A Word of Caution to Fiduciaries

Many trustees employ counsel to provide advice on dealing with and responding to inquiries from beneficiaries. Trustees may believe that their communications with and advice from counsel are confidential and cannot be disclosed to the beneficiaries without their consent. The recent court decision in Fiduciary Trust International of California v. Klein (2017) 9 Cal. App. 5th 1184 is a cautionary tale that warns trustees against assuming that all communications with an attorney are confidential.

Under California law, a trustee may employ counsel and assert the attorney-client privilege to prevent disclosure of confidential communications between them. The privilege lies, however, in the office of the trustee and not the individual or individuals who act as trustee from time to time. If a successor trustee is appointed, the right to assert the privilege belongs to that successor trustee. A prior trustee cannot prevent the successor from obtaining copies or reviewing communications with the prior trustee’s counsel relating to the trust administration.

A limited exception to this rule exists. This exception allows the former trustee to prevent disclosure to a current trustee of communications that address protecting a trustee from personal liability. Fiduciary Trust focused on this limited exception.

In this case, the beneficiary sued the trustees for breach of trust, surcharge, and removal. The trustees employed counsel to represent them in defending the claims. The beneficiary succeeded in having the trustees held liable for damages and removed, and a successor trustee began serving.

The successor trustee and beneficiary then demanded all the trust records from the former trustees, including all attorney-client communications. Apparently, the beneficiaries sought either damaging admissions from the prior trustee or unfavorable assessments of personal liability from counsel. The former trustees objected to disclosure of records relating to their defense, asserting that those communications were privileged. The trial court upheld the privilege claim in part, and the appellate court reversed.

The appellate court stated that a trustee who wants to assert the limited privilege must distinguish communications relating to personal liability from communications on general trust administration matters. Requiring the trustee to adopt and maintain a procedure to segregate communications relating to personal liability was, in the court’s opinion, a reasonable burden. No procedure was specified. Nevertheless, the court required that identification and segregation of privileged communications be contemporaneous. A trustee who fails to distinguish a communication at the time it is sought may not be able to assert later that it falls within the limited exception. The court rejected the argument that a trustee can characterize an earlier communication as personal based on subsequent events, and prevent its disclosure to a successor trustee.

This limited exception is not dependent upon payment. A trustee may use trust funds to pay counsel and if the communication is identified and segregated when it occurs, the communication may remain confidential even from a successor trustee. Nevertheless, the trustee’s payment of legal fees from personal funds would support a claim that the communication remains confidential from a successor trustee or a beneficiary.

A beneficiary seeking details about a former trustee’s conduct may pursue the former trustee’s communications with counsel. An unwary trustee may learn that the damaging statements and recommendations relating to a potential claim for breach of fiduciary duty are in hands of a beneficiary.

This recent case reminds a trustee of the need to keep general trust administration communications separate from personal matters. The line between trust administration, such as defending a trustee’s account and actions disclosed on that account, and personal liability, such as breach of fiduciary duty for improper disbursements or distributions, is not always obvious. A well-documented approach and separate letters on the topics could prevent later disclosure of communication that may be detrimental to the interest of the trustee.

We would be pleased to discuss with you the trust administration procedures you may want to adopt in response to this recent case.

Kind regards.