Fiduciary Beware: Contested Accounting in the Face of Exoneration Clause Results in Liability for Inter Vivos Trustee
Although exoneration clauses in a testamentary trust will not, as a matter of public policy, absolve a trustee of liability for failure to exercise reasonable care, diligence and prudence (EPTL §11-1.7(a)(1)), there is no comparable statutory provision with respect to exoneration clauses in lifetime trusts. Nevertheless, the court, in Matter of Accounting of Tydings, NYLJ, July 7, 2011, at p. 26 (Sur Ct, Bronx County), found reason, despite the exoneration clause in the inter vivos trust instrument, to hold the trustee liable.
In Tydings, the court had the opportunity to opine on the effect of the exoneration clause in the subject trust, commissions, and the legal fees incurred by the petitioner and objectant. The objectant in the proceeding was the grantor and income beneficiary of the trust, with a discretionary interest in the principal. The ultimate remainderman of the trust was the grantor’s infant son.
With regard to the issue of the exoneration clause, the trust instrument authorized, inter alia, the trustee to retain an original investment for any length of time without liability for such retention, and to act on behalf of the trust and herself or another entity with regard to any transaction in which the trustee and the trust or the other entity had an interest. The trust also provided that the trustee would not be responsible for any loss to the trust unless such loss resulted from bad faith or fraud on the part of the trustee, and that the trustee would not be disqualified from acting because the trustee held an interest in any property or entity in which the trust also held an interest. The court noted that several of the objections raised in the proceeding hinged, inter alia, on the enforceability of this exoneration clause.
To this extent, the court opined that despite the absence of a statute applicable to exoneration clauses contained in lifetime trusts (cf. EPTL 11-1.7(a)(1)), the enforceability of such clauses were nevertheless subject to certain defined limitations. For instance, the court observed that a trustee of a lifetime trust who is guilty of wrongful negligence, impermissible self-dealing, bad faith or reckless indifference to the interests of the beneficiaries will not be shielded from liability by an exoneration clause. Moreover, when an attorney, named as trustee, is the draftsperson of the instrument containing an exoneration clause, the clause limiting the trustee’s liability to bad faith acts is void as against public policy. Further, the court noted that while improper self-dealing will not come under the umbrella of an exoneration clause, the rule of undivided loyalty due from a trustee may be relaxed by appropriate language in the trust instrument which directly or indirectly recognizes the trustee may be in a position of conflict with the trust.
Within this context, the court held that the petitioner would not be liable with respect to an interest-free loan that pre-existed the creation of the trust and that had been transferred into the trust by the grantor. On the other hand, the court found the petitioner liable for interest-free loans made by the trust subsequent to the inception of her stewardship. To this extent, the court concluded that petitioner’s conduct exhibited a complete indifference to the best interests of the objectant, mandating that she be surcharged for the income lost on the loan transactions.
Additionally, the court found that the exoneration clause in the instrument did not bar the objectant from recovering lost profits from the trustee attributable to her use of trust funds, without consideration, to benefit an entity in which she was personally interested.
As to the balance of the objections, the court concluded that the objectant was either estopped from raising the issues, or did not warrant the imposition of a surcharge.
With respect to the issue of commissions, the court opined that while not every surcharge warrants a denial of commissions, when the fiduciary has engaged in conduct evidencing bad faith, a complete indifference to his/her duties and responsibilities, or some act of malfeasance or misfeasance, commissions will be denied. Based on the record, the court found that the petitioner was lax with regard to managing the financial aspects of the trust. Indeed, although the court concluded that the petitioner had not acted in bad faith, it, nevertheless, held, particularly based on the interest-free loans that had been made, that she had exhibited indifference to her duties, and, accordingly, sufficient misfeasance to warrant a denial of commissions. Further, the court denied the petitioner annual commissions on the grounds that she had failed to establish that she had furnished the objectant with an annual statement pursuant to the provisions of SCPA 2309, that the objectant had waived her right to receive the statement, or that there was sufficient income retained by the trust in any particular year from which she could pay herself income commissions.
Finally, with regard to the issue of legal fees, the court held, in the exercise of discretion, that the petitioner and the objectant should each, individually, bear responsibility for their legal fees and expenses. The court observed that while many of the objections to the petitioner’s account had not been sustained, the petitioner could not seek payment of fees from the trust for defending objections for which she was surcharged. Moreover, the court opined that a strong case could be made for holding the petitioner responsible for the expert witness fees incurred by the objectant in proving petitioner’s liability in connection with the transactions for which she was surcharged. On the other hand, the court noted that the objectant vigorously pursued, and caused the petitioner to defend, numerous objections of which she was aware and had approved prior to their occurrence. Accordingly, under all the circumstances, the court determined it would be most equitable to have the petitioner and the objectant to personally satisfy their own legal fees in connection with the proceeding.
Cases of Attorney-Fiduciaries
Within the past year, several decisions have been rendered that impact upon the appointment of the attorney as fiduciary, and provide cautionary tales to the attorney-draftsman of instruments in which counsel is named to serve in a fiduciary role.
In re Estate of Wrobleski, NYLJ, 6/4/08, p. 41 (Sur. Ct. Kings County)(Sur. Johnson), the court was confronted with the issue of whether the acknowledgement of disclosure submitted by the nominated attorney-fiduciary was in compliance with the dictates of SCPA 2307-a.
The court noted that while the statements contained in the acknowledgment did not comply with the current requirements of SCPA 2307-a, they did appear to comport with those required by the statute at the time the acknowledgment was executed.
Nevertheless, the court noted that an essential element missing from the acknowledgment was the signature of the witness to the instrument. It was held that the petitioner’s attempts to cure the defect after-death were insufficient to rectify the attorney-fiduciary’s failure to comply with a material requirement of the statute. Specifically, in this regard, the court held that inasmuch as both model statements included in the statute contained a line for the witness’ signature, the signature was a substantial component of the statutory requirement that could not be overlooked. Since the statute failed to provide any remedy for failure to include the signature of the witness to the statement, the court found, under the circumstances, that the petitioner’s commissions should be reduced to one-half.
In re Estate of Deener, 2008 N.Y. Slip Op 28470, N.Y. Sur., Nov. 28, 2008 (Sur. Roth), the issue before the court was whether the disclosure requirements of SCPA 2307-a were applicable to the proponent, an out-of-state attorney named as fiduciary.
The decedent’s Will, which had been prepared by proponent, had been executed in New Jersey and named proponent’s New Jersey firm as the executor. Approximately two years after the execution of her Will, the decedent executed a codicil in which she named the proponent as fiduciary of her estate rather than the law firm.
In petitioning for probate of the decedent’s Will, proponent failed to file a disclosure statement pursuant to SCPA 2307-a with the court. Hence, the question arose as to whether she was subject to the provisions of the statute.
In determining that the statute applied to non-domiciliary attorney-fiduciaries, the court examined its legislative history and noted that it was designed to curb the possible abuses that can be part of the drafting of a will. The court determined that there was nothing in the language of the statute which exempted out-of-state attorney/fiduciaries from the scope of its provisions.
Accordingly, the court admitted the decedent’s Will to probate and limited the commissions of the attorney-fiduciary to one-half the amount that would otherwise be allowable under SCPA 2307.
In re Estate of Moss, NYLJ, 9/24/08, p. 40 (Sur. Ct. New York County)(Sur. Roth), the court had occasion to review the disclosure statements provided by the attorney-draftsmen fiduciaries under two propounded Wills.
The facts of the first case (Moss) revealed that the decedent executed a Will in which she named as executors a friend, who predeceased her, and the attorney-draftsman of the instrument. At the time she executed her Will, the decedent signed a disclosure statement under SCPA 2307-a. Two years later the decedent executed a codicil to her Will which did not involve any fiduciary appointments. At the time the codicil was executed, no disclosure statement was again signed. Accordingly, the issue before the court was whether the disclosure statement obtained when the Will was signed was sufficient to shield the attorney-draftsman from a reduction of commissions pursuant to SCPA 2307-a.
Upon review of the circumstances and the legislative history of the statute, the court concluded that the circumstances surrounding the execution of the said instrument did not require that a further disclosure statement be procured from the testator. Therefore, full statutory commissions were allowed to the named executor.
In the second case before the court (Hess), the court reached a different result. There, the record revealed that the decedent executed a Will in which he named one of his children and a lawyer to serve as executors. He also executed two codicils subsequent to the date of the Will. While the first codicil made no changes in the fiduciary appointments, the second codicil changed the original fiduciary designations by naming as executors the draftsman of the instrument and two of the decedent’s children.
At the time he executed his Will, the decedent executed a disclosure statement which conformed to the requirements of SCPA 2307-a as then in effect, which was witnessed by the attorney-draftsman, who was a partner of the named attorney-fiduciary in the propounded instrument and a named fiduciary in the second codicil.
The question before the court was whether the partner was qualified to serve as a witness to the disclosure statement for purposes of the statute. The court opined that in view of the affiliation between the attorney-executor and the draftsman/partner, the disclosure statement was not “witnessed” in accordance with the purpose of the statute, but rather by a nominee of the attorney-fiduciary. Thus, the court held that he was not independent, and could not serve as a witness to the disclosure statement. The commissions of the attorney-fiduciary were therefore limited to one-half, as provided in the statute.
Author’s Note: For a more in-depth discussion of the foregoing decisions, refer to the New York Law Journal, Trusts and Estates Update, by Ilene Sherwyn Cooper, Esq., dated January 12, 2009, p.3, the New York Law Journal, Trusts and Estates Update, dated November 17, 2008, p. 3 and New York Law Journal, Trusts and Estates Update, by Ilene Sherwyn Cooper, Esq., dated July 14, 2008, p.3.
Executor Granted Advance Payment Of Commissions Despite Prohibition In Will
There really is no substitute for good old common sense.
In Matter of Goldberg, NYLJ 1/15/09, a recent case emanating from the Surrogate’s Court, Nassau County, the court was called upon to decide a fiduciary’s petition seeking the advance payment of his executor’s commission during the administration of the estate.
The court began its analysis with reference to SCPA 2311, which allows a fiduciary to make an ex parte application for advance payment of commissions during the administration of an estate. The court noted that a petition seeking advance payment must allege that absent such payment, either the fiduciary or the estate would “be deprived of substantial advantages under the income tax laws of the United States or the state of New York or that [the fiduciary would] suffer inconvenience or hardship or that all persons whose rights and interests would be affected by the payment applied for applied for are persons under no legal disability and have by acknowledged instrument consented thereto” (SCPA 2311).
In the case before the court, the petitioner alleged that he desired advance payment of commissions for purposes of income tax planning, and because of the potential income tax savings associated with payments spread out over separate calendar years. Moreover, the petitioner alleged that the federal and state estate tax returns were filed; that he elected to pay a portion of the estate taxes in installments pursuant to Internal Revenue Code section 6166; that the undeferred portion of the estate taxes has been paid; and that all specific bequests under the decedent’s will have been paid. Moreover, all the beneficiaries -- none of whom was under a disability -- consented in writing to the application.
Therefore, the court determined that advance payment of commissions was appropriate.
There was, however, one obstacle for the court. The decedent’s will required any fiduciary to serve without compensation. In the ordinary case, according to the court, a fiduciary would have two choices: either decline to serve at all, or serve without compensation. But the court noted that unlike other cases in which courts had so held, in the case before it all the beneficiaries had executed and submitted written waivers confirming their awareness of the provision in the will requiring that an executor serve without commissions, but nevertheless consenting to the payment of a full statutory commission.
This, according to the court, rendered the case before it one of first impression. However, other cases had permitted full statutory commissions upon the consent of the beneficiaries in instances where the executor would not otherwise have been entitled to a full commission, for example, where an attorney-executor would only be entitled to half a commission pursuant to SCPA 2307-a.
Accordingly, the court granted the petition on the consent of all beneficiaries under the will, i.e., the persons who would bear the cost of the commissions. Makes perfect sense, doesn’t it?
