Protecting Your Attorney’s Fees to Benefit Your Client and Yourself

“Protecting Your Attorney’s Fees to Benefit Your Client and Yourself.” That’s the subject of today’s ACTEC Trust and Estate Talk.

Transcript/Show Notes

This is Travis Hayes, ACTEC Fellow from Naples, Florida. Who is the responsible party to pay attorney’s fees when litigating trust matters? To learn more about this topic, you’ll be hearing from ACTEC Fellow Dan Young of Little Rock, Arkansas. Welcome to Dan.

Thank you, Travis. And before I get started with the presentation, I want to give credit to ACTEC Fellows Jordan Weitberg, David Marchetti, Jack Falk, Michael Goodwin, and Robert Landon. They prepared the materials, along with Martin, and myself.

Today, we are talking about ways to advise our clients on the payment of legal fees and expenses. Our client will either be the trustee of the trust or a beneficiary of the trust. The options for payment of the trust attorney’s fees – if you’re representing the trustee or the beneficiary – it’s from the trust fund. It’s the beneficiary or trustee personally pay his or her expenses or the fee be shifted to another party in the litigation.

In my experience, this has been one of the most difficult conversations – parts of the conversation with a client is to discuss my fee and how I’m going to get paid. In the general rule for legal fees, the American Rule was that each party pays his or her own fee, regardless of the outcome. In the trustee area, we have a concept known as the Common Fund Doctrine or the Fund in the Court Doctrine. And that means that the attorney for the fiduciary is compensated out of the trust because the fiduciary’s duty is to aid in creating, preserving, or protecting the trust. So, it makes sense to follow that – okay, if the trustee is doing its job to preserve and protect the trust, it gets paid out of the trust.

There is current law on this topic in the states that have adopted the Uniform Trust Code. There are two relevant sections – Sections 709 and 1004. Section 709 provides that a trustee is entitled to be reimbursed out of its trust property for expenses that were properly incurred in the administration of a trust. This includes a trustee’s legal expenses. However, comment to the statute provides that a trustee is not ordinarily entitled to attorney’s fees and expenses if it’s determined that the trustee breached the trust. So, the conversation needs to happen with the trustee, whether it’s an individual or corporation, and be in the engagement letter that it’s possible that the trustee will have to pay its own fee.

My experience has been, with corporate trustees, if they think there’s wrongdoing on their part, we start those off as a bank pay matter. But as to attorneys’ legal fees, if those are necessary in connection to the administration of a trust, those can be paid out of the trust.

Section 1004 deals with attorney’s fees and costs, and it only applies to judicial proceedings. That’s important. And it says that, “in a judicial proceeding, a court as justice and equity may require, may award cost and expenses, including reasonable attorney’s fees to any party to be paid by another party or from the trust.” And the comment provides that the court may award a beneficiary litigation costs if the litigation’s deemed beneficial to the trust. The legal standard in this statute is justice and equity may require, and so that leaves a lot of room for the court.

Oklahoma Court gave us five non-exclusive factors to help define what justice and equity require, and that’s in Atwood v. Atwood, 25 P.3d 936, Oklahoma Appellate 2001. And those five factors are the reasonableness of the parties’ claims, contentions, and defenses; an unnecessarily prolonged litigation; relative ability to bear the financial burden; result obtained by the litigation and prevailing party concepts; and whether a party has acted in bad faith, vexaciously, wantonly, or for oppressive reasons in bringing the litigation.

In summary, what this means is that when you are meeting with a client, whether it’s a beneficiary or a trustee, the beneficiary or trustee needs to leave the meeting expecting that he or she is going to be responsible for his fee. They can be discussed that it is possible that the fee could be shifted to the trust or to another party, but they shouldn’t leave the meeting thinking that they’re not responsible for their own fee.

And they also need to be made aware of, for a beneficiary client, if the court determines that the claim was meritless, the beneficiary may also be responsible for the trustee’s fee. And the trustee also needs to be made aware of and in writing in the engagement letter, that if the trustee is found to have acted in bad faith, it’s likely – one, the trustee cannot be reimbursed from the trust. And it’s possible that the trustee may have to pay a beneficiary’s fee.

The last point of this presentation is going to be, can a trust agreement make a difference? Meaning that if you’re the drafting attorney, and your client wants to make sure that the trustee has access to funds to pay attorney’s fees, can you do that? This is more important when you have an individual as trustee who may not be able to afford his fees.

And the answer is yes. A provision can be put into the trust. And it’s likely the court will follow it, unless the breach is serious, and the trustee was not involved with the drafting. And normally, if you have an individual trustee, the trustee is not going to be involved with the drafting. If you have a professional trustee and they’re reviewing the document, and they’re making the proposal, just remind yourself to check Section 108 of the Uniform Trust Code that applies on relieving a trustee of breach of liability if it was inserted as a result of an abuse by the trustee.

And lastly on this, if you want more information, there’s a recent South Carolina Law Review article on this – 72 S.C.L. Rev. 145.

I want to thank you for taking time to listening to this podcast, and I hope that it is beneficial to you. Thank you.

Thank you, Dan, for discussing attorney’s fees and who is responsible for their payment in litigated trust matters.

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