PORTFOLIO

Managing Litigation Risks of Fiduciaries (Portfolio 857)

Tax Management Portfolio, Managing Litigation Risks of Fiduciaries, No. 857, discusses the increasingly risky business of serving as trustee.

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DESCRIPTION

Tax Management Portfolio, Managing Litigation Risks of Fiduciaries, No. 857, discusses the increasingly risky business of serving as trustee. Fiduciary litigation is on the rise as beneficiaries discover they, like the rest of society, may seek redress in the courts for actual or perceived wrongs. Fiduciaries have a duty of loyalty, a duty to invest reasonably, and a duty to diversify, among others. Even a cautious and conservative fiduciary will find that, when real life circumstances and people are thrown into the mix, the textbook line that a fiduciary may not cross may become blurry rather quickly.
This portfolio addresses common pitfall areas for fiduciaries and highlights actions of fiduciaries that may result in litigation. The purpose of this portfolio is not to serve as a comprehensive guide on fiduciary duty, but rather to serve as a guide to avoiding and, if preventive measures fail, preparing for litigation.
Although the guiding principle of this portfolio is risk management, the discussion of risk management techniques intentionally was placed at the end of this portfolio. The discussion regarding certain core fiduciary duties and defenses that precedes the section on risk management is intended to assist fiduciaries in defining the “zone of risk.” The section on risk management is followed by a brief discussion of court actions available to fiduciaries in the risk management phase that desire to have court approval of a proposed action or court clarification of an ambiguity.
This portfolio intertwines discussion of case law and published guidance with practical application to the fiduciary context. The worksheets include sample trust administration checklists, sample letters to beneficiaries, forms regarding action with respect to trust administration, and summaries of representative state laws.
This Portfolio may be cited as Horwood & Wolven, 857 T.M., Managing Litigation Risks of Fiduciaries.


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AUTHORS

RICHARD M. HORWOOD, ESQ.
Richard M. Horwood, A.B., Colgate University (1962); J.D., University of Pennsylvania Law School (1965); M.B.A., American University School of Business (1967); LL.M. (Taxation), George Washington University Law School (1969); managing partner, Horwood Marcus & Berk, Chartered, Chicago, Illinois; member, Illinois State Bar; member, Chicago Estate Planning Council, Chicago Bar Association Trust Law Committee, American College of Trusts and Estates Counsel; contributor to numerous publications on investing, personal financial planning and fiduciary risk management. Mr. Horwood was formerly with the National Office of the Internal Revenue Service in Washington, D.C.

LAUREN J. WOLVEN, J.D.
Lauren J. Wolven, B.A., Indiana University (1996, magna cum laude), Phi Beta Kappa; J.D., University of Illinois College of Law (1999, magna cum laude); Regional Trust Head with Chicago office of Brown Brothers Harriman Trust Company, N.A.; former partner, Horwood Marcus & Berk, Chartered, Chicago, Illinois; member, Illinois State Bar; member, Chicago Estate Planning Council, Chicago Bar Association Trust Law Committee; contributor to numerous publications on estate planning and education funding.

TABLE OF CONTENTS

Detailed Analysis

I. Introduction

A. Fiduciary Litigation on the Rise

B. Overview

II. The State of the Law

A. Legal Trends

1. Background

2. Changing Fiduciary Environment

B. Governing Law

C. Case Law Trends

1. Fiduciaries and Corporations

a. Enron

b. WorldCom

2. Warning to Plan Administrators

D. Fiduciaries and “Traditional Trusts”

1. Assumed Duty of Review

2. Environmental Liabilities

3. Statutory Trends

III. Investment Duties of a Trustee

A. Causes of Action for Breach, in General

B. Breach of Duty to Invest “Prudently”

1. Prudent Investor Rule

2. Uniform Prudent Investor Act

3. Failure to Diversify

4. Trustee with Special Skills

C. Settlor's Specific Directions Regarding Trust Investments

1. In re Will of Dumont

2. In re Estate of Kettle

D. Results of Investment Failure

1. Matter of Janes

2. Review of Investment Decisions

E. Damages in Actions for Breach of Investment Duties

IV. The Fiduciary's Duty of Loyalty

Introductory Material

A. Duty Prescribed by Statute

B. Breaching the Duty of Loyalty

1. Self-Dealing

a. Purchases of Trust Property by the Trustee

b. Sale of Property to the Trust by the Trustee

2. Conflict of Interest

a. Undivided Loyalty Required of Fiduciaries

b. Resignation and Removal for Conflicts of Interest

3. Excessive Trustee Fees Violate Duty of Loyalty

a. Fee Requests and Self-Interest

b. Fees Outlined in Governing Instruments

C. Causes of Action for Breach of Duty of Loyalty

1. Burden of Proof

a. Fairness Inquiry

b. Damages for Breach of Duty of Loyalty

2. Protections Against Fiduciary Liability for Conflict Transactions

a. Waiver of Duty by Settlor

b. Seeking Court Instruction

V. Breach of Duty of Impartiality

Introductory Material

A. Income vs. Principal: The Impossible Balancing Act

1. Balancing the Investment Portfolio

2. Competing Interests: Income Beneficiaries and Remaindermen

3. Building Flexibility Through Equitable Adjustment and Unitrust Conversions

B. Causes of Action for Breach of Duty of Impartiality

1. Burden of Proof

2. Standing of Remaindermen to Enforce Trust Terms in Court

3. Favoring One Beneficiary over Another

a. Duty to Increase Corpus for Remainder Beneficiaries

b. Impartiality in Beneficiary Communications

4. Multiple Trusts with a Single Fiduciary

5. Impartiality and Court Actions

6. Damages for Breach of Duty of Impartiality

VI. Breach of Other Duties

A. Duty to Account

1. Demanding an Accounting

2. Contingent Remaindermen

3. Parents as Trustees

4. Modification of Duty by Governing Instrument

5. Liability for Failure to Keep Accurate Accounts

B. Protection of Trust Property

1. Liability

2. Duty to Repair and Improve

3. Duty to Pay Taxes and Assessments

VII. Remedies

Introductory Material

A. Actual Damages

B. Interest

C. Reduction or Denial of Compensation

D. Removal

1. Conditional and Partial Removal

2. Jurisdiction

E. Punitive Damages

1. Misappropriation of Funds by Trustee

2. Level of Conduct Needed for Imposition of Punitive Damages

3. Statutory Limitations

F. Successor and Co-Trustee Liability

G. Attorney Fees

VIII. Defenses

A. Statutes of Limitation

B. Res Judicata

C. Exculpatory Provisions of Governing Document

D. Consent and Ratification

E. Attorney-Client Privilege Issues

IX. Risk Management

Introductory Material

A. Document Review

1. Ambiguities

2. Administrative Concerns

3. Considerations for Document Review

4. Possible “Quick Fixes”

5. Rules of Construction

a. Application

b. Governing Principles

c. Presumptions

B. Managing Uncertainty in Governing Documents

1. Revising Unamendable Documents to Clarify Uncertainty

a. Duty to Seek Correction of Document Errors

b. Virtual Representation

c. Merger of Trusts

d. Powers of Appointment

2. Attorney Opinion Letters

3. Family Settlement Agreements

4. Insurance

X. Court Actions to Avoid Lawsuits

A. Construction

1. Rules of Construction and Constructional Preferences

2. Extrinsic Evidence

B. Reformation

C. Judicial Instruction


WORKING PAPERS

Working Papers

Table of Worksheets

Relevant Worksheets Appearing in Other Portfolios:

Worksheet 1 Sample Trust Intake Checklist

Worksheet 2 Sample Trust Administration Quarterly Checklist

Worksheet 3 Sample Letter to Beneficiaries - Initial Acceptance of Trusteeship

Worksheet 4 Sample Letter to Beneficiaries - Quarterly Report

Worksheet 5 Sample Illinois Virtual Representation Agreement

Worksheet 6 Sample Trust Merger Agreement

Worksheet 7 Selected State Statutes Prescribing Duty of Loyalty

Worksheet 8 Selected State Statutes of Limitations

Worksheet 9 UPC and Selected State Anti-Lapse Provisions

Worksheet 10 Selected State Trust Merger Provisions

Bibliography

OFFICIAL

Statutes:

Federal:

State:

Regulations:

Public Laws:

Committee Reports:

Cases:

UNOFFICIAL

Books, Treatises and Commentaries:

Tax Management Portfolios:

Periodicals:

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