for decisions, the qualifications of those making the decisions.

       It is good practice in many situations to periodically inform beneficiaries of the state of the assets under administration, the expenses incurred, and particular challenges that have arisen.  This can be done in written reports or informal written accountings.  If the assets are part of a revocable trust, then such reports should go to the settlor of the trust.  In some situations, it may be appropriate to consult with the beneficiaries.  It is almost always better to surface and deal with objections sooner than later.  Such reports may be of particular value if litigation is threatened at a much later date and the fiduciary may wish to assert a statute of limitations defense against a beneficiary claiming to have just discovered an alleged fiduciary breach.

      Document retention policies regarding preservation of information need to consider the inevitable turnover of personnel and the need for the replacement personnel to understand the reasons for prior actions.  Companies should consider that these fiduciary relationships may span decades and that, depending upon the circumstances, the law may permit review of fiduciary conduct that occurred a considerable number of years in the past.  Resigning as a fiduciary may not be sufficient to trigger the running of the statute of limitations with respect to the fiduciary conduct occurring prior to the date of resignation.  Counsel should be consulted regarding the possible need to file an accounting and make a formal application to a court for discharge from potential liability for prior actions.

      Fiduciary companies should be mindful that records of attorney-client communications between legal counsel and fiduciaries in relation to estate administration may not be protected by the attorney-client privilege of confidentiality.  This is particularly true when: (a) the underlying attorney client communications were not made in contemplation of litigation; and (b) the records of such communications are being sought by persons who are beneficiaries of the estate or trust that is funding the legal services.  Due consideration should also be given to whether, in the event of a litigation, it may be argued by the beneficiaries that the privilege has been waived.  This may happen when a fiduciary asserts advice of counsel in defense of the fiduciary’s or where attorney fees are challenged and the value of advice of counsel is contested.

     E.  Minimize risk to large multiservice fiduciary companies

      Large multiservice companies need to ensure that not only is the scope of their fiduciary services clearly defined in the controlling fiduciary contracts and agreements, but that these documents also specify what services are not included in the engagement unless separately agreed upon in writing.  For example, a company may be engaged to provide fiduciary services as trustee for a high net worth individual’s trust.  Separate units within that same company may offer tax, estate, and asset protection planning services.  There needs to be clarity regarding which services are and are not included in the trustee fiduciary services undertaking.  Otherwise, the beneficiary may later seek to hold the company responsible for merely administering the trust according to its terms instead of proposing a new and better planning structure that the company was never engaged to provide.

      Another issue for large multiservice companies is controlling beneficiary perceptions regarding the use and dissemination of information within the company.  For example, in the trust department of a company a trustee for a very sizable trust may be making investment decisions.  In the investment banking department of the same company, a merger or acquisition may be being planned based on information that may or may not be public.  There needs to be clarity between company trustees and their trust beneficiaries regarding the trust officer’s inability to use nonpublic information in the company’s possession in managing investments for trust beneficiaries.  There needs to be equal clarity regarding whether a trustee in a large multiservice company, when managing trust investments, has an affirmative duty to beneficiaries to acquire and consider all relevant public information and market analyses created or possessed by other departments of the company.  Risk in this area can be minimized through contractual provisions and disclosures, as well as by ensuring that the marketing of the company’s services does not create any impressions inconsistent with actual company practice and regulatory requirements.


      A fair-sized list of fiduciary litigation risk factors can be compiled simply by considering the consequences of not adopting the general safeguards and best practices listed above.  In addition, fiduciary companies should be vigilant regarding the specific risk factors discussed below.

     A.  Don’t assume that “It can’t happen here”

      A fiduciary company may have a sterling reputation and an enviable track record of avoiding fiduciary litigation.  That is not a reason for it to let down its guard.  There is no immunity from fiduciary litigation and the acts of a rogue employee.  Fiduciary companies must be continually vigilant for signs of self-dealing, use of insider information, conflicts of interest, transactions with parties-in-interest, failures to adhere to ethical wall standards, the charging of excessive or unauthorized fees, diversion of assets, unauthorized persons assuming nonexistent authority, non-compliant marketing conduct, intentional failures to make adequate disclosures, and other improprieties.

      Marital status should never be assumed.  I should be verified.  Diligent inquiry should be made regarding prior domestic or foreign marriages, relationships, or children of such marriages and relationships.  Litigation avoidance dictates that planning not ignore preexisting domestic statutory, contractual or court-ordered family obligations.

      Disclosures to beneficiaries are particularly important when a fiduciary company is invested in the same securities as the beneficiaries of the trusts that it administers.  In such instances caution needs to be exercised with regard to inconsistencies between company investment and trust investment strategies respecting the same securities.

      The legal and regulatory framework applicable to complex estate and tax planning structures is constantly changing.  It is necessary to periodically review situations where fiduciary services are rendered in connection with complex estate planning regimes that involve one or more domestic or offshore grantor or non-grantor trusts, purportedly designed for legitimate tax avoidance (as distinguished from tax evasion), asset protection, dilution of control of business entities, or secrecy through the use of nominees and agents.  Even where such sophisticated planning structures represent “state-of the-art” planning by highly reputed professionals, there may be fiduciary risk if the purportedly well-thought out planning and drafting of the relevant legal instruments are not matched by the manner in which the sophisticated fiduciary structures function in practice.  Regulators, investigators, and potential litigants will not limit their review of such structures to the documents involved.  They will also focus on intent, conduct, and result.

      Fiduciary companies are “deep pockets” in the context of debtor-creditor litigation.  A fiduciary company that conducts periodic good faith reviews of such arrangements has a strong response to potential claims that it turned a “blind eye” to, or somehow aided or abetted allegedly improper estate planning schemes that constituted fraudulent transfers.  Sophisticated institutional fiduciaries and their professional advisors are likely to be held to high legal and ethical standards in their provision of fiduciary services in complex trust situations.

     B.  Defuse beneficiary-centered risk factors

      Beneficiary-related parties may disagree among themselves and seek to embroil the fiduciary in their interpersonal conflicts and/or litigations.  The fiduciary should keep sufficiently informed of beneficiary developments so that if and when such situations develop, the underlying issues can quickly be identified and defused.  In particular, there is the risk of being caught in the cross-fire between various parties with differing interests in the investment, use, and distribution of the assets under fiduciary management.  Such parties may disagree among themselves and may give conflicting instructions to, or make conflicting demands upon, the institutional fiduciary or wealth manager.  If those parties don’t get their way, they may attempt to secure strategic advantage by threatening to accuse the fiduciary of improper conduct.

      There may be occasions where the only way to avoid potential entanglement in litigation is to require that the contentious parties provide the fiduciary company with a court order or a judicially recognized stipulation resolving the dispute among themselves and setting forth clear parameters and guidance for the company’s future handling of competing demands.  Equal caution is warranted if the contentious parties assure the fiduciary company that it is not named as a party in their lawsuit, but that a company executive is “only” being subpoenaed for testimony and documents.  It is not unknown for so-called “mere witnesses” to walk into depositions without personal counsel (perhaps to show their commitment to envisioned cost savings), then be grilled for hours, and emerge with their companies having become likely future parties to litigation.  It is also possible that a party adverse to the fiduciary company may use the deposition as a covert basis for obtaining sworn testimony that could be the basis for a regulatory referral.

      An individual or company undertaking a new fiduciary responsibility should be careful not to become the victim of a situation that already contains the seeds of litigation.  Familial disputes may be simmering just below the surface.  Professionals or family office staff working for the beneficiaries may previously have made unwise financial decisions or exceeded their authority.  It may be prudent, in connection with undertaking a new fiduciary engagement, to propose that specified steps be taken to put a beneficiary’s finances in order.

      Prospective trust fiduciaries should exercise care in determining whether there is more to the trust that first meets the eye.  The source of trust assets should be closely scrutinized to confirm that the trust is not being used to launder funds from illicit sources, defraud existing creditors then pursuing the settlor, or secrete marital assets.  If the source of the assets to be used to settle the trust is another trust or an estate, the prospective trust fiduciary should seek professional advice confirming that the transfer does not violate any provisions of the instruments that control the other trust or estate.

     Potential risks may develop from attorney fiduciaries having interacted with disappointed beneficiaries during the estate planning process.  These beneficiaries may seek to sue attorney fiduciaries for malpractice based upon claims of the existence of an attorney-client relationship between the attorney fiduciary and one or more beneficiaries.  Alternatively, disappointed beneficiaries involved in the estate planning process may seek to sue the planner on a theory of negligent representation.  Another risk-laden situation is where the attorney fiduciary jointly represents spouses.  Risk avoidance in fiduciary planning for nontraditional families requires an up-to-date knowledge of applicable law and familiarity with the distinctions among the laws of different jurisdictions.

      When lawyers interact with and/or advise family members in the planning stages, it is particularly important to have a common agreement in writing identifying who is and is not a client and what communications are or are not confidential.  When there are multiple clients, potential conflicts should be identified and communicated before any engagement.  Waivers should be obtained and the engagement letter should make clear how considerations of confidentiality among multiple clients will be handled.

      Sometimes attorneys who agree to draft wills and trusts also agree to serve as fiduciaries.  Risk-prone situations are created whenever the fiduciary is also a beneficiary or contingent beneficiary of a will or trust.  This risk is increased when an attorney fiduciary is the draftsperson of the will or trust and/or is also a beneficiary or contingent beneficiary.  The best practice is for planners and fiduciaries to avoid multiple, potentially conflicting, roles in the planning process to the maximum extent practical and feasible.

     C.  Avoid litigation by accommodating special needs of persons with disabilities

        Extra precautions must be taken when interacting with the aged, the ill, and persons who may have,  or may be claimed to have, diminished mental capacity.  If age-related issues are ignored, they may not only create problems in any long-term fiduciary relationship, but they are an invitation to later litigation.  Remedial measures to minimize the risks that these situations may present include proper use of powers of attorney, property guardianships, and well-defined trust accounts.  Fiduciaries may be entrusted with very large sums by clearly competent but very elderly persons who nonetheless, due to their age, may later be alleged to have been incapacitated at the time that they executed trust documents.  There may be rare instances when, over and above communicating with the settlor of the trust before objective witnesses, it may be appropriate to videotape a conversation with the very elderly settlor or arrange for the settlor to have a medical examination shortly before fiduciary documents are executed.

        Fiduciaries must be alert to the possible presence of elder financial abuse, misuse of powers of attorneys, and the conduct of persons who, by virtue of their familial relationship with an aged person, feel they have an entitlement to ignore legal restrictions upon their ability to act on behalf of an aged relative.  Such overreaching conduct is often aided by family attorneys and accountants who may be unwittingly manipulated by a relative who is handling the affairs of the “entitled” family member in a self-interested manner.  What appears to be a tax-advantaged transaction may also be a disguised act of self-dealing.  The fiduciary needs to discreetly explore whether the family professionals are mere agents of some self-interested influential family member who feels entitled to the older relative’s property.

       Where rather large sums are involved, it is best to avoid informal “convenience” accounts where a third party receives joint signatory authority as a convenience, purportedly in order to assist an elderly disabled person with financial transactions.  Disputes may arise if and when that third party uses the signatory authority to make withdrawals for personal use of the funds.  The third party, often a relative, may say that the withdrawn funds were a gift from the other signatory to the account.  Upon the passing of the elderly disabled relative and co-signatory, the heirs may blame the financial institution for having permitted the withdrawal.  On other occasions, an older or infirm high net worth individual may appear to have given a relative clear legal authority, but the surrounding circumstances are such that the individual’s purportedly authorized decisions, instructions, and gifts may be challenged as the product of undue influence.

      Difficulty in communicating can be a source of misunderstandings and confusion that can sometimes lead to litigation.  Extra measures need to be taken when communicating with individuals who are most comfortable in a foreign language, who have hearing or vision impairments, or who are seriously ill.  Simple measures, such as extra large-print copies of documents or engagement of a professional interpreter, may avoid problems at a later date.  It is important to resist the temptation to communicate instead with an apparently well-intentioned third party who has no legal authority to play the role of an intermediary.  On matters of importance, the best practice is to establish good communications by making the necessary accommodations or, if that is not possible for some reason, communicate through a legally authorized representative.


      If a specific litigation threat is encountered, the knowledgeable personnel should be required to immediately report it through previously designated channels.  They should be able to do so without being inhibited by a fear of a “shoot-the-messenger” reaction.  The objective must be to immediately and accurately assess the threat of litigation and then to designate a response team, proportionate to the threat, which will work to avoid litigation, possibly with the participation and guidance of in-house or outside counsel.

      There are many approaches to dispute resolution short of courtroom litigation or formal arbitration.  These techniques include direct negotiation by fiduciary staff or counsel and, where necessary, retention of a professional settlement facilitator or conflict resolution team to assist the company with its negotiations.  In more challenging situations, it may be appropriate for both sides to jointly engage a neutral mediator or a neutral multidisciplinary collaborative approach team to help resolve the dispute.  The latter approach may be particularly helpful where the underlying issues involve deeply divisive emotional disputes within the families of high net worth individuals.  A collaborative approach team may include some combination of counsel, psychologist, family business succession advisor, elder care lawyer, and tax counsel, as may be appropriate.

      When litigation is threatened, the fiduciary company will normally advise its insurance carrier of the potential claim.  The company’s insurance carrier and its counsel, if timely notified of the possible claim, may be helpful in facilitating a settlement that will avoid litigation without any admissions by either party.  Sometimes the stumbling block to a settlement is that one side or the other has an unrealistically optimistic view of the strength of its case.  In such event, a confidential and objective case assessment may be obtained by presenting the case to a retired judge, senior counsel, or focus group.  In cases where both sides are convinced that they would fare better in a courtroom litigation, it may be helpful to set up a highly confidential non-binding mock trial before a retired judge or senior lawyer who then separately and privately previews to each side what the ultimate result might be.  This may lead to a more realistic settlement without the need for public, protracted, and costly litigation.


      After the dust has settled and the controversy has been resolved, a company should invest  time in a formal “lessons learned” process.  This should be done for the purpose of: (a) learning from possible mistakes made by the company and (b) as an exercise in learning how to protect fiduciaries from litigations arising from unanticipated and possibly wrongful acts by parties outside the company.  The key to the success of such exercises is to adopt a constructive approach and avoid a “blame game” mentality.  There is a place for accountability, but it is not in the lessons learned process.  In the absence of a recently resolved litigation threat to use as a case study, it is often productive to undertake an occasional historical study of a past situation where fiduciary litigation was threatened or ensued.  Perhaps present litigation avoidance policies can be refined and enhanced.            


      An effective fiduciary risk minimization program should encompass: (a) legal auditing to ensure that the organization keeps pace with the latest changes in applicable law in the relevant jurisdictions; (b) regulatory compliance auditing to confirm compliance with federal and state regulatory requirements; (c) financial auditing to protect the financial integrity of accounts holding large sums of money of the fiduciary beneficiaries; (d) a systematic periodic review of asset management and investment decisions; (e) an audit of the reasonableness of expenses incurred for outside professional services, and (f) policy auditing to assure management that company policies regarding fiduciary services are being faithfully executed.

      While company procedural manuals are highly recommended, the most painstakingly prepared manuals are of limited value unless frontline personnel are following them in practice.  While management should avoid inadvertently creating an audit program that may negatively affect morale by being overly intrusive or time-consuming, some amount of visiting departments, interviewing personnel, inspecting records, and monitoring operations is usually necessary at all levels of operations.  If an audit discloses irregularities, all fiduciary accounts handled by the involved personnel should be subjected to a level of scrutiny that is reasonable under the circumstances.

      There should be functional coordination among a fiduciary company’s various audit units and between those units and the company’s risk management team.  However, responsibility for fiduciary risk management is best centralized in a single individual, possibly a Fiduciary Risk Management Officer who chairs a Fiduciary Risk Management Committee.  Such a committee might have representation from the compliance, legal, financial, asset management, human resources, executive, and frontline supervisory sectors of the company’s operations.

      In a company that has a major fiduciary business component, the Fiduciary Risk Management Officer (or whoever is assigned that function) should not be a figurehead.  That officer should be given considerable authority, reasonable independence, adequate staff, a line of reporting directly to the Chief Executive Officer or the Chief Operating Officer, and access, when necessary, to the company’s Board of Directors, Managing Committee, or the equivalent.  An annual Fiduciary Risk Management Report, to be distributed at the highest levels of the company’s governance, may be useful in maintaining focus and commitment to solutions.

      The provision of fiduciary services is a much needed financial and social service.  It does not have to be burdened by very costly court procedures and seemingly endless legal maneuvers–a “lose-lose” proposition for both disputing parties.  Rather, the provision of fiduciary services should and can be a valuable and rewarding “win-win” experience for both beneficiaries and fiduciaries.

Copyright 2014 by John F. Lang


Undue Influence: Checklist of Possible Indicators of Undue Influence

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There is no simple test for determining whether there is a valid objection to a will on the basis of undue influence.  It is a question of fact for a judge or jury to determine, often based on circumstantial evidence.  No single factor is determinative and all relevant facts should be taken under consideration.  Solely for the illustrative purposes of this blog post the “testator” is the deceased maker of the will, the “proponent” is a person or entity (such as a charity) seeking to have the will admitted to probate and alleged to have used undue influence to obtain a benefit under the will, and the “objectant” is a person or entity objecting to the probate of the will based on it being the result of the proponent’s undue influence on the testator.    

Here is a list of considerations that may be relevant, especially when several are simultaneously present, to an evaluation of whether there may be a valid objection to the probate of a will based on undue influence:

  1.    Is the alleged undue influence more than a mere request by the proponent-beneficiary to be treated kindly by the Testator?  (“Dad, since I am almost bankrupt due to no fault of my own, your will should leave more to me than to my filthy rich siblings.”) 
  2.    Did the alleged undue influence amount to imposing the will of the proponent-beneficiary’s upon the testator?  (Restraining testator’s independent action and destroying testator’s free agency by, in effect, substituting the intent of the proponent-beneficiary.) 
  3.    There must be actual acts of alleged undue influence.  (Such as, by way of example only, the proponent-beneficiary repeatedly demanding of a bed-ridden infirm testator that a will be changed and making clear that the testator was dependent on the proponent-beneficiary for adequate home health care.)
  4.    Is there a causal relationship between the alleged undue influence and the bequest to the proponent-beneficiary leading to an actual benefit to the proponent-beneficiary?  (Testator to lawyer: “Please draw up the will so that my crazy son, who has been trying to pressure me to leave him more than he deserves, gets most of my estate—not because of his pathetic attempts to intimidate me, but because I promised his late mother I would take care of him no matter how obnoxiously he behaved towards me.”) 
  5.    Did the proponent-beneficiary have a motive to use undue influence on the testator?  (Perhaps the beneficiary was under terrible financial pressure from creditors and desperately needed the bequest.) 
  6.    Did the beneficiary have an opportunity to use undue influence on the testator?  (Perhaps the testator was living in the home of the proponent-beneficiary.) 
  7.    Was there a fiduciary or confidential relationship between the testator and the proponent-beneficiary?  (Such as a lawyer, clergyman, accountant/financial advisor, or guardian of the testator, usually acting in the absence of meaningful independent countervailing advice to the testator.) 
  8.    Was the testator in a weakened mental state when the alleged undue influence took place?  (This could be, by way of example only, the after-effects of a stroke, severe depression after the loss of a loved one, early stages of dementia, or while under strong pain medication after major surgery.) 
  9.    Was the testator of advanced age?  (This could mean mid to late eighties or older.) 
  10. Did the proponent-beneficiary isolate the testator from the objectant during the relevant period?  (This could involve wrongfully interfering with visits or communications to testator by the objectant or by otherwise restricting access to the testator.)
  11.    Was the testator very dependent upon the proponent-beneficiary, who is alleged to have exercised dominance and control over the testator?  (This could be physical dependence, such as for living accommodations, assistance in activities of daily living, and home health care, or the psychological dependence of a testator who is very lonely, anxious, and fearful.) 
  12.    Did the proponent-beneficiary exercise control over testator’s assets prior to the making of the will?  (As by managing testator’s finances.) 
  13.    Did the testator feel threatened by the proponent-beneficiary?  (This may be shown by the testimony or statements third parties to whom the testator may have said that he or she felt threatened by the proponent-testator or that the testator found the proponent-testator to be very intimidating.)
  14.    Was there conduct tantamount to duress and coercion by the proponent-beneficiary?  (For example, a daughter says “If you don’t give me your house in your will, you will never see your grandchildren again.”)
  15.    Was there a history of elder abuse against the testator in which the proponent-beneficiary played a role.   (For example, by being the abuser or by being present and passive while a spouse engaged in a pattern of elder abuse.) 
  16.    Is the proponent-beneficiary a serial undue influencer?  (People who have exhibited a prior pattern of establishing relationships with vulnerable elderly or infirm wealthy people and then being named in their wills.)
  17.    Is the proponent-beneficiary someone who would not normally be expected to inherit from the testator to the exclusion of the family?  (Such as a health care attendant who might be expected to receive some bequest, but not the entire inheritance.) 
  18.    Has the proponent-beneficiary engaged in a pattern of relationship poisoning and self-promotion?  (This is akin to the proponent-beneficiary brain-washing the testator by repeatedly bad-mouthing the objectant, while constantly praising himself or herself.) 
  19.    Had there been financial exploitation of the testator by the proponent-beneficiary during the years preceding the making of the will?  (This could take the form, at times when the testator was in a weakened state, of inducing the testator to create trusts or make unusually large loans and gifts benefiting the proponent-beneficiary.) 
  20.    Is the will at issue a major departure from prior wills?  (For example, three wills divide the estate equally between the proponent-beneficiary and the objectant, but the will at issue disinherits the objectant.)
  21.    Is the will at issue a major departure from testator’s prior expressions of testamentary intent?  (For example, the testator has, before witnesses, told relatives that the objectant would inherit, but then the will gives all to the proponent beneficiary.) 
  22.    Did the proponent-beneficiary choose a lawyer with whom the proponent-beneficiary had a prior relationship as the attorney to draft the testator’s will?  (This could be the proponent-beneficiary’s own attorney or someone with who the proponent-beneficiary had some other relationship that could be expected to result in loyalty to the proponent-beneficiary.) 
  23.    Did the attorney draftsperson of the will depart from generally accepted estate planning procedures?   (This could be many things, such as the lack of records, the absence of sufficient inquiry regarding a change from a prior will, or a failure to confirm testamentary capacity.)
  24.    Was the proponent-beneficiary have involvement in the process of drafting the will?  (This could mean drafting or suggesting particular provisions, acting as a means of communication between the testator and the attorney who drafted the will, or being physically present when the attorney and the testator discussed the provisions to be incorporated into the will.) 
  25.    Was the proponent-beneficiary present when the will was executed?    (This may be combined with the proponent-beneficiary personally transporting the testator to and from the will execution ceremony or, possibly, having it take place at the proponent-beneficiary’s residence.)

The foregoing is not intended to be an exhaustive list of considerations in evaluating a potential undue influence claim.  Drawing conclusions from two or three instances of conduct described above may possibly lead to an incorrect conclusion.  This is an analysis that should be performed by experienced estate litigation counsel.      



Probate and Trust Litigation Avoidance: Mediation FAQs

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What is Mediation?

A mediation is an assisted settlement negotiation.  In a typical mediation, two parties that want to settle a dispute agree to call upon a neutral third party, known as the mediator, to assist them to achieve their mutual objective.  If the parties are sincere in their desire for a settlement and the mediator is experienced and qualified, then it is likely that a settlement will be achieved.  The parties may agree upon certain preliminary mediation ground rules relating to, for example, selection of the mediator, confidentiality of the mediation proceedings, and the sharing of certain expenses, such as the costs of the mediator’s services and, possibly, of the mediation conference facilities.  It is not the role of the mediator to judge the merits of the dispute, declare a winner and loser, and impose a judgment, penalty, or award.  The role of the mediator is to help the parties arrive at a compromise, ideally a win-win solution that maximizes the total benefit to all the parties.    

What Usually Happens in Mediation?

The mediator will often have an initial meeting or conference call with the parties and their counsel, or possibly just with counsel.  The mediator may then confirm the preliminary mediation ground rules agreed upon by the parties and inform the parties of how the mediator expects the parties to proceed, usually including a requirement that all key decision-makers attend the mediation or, if that is not possible, be available by phone during the entire mediation.  The mediator may ask for a joint written mediation submission setting forth what is agreed upon by the parties, what is disputed, and, possibly, some information regarding the background and history of the dispute.  The mediator may also invite each party to make a confidential mediation submission to the mediator presenting that party’s side of the dispute, suggestions regarding the best approach to settling the dispute, and, possibly, what that party is and is not willing to agree to in order to achieve a settlement in the mediation. 

At the mediation session, the parties may make initial presentations of their positions with all parties present, after which the mediator may separately meet with each party and that party’s counsel.  There may then be some “shuttle diplomacy,” during which the mediator alternately meets with the parties as the mediator closes in on a mutually acceptable settlement.  The mediator’s techniques may include separately advising each parties that its expectations in the mediation are unrealistic, that its case is not as airtight as it thought, and that there may be underestimated strengths in the opposing side’s position.  Usually every effort will be made to craft a creative mutually beneficial win-win solution, in which neither side is left empty-handed, neither side loses face, and both sides have something of real value to show for their efforts.  As the parties begin to show some flexibility and the prospect of a mediation settlement appears more likely, the mediator may ask to meet privately with each party, outside the presence of counsel, for a final round of reality checks, benevolent arm-twisting, and common sense advice.  Finally, the mediator may meet with all the parties and propose a mediation settlement to which all parties have, in principle, already agreed in their private meetings with the mediator.  Finally, if the mediation has succeeded, the details are ironed out and the parties’ agreement is recorded in a term sheet signed by both parties.

What Are Some Benefits of Mediation?

The major benefit of mediation is control over outcome.  There are only two possibilities at the end of a mediation: no settlement or a settlement that both parties have agreed upon. In a trial or in binding arbitration, the possibility of a glorious victory is balanced by the possibility of a humiliating defeat.  Good mediators can often provide a reasonably accurate prediction of what will probably happen if the case is tried.  That prediction can provide an informed basis for a fair mediation settlement.  However, any trial is still, to some extent, a roll of the dice.  It is not unheard of for juries to return verdicts that experts, in opinions expressed before the trial, had not predicted.  Mediation reduces this uncertainty. 

Another major benefit of mediation is cost.  The costs of compensating the lawyers and the mediator for their services, is usually a small fraction of the costs of protracted litigation with charges incurred for discovery proceedings, motion practice, litigation support personnel, legal research, transcripts, expert witnesses, a trial, and then a possible appeal.  Mediation costs can be reduced through narrowing the issues to be mediated by agreeing, before the mediation on items not in contention or where the parties’ differences are minimal.  Then the mediator can use the mediation time to focus on the issues at the heart of the dispute.  The choice of a mediator who is trusted by both sides and who is familiar with the kind of matter being mediated increases the likelihood of a successful, less costly and time-consuming mediation.  A well-crafted settlement may also have tax advantages over a litigation outcome.  Parties should also bear in mind one less obvious cost of a drawn out and demanding full-fledged litigation: diversion of their own attention and precious time from other matters and pursuits.  Parties need to consider, as a cost, the value of their own lost “litigation time” that would otherwise have been devoted to their families, their businesses, and personal commitments.          

An equally important benefit of mediation is the possibility of preserving relationships or, at least, minimizing the damage to relationships.  Corporate parties to a mediation may still have to do business with each other after the mediation.  Resolving their differences in a confidential mediation may help both parties avoid public relations damage and may open the door to a resolution to their dispute that has economic benefits for both parties—something that a public court battle is unlikely to achieve.  Similarly, individual parties to a dispute may be part of the same family group or may share child-raising responsibilities.  Resolving their differences in a confidential mediation may minimize damage due to strained family relationships and washing previously private dirty linen in a public forum.  The fact that there is no winner or loser in a mediation may enhance the prospects for an eventual reconciliation.  Mediation is far from a perfect solution.  However, where interparty negotiations have not been able to close the gap between the parties’ positions, mediation is a dispute resolution alternative well worth exploring.

Probate and Trust Litigation Avoidance: Techniques for Experienced Estate Planning Counsel

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An Ounce of Prevention Is Worth a Pound of Cure 

Because of the financial and emotional toll imposed by probate and trust litigation, every reasonable effort should be made to avoid such litigation.  Retaining experienced estate planning counsel is an important first step in enabling families to avoid costly and protracted trust and probate litigation.  A building with a firm foundation is less likely to face the possibility of collapse.  However, the owner of the house, who gives the builder instructions, also bears responsibility for the result.  Experienced estate planning counsel will advise regarding how to minimize the chances of estate litigation.  If that advice is disregarded, the instructions given to the estate planning counsel may result in a will or trust with provisions that are unreasonable, inconsistent, or likely to cause conflict.  However, even a first-rate estate planner is not a guarantee against litigation by some conflict-prone or irrational relative, just as a sound foundation of a house may not protect it against the ravages of an earthquake or other natural disaster.  Nonetheless, retaining experienced estate planning counsel is an excellent first line of defense in avoiding probate and trust litigation.       

Identifying Competent Estate Planning Counsel

How does one find the right estate planning counsel who can help avoid litigation?  It may well be the attorney who has been advising your family for years.  You want an attorney who is experienced and can see likely problems before they materialize.  You want someone who has no conflict or interest and will not be perceived to be giving advice based upon personal relationships with other family members.  Not every estate planning lawyer can have gone to a prestigious law school, be a partner in a top law firm, have the highest ratings on Internet attorney sites, lecture at educational programs for fellow attorneys, belong to prestigious estate planning professional organizations, have written books and articles on estate planning, and been recognized for excellence by his or her peers.  But if the value of the estate is substantial, it is not unreasonable to look for an attorney with substantial estate planning experience and at least a modest record of achievement.  Having a lot of experience with probate and trust litigation arising from his or her own planning work may not be the best indicator, since the ideal estate planning attorney minimizes such outcomes. 

A Sampling of Litigation Avoidance Techniques for Experienced Estate Planning Counsel

While good draftsmanship of wills and trusts is certainly a necessity, it is equally important that estate planning counsel know everything that he or she needs to know about the client’s property and business interests, mental and physical health,  and relevant personal and family relationships.  Armed with this knowledge (usually recorded in meticulous notes of meetings held with the client requesting the will), litigation avoidance measures may be taken.  If, for example, the family thinks Aunt Clara is applying undue pressure to get a large bequest, perhaps she should not be present during the estate planning process and the will should not be drafted by her niece, the personal injury lawyer.  If the will is for someone who is 95 years old and there will be foreseeable claims of lack of testamentary capacity, an examination by the appropriately qualified medical professional, shortly before the will is executed, might be helpful.  

Sometimes an estate planning professional will discuss with his or her client the possibility of having a family meeting to discuss the estate plan or, perhaps, the option of leaving behind a letter, written by the client and to be opened after the client passes.  Such a letter might, for example, explain why nephew Herbert, who almost bankrupted the family business, is getting a spendthrift trust and not the stock he wanted in the family business.  Less frequently used litigation avoidance techniques include videotaping parts of the estate planning process, the use of multiple wills executed at intervals, or including a clause in the will penalizing with a lesser bequest any beneficiary who challenges the validity of the will.  Some of these measures can be two-edged swords and can backfire when employed by the less experienced estate planning attorney.  Lastly, when a probate or trust litigation seems highly likely, an alternative may be to seek mediation or use the collaborative approach discussed in a prior blog.