Fall 2011 Newsletter
Ethical Issues in the Compensation of Attorneys Acting as Fiduciaries
By Mark V. Pascucci
“Compensation to fiduciaries is a veritable well spring of litigation.” Trotman v. Trotman, 148 Va. 860, 868-869, (1927)Attorneys are often asked by their clients to serve as executor or trustee. In many cases, the attorney being named as executor/trustee is also drafting the document and may provide future legal ser-vices to the estate or trust in addition to serving as a fiduciary. Although Virginia law has abundant guidance on fiduciary compensation in general, the ethical restrictions of lawyers make these issues more complex.This article analyzes and applies the current law to a few hypotheticals based on actual cases involving compensation for attorneys serving as fiduciaries and/or representing fiduciaries. The article notes questions as yet unaddressed in Virginia and pro-vides practice tips as well.
Hypothetical #1. Dispute over Fiduciary Fees for Attorney/Executor.
The son, a beneficiary of his late father’s estate, questions appropriate attorney fees to the executor of his father’s estate. The father’s attorney drafted the Will, which named that attorney as executor. As the estate remained open for a number of years, the beneficiaries and attorney/executor disagreed on appropriate compensation; the former claimed a percent compensation would be appropriate, the latter claimed the Will granted him his hourly rate. We assume from the attorney/executor’s claim that the Will included a typical reference allowing corporate fiduciaries to be compensated according to their published fee schedules. We can infer from the beneficiary’s protest, that hourly rate compensation would exceed percent compensation. This fact pattern is typical of many “small” but time-intensive estates, where the executor’s fee as a per-cent of probate assets is far less than the executor’s fee at an hourly rate.
How should the attorney/executor be compensated?
Does his reliance on a clause in the Will support his argument?
Does/should a Will’s reference to a fiduciary’s “published fee schedule” include an attorney’s retainer agreement?
Hypothetical #2. Dual Fees with Beneficiaries’ Consent.
With the beneficiaries’ written consent, executors charge their full commission and retain attorneys who charge at their standard hourly rates to under-take to perform all services necessary to administer the estate, which include legal services as well as performance of the normal duties of the executors including filing of Inventories, Accountings and related tax work. The Will and related trusts are silent as to the compensation to be paid to executors or attorneys serving the estate. It should be noted that Virginia’s Guidelines for Fiduciary Compensation require an executor’s fee to be reduced by attorneys’ fees incurred in performing work normally considered the executor’s duties. Therefore, this arrangement violates those Guidelines, although it was consented to be the beneficiaries.
Is the attorneys’ conduct legal? Is it ethical?
Hypothetical #3. Legal Services for Estate Paid by Executors Individually Instead of by the Estate.
Attorney engages to represent executors, who, like Hypothetical #2, request that attorney provide all services for the estate, which includes legal work and normal executor duties. The attorney engages to represent the executors as individuals rather than as representatives of the estate. Legal fees for all services are billed to the executors as individuals, who pay the bills from their personal funds or their commissions or distributions from the estate. The executors take their full commissions, not reduced by any legal fees they are personally paying. The total of the legal fees alone is several times the allowable commission which would be calculated under the judicial council guidelines. In addition, the legal fees also appear significantly disproportionate to the work completed. However, since the bills were not paid directly from estate funds, they were not subject to a Commissioner’s review.
Is this arrangement legally permissible? Is it ethical? Should the legal bills be paid by the estate instead?
Review of Virginia Law:
Before we analyze the hypotheticals, a brief review of relevant law is in order. In Virginia, the right of a fiduciary to receive compensation is statutory. See Virginia Code §26-30, below. However, further guidance is found in Legal Ethics Opinions (“LEO’s”) and the Guidelines for Fiduciary Compensation (“Guidelines”). Following are LEO and Guidelines excerpts that pertain to the hypotheticals, as well as Virginia Code §26-30.
The commissioner…shall allow the fiduciary any reasonable expenses incurred by him as such; and also, except in cases in which it is otherwise provided, a reasonable compensation, in the form of a commission on receipts, or otherwise… Notwithstanding the foregoing…where the compensation of an institutional fiduciary is specified under the terms of the trust or will by reference to a standard published fee schedule, the commissioner shall not reduce the compensation below the amount specified, unless there is sufficient proof that i) the settler or testator was not competent when the trust instrument or will was executed or ii) such compensation is excessive in light of the compensation institutional fiduciaries generally receive in similar situations.
Virginia Code §26-30
Review of Guidelines for Fiduciary Compensation:
In 1993, The Guidelines for Fiduciary Compensation were created by the Standing Committee on Commissioners of Accounts. (“Guidelines”) The Judicial Council of Virginia approved the Guidelines in 2004. The Guidelines, following Va. Code §26-30, leave the reasonableness of fiduciary compensation within the discretion of the Commissioner of Accounts.
The Guidelines contain provisions on compensation under Paragraph A. DECEDENTS’ ESTATES. Certain of those provisions apply to estates and trusts and are reproduced below (excepting sub-paragraph 5, which applies only to estates):
1. Where the will clearly sets out compensation in a specific dollar amount or a specific percentage that the Executor is to receive, the will controls, and the Executor is entitled to the amount set out.
2. Where the will states that the Executor shall receive for services the compensation set out in a referenced published fee schedule in effect at the time such services are rendered, fees as set out in the fee schedule shall be presumed to be reasonable, as that term is used in §26-30. The burden of persuading the Commissioner that fiduciary compensation taken according to such a fee schedule is not reasonable would be on an objecting party. The ultimate responsibility of determining the reasonableness of the compensation rests with the Com-missioner.
3. Paragraph 2. above does not apply in the case where the will is silent as to the Executor’s compensation. In such a case, if the Executor (corporate or otherwise) uses a published fee schedule to deter-mine compensation, the other guidelines set out herein apply. There is, however, no presumption that such a published fee schedule is not reasonable.
4. Where all parties affected by the amount of the compensation are (i) competent to contract (ii) understand the issues involved (i.e., can give “informed con-sent”) and (iii) agree in writing as to the amount of the compensation to be paid, then the agreement should be honored by the Commissioner.
5. Unless determined as set out in para-graphs 1., 2. or 4. above, the fee to be allowed the Executor on all property in the decedent’s probate estate (calculated on the inventory value, including amended inventories) is as follows:
a. 5% of first $400,000.
4% of next $300,000.
3% of next $300,000.
2% over $1,000,000.
Over $10,000,000 – by agreement with the Commissioner (prior consultation is required.)
b. 5% of income receipts (not including capital gains).
7. If the Executor employs an attorney or accountant to perform duties that should be performed by the Executor, the fees of those persons should be deducted from the compensation due the Executor. Note that this does not apply to reasonable fees paid to attorneys or accountants for tax work or litigation or other legal services reasonably necessary for the orderly administration of the estate.
9. The Commissioner may also increase or decrease the otherwise allowable compensation in exceptional circumstances. Factors to be considered in determining the compensation include the nature of the assets, the character of the work, the difficulties encountered, the time and expertise required, the responsibilities assumed, the risks incurred and the results obtained. A consideration of these factors could result in a decrease or an increase of the compensation that would otherwise be determined using the standards set out elsewhere in these guidelines.
11. If, after examining these “Guide-lines,” the Executor has any questions about the fee to be taken in a specific estate he or she should be encouraged to consult with the Commissioner in advance of taking any fee.
Review of Relevant Legal Ethics Opinions:
As shown by the Legal Ethics Opinions excerpts below, an attorney acting as a fiduciary may hire himself or his firm to provide legal services. These LEO’s explain that, while a potential conflict exists, the remedy is full disclosure of the conflict and of the manner in which the attorney (and the firm) will be compensated as a fiduciary and as a legal representative of the fiduciary. The disclosure should be made prior to drafting the document naming the attorney as executor or trustee.
Thus, it is not per se improper for an executor or trustee (“fiduciary/partner”) to engage his own law firm to represent matters of estate administration. LE Op. 1387 (1990)
The Committee believes that…the lawyer’s fees [pertaining to the attorney’s service as executor/trustee] be adequately explained to the client; requiring a client’s consent, after full and adequate disclosure, to the lawyer’s financial interest when that interest may affect the exercise of the lawyer’s professional judgment on behalf of his client… LE Op. 1358 (1990)The role of an attorney who serves as fiduciary to a trust or estate and additionally engages his law firm as attorney for the same entity presents a personal conflict…Clearly, in order to obviate the conflict, full and adequate disclosure must be made to the testator/grantor/client in the course of the preparation of the instrument and the client must consent in order for the attorney to proceed. LE Op. 1358 (1990)
The committee is of the opinion that the attorney named as executor or trustee must disclose and obtain the consent of the testator/grantor prior to the execution of the trust/will when the attorney intends to or is considering retaining his law firm as attorney for the trust or estate. The committee is of the further opinion that the disclosure must include the general compensation to be paid to the law firm. LE Op. 1515 (1994)
Based on the above LEO’s, an estate planning attorney whose client desires to name him as trustee/executor, should prepare a disclosure letter identifying the potential conflict and requesting a waiver, discussing the method of compensation the attorney would receive if acting as executor, and discussing the possibility of the attorney hiring his firm for legal services on behalf of himself as a fiduciary, and the potential costs and/or method of billing. The client should sign this before executing his/her documents.
Analysis of Hypothetical #1: Fiduciary Fees for Attorneys Serving as Executors
One of the difficulties in this hypothetical lies in tracing the potential dual roles of the attorney. What is the nature of his disputed time? Was he acting as an executor or performing legal services? His time may include both, or he may not have distinguished between the two himself. This line can be blurred and is often difficult to distinguish. In fact, it is possible the attorney expected an hourly rate and thought distinguishing between his administrative and legal services was moot. Based on the disagreement with the beneficiary, the attorney may not have clearly communicated or documented the manner of his compensation. At, or prior to, the execution of the Will, this attorney should have clearly disclosed that he would be compensated at his hourly rate.
Assuming a Commissioner would find both an hourly rate and a percent compensation reasonable, let’s review whether the attorney should be entitled to his hourly wage. He bases his assertion on the Will, which assumedly contains a provision regarding compensation. The analysis below focuses on what executor fees the attorney/executor would be entitled to receive based on alternate possible Will provisions.
If the Will contained a provision specifically allowing that attorney to be compensated as executor at his hourly rate.
Paragraph A(1) of the Guidelines entitles an executor to compensation where a Will “clearly sets out in a specific dollar amount or a specific dollar percentage.” But since an hourly rate is not a specific dollar amount or a specific percentage, the attorney in this case should not be entitled to hourly rate compensation. Therefore, the Will would not control the executor’s compensation, and a reasonable compensation must be determined.
However, if the hourly rate reference were interpreted as a reference to a “published fee schedule,” perhaps the attorney/executor could be entitled to hourly rate compensation under the published fee schedule analysis discussed below.If the Will contained a provision referring to payment according to a published fee schedule, does this apply to an attorney?
If the Will contains a reference to a published fee schedule, then Paragraph A(2) of the Guidelines entitles an executor to payment based on that published fee schedule (which is presumed to be reasonable). But does Paragraph A(2)’s reference to published fee schedules apply only to corporate fiduciaries, or could it extend to attorneys as well? The Guidelines appear to contemplate the use of fee schedules by non corporate fiduciaries; see Paragraph A(2), which refers generically to a fiduciary, and Paragraph A(3), which provides, “…if the Executor (corporate or otherwise) uses a published fee schedule…” If a non corporate fiduciary can use a published fee schedule, perhaps this could apply to attorneys.
But to muddy the waters a bit, note the Code’s reference to published fee schedules may be narrower in scope than the Guidelines. §26-30 refers to the use of published fee schedules by an “institutional fiduciary.” This may exclude an attorney.
Perhaps a better question to ask is whether an attorney’s retainer agreement could be a “published fee schedule” under Paragraph A(2). This question has not been answered in Virginia, but the key issue should be whether a retainer agreement serves the same client-disclosing purpose as a published fee schedule. It should, provided the attorney follows the ethical disclosures required by LEO 1515 (which requires an attorney to effectively publish his “fee schedule” to the testator/grantor). If this is done, the client is no less informed than if he retained a corporate fiduciary with a published fee schedule. Arguably then, an attorney who follows LEO 1515 should be entitled to his hourly rates under Paragraph A(2).
LEO 1515 provides in part:
It is the committee’s opinion that full disclosure of the attorney/draftsman’s potential fees as executor or trustee or legal counsel to the estate must be made to the client…prior to the execution of the instrument. See Estate of Weinstock, 386 N.Y.S.2d 1…
The committee is of the further opinion that…disclosure be made in written form, signed by the testator/grantor, either in the will or trust agreement itself or in a separate document.
Furthermore, when the attorney/drafts-man or a member of his firm is being named executor or trustee, the committee also believes that the attorney has a duty to suggest that the client investigate potential fees of others who might otherwise pro-vide such services. Finally, the committee is of the opinion that an attorney/drafts-man who contemplates charging separate fees for investment, tax or other services, over and above the fees for executor/trustee, must also fully disclose those separate fees.
LE Op. 1515 (1994)
In summary, although unanswered in Virginia, Paragraph A(2) and its favorable presumption should be found applicable to attorneys who follow LEO 1515. The practice of charging hourly rates instead of an executor’s percent fee is relatively common, and diligent attorneys will follow LEO 1515 in disclosing the manner in which they will charge fees as executors. In doing so, their clients receive notice regarding fees equivalent to a published fee schedule. Therefore, it would be equitable to afford the compensation agreements of those attorneys the protection and presumption of reasonableness under Paragraph A(2), which ends with this caveat: “The ultimate responsibility of determining the reasonableness of the compensation rests with the Commissioner.”
The above quote raises another question: should a Commissioner judge the reasonableness of an attorney/fiduciary’s fees by comparison to the rates of a trust company or bank trust department? Attorney/fiduciaries at hourly rates may be more costly than a trust company or other corporate fiduciary. The Guidelines and Virginia Code §26-30 allow a fee schedule to be overturned if “excessive” or not reasonable, in the Commissioner’s discretion. Is it fair to compare the rates of an attorney/fiduciary to the rates of a corporate fiduciary?
This author believes the answer lies in the client’s informed consent, by virtue of the attorney/fiduciary’s adherence (or lack thereof) to LEO 1515. Since LEO 1515 requires an attorney to recommend the client “investigate the potential fees” of alternate fiduciaries, the client will have made an informed decision to hire the attorney at his rates. Therefore, if LEO 1515 is followed, the Commissioner should restrict his review of an attorney/fiduciary’s rates only to rates of other attorneys.
Analysis of Hypothetical #2: Dual Fees with Beneficiaries’ Consent
The right to contract comes to mind here. It could be argued the attorneys have merely contracted to be paid in full for their services, and the beneficiaries have generously agreed to allow full executor commissions without a reduction as required by Paragraph A(7) of the Guidelines. However, informed and written consent of competent beneficiaries is required for the Commissioner to allow the compensation agreement. In this case, the beneficiaries should have been specifically informed of the reduction in executor commissions required by Paragraph A(7).
This hypothetical presents a situation where a compensation agreement results in essentially a “double dip;” the executors receive full commissions for work done by hired attorneys. This results in higher executor commissions than provided for under the Guidelines, but it may be acceptable based on the Guidelines’ directive for Commissioners to honor compensation agreements that meet certain requirements.
Paragraph A(7) of the Guidelines, provides:
If the Executor employs an attorney or accountant to perform duties that should be performed by the Executor, the fees of those persons should be deducted from the compensation due the Executor. Note that this does not apply to reasonable fees paid to attorneys or accountants for tax work or litigation or other legal services reason-ably necessary for the orderly administration of the estate.
However, Paragraph A(4) requires a Commissioner to honor a compensation agreement, provided three requirements are met:
Where all parties affected by the amount of the compensation are (i) competent to contract (ii) understand the issues involved (i.e., can give “informed consent”) and (iii) agree in writing as to the amount of the compensation to be paid, then the agreement should be honored by the Commissioner.
In obtaining consent, ensure the interests of minor beneficiaries are represented. In Estate of Griffith, the court acknowledged that adult beneficiaries can consent to executor’s commissions that exceed what would be allowable under Virginia law. In this case, the consent was in the form of an Accounting signed by the adult beneficiaries, which disclosed a high executor’s commission. Those signatures were deemed consent. However, the court found that the minor beneficiaries of the estate did not consent, because their mother had not consented in her capacity as their guardian.
Regardless of how Carolyn or Marilyn may view the meaning of their signing the second accounting, it is my opinion that by doing so they agreed to an executor’s commission of $13,954.00 for Rowley for administering the estate. They are both adults and had the capacity to agree to the commission even if it were in excess of what Rowley would be entitled to under the law.
The situation is different, however, as to the children because they are minors and their mother did not approve the fee as their guardian. Further, she had no authority to do so absent court approval.
In Re: Estate of Griffith, 20 Cir. C13820 (1993)
In summary, the dual fee agreement in this hypothetical should be honored by the Commissioner if Paragraph A(4)’s requirements were met: namely, the beneficiaries were competent, they understood that the agreement resulted in a higher executor commission than allowed under law, and an agreement for the amount of fees was reduced to writing. Without the informed consent of the beneficiaries after the drafting of the instruments, changes in compensation are likely not permissible unless the Commissioner can be convinced that the total of executors fees and attorney compensation is reasonable. Finally, it is the attorneys’ responsibility to inform their executor clients regarding the proper beneficiary consent required.
Analysis of Hypothetical #3: Legal Services for Estate Paid by Executors Individually Instead of by the Estate.
Note, this hypothetical involves high attorneys’ fees charged for legal services to an estate and paid directly by executors. The Guidelines and LEO’s discussed in this article do not directly restrict the amount attorneys can charge for legal services in assisting an estate (although legal expenses paid by an estate are generally reviewed by the assigned Commissioner). Therefore, the issue at hand is primarily ethical.
In this hypothetical, the facts imply no prior agreement regarding fees existed between the attorneys and the Grantor/Trustee or Decedent. Significantly, we can infer the Commissioner and/or the beneficiaries will remain unaware of the fees of the attorney paid directly by the executors. The facts further imply that the legal fees incurred were not proportionate to the legal work performed.
While the beneficiaries and estate may not be directly harmed by the executors’ personal payment of high legal fees, an ethical question persists; the attorney has entered into an atypical contract that enables him to charge fees without any third party review. Granted, this is perhaps the case for many legal engagements, but is it proper in an area where Virginia law requires review? In a probate estate, Commissioners review expenses, including legal fees. Circumventing this review and then charging high fees appears unethical and could be viewed as a deliberate attempt to avoid the Commissioner’s review.
It is possible that the structure of this arrangement is contrary to the spirit of both the case law and the ethical guidance in Virginia regarding fiduciary compensation. By avoiding the Commissioner’s scrutiny, the parties have conducted indirectly what otherwise might not withstand a Commissioner’s review. At least thus far, no legal or ethical authority appears to deal directly with this fact pattern.
Does the attorney in this case have an ethical duty to inform the executors that his legal fees, if paid by the estate, would be reviewed by a Commissioner? This would at least ensure the executors had made an informed decision in engaging the attorney directly. Again, no guidance appears to deal directly with this case.
To sum up, attorneys serving as fiduciaries must be mindful of the ethical and legal restrictions regarding their engagement and their compensation. Many attorneys serving as fiduciaries will be providing both legal and administrative services, and they should preserve that distinction in their compensation agreements and their billing. Virginia law does appear to give slightly more deference to compensation agreements for fixed amounts, as opposed to published fee schedules or no agreement at all. The theme of the relevant ethical guidance is disclosure - of potential conflicts, of compensation amounts, advice to review alternate fiduciaries, etc. In all cases, discretion rests with the Commissioner as to reasonableness, unless, as in Hypothetical #3, fees are paid outside of the estate.
We close with a list of unanswered questions in this area and tips for best practices as well.
• Virginia Code §26-30 (see also Guidelines Paragraph A(2)) states a Commissioner “shall not reduce” an institutional fiduciary’s compensation, when that compensation is specified under the trust or will by reference to a published fee schedule, unless, inter alia, that fee schedule is excessive:
o Does an attorney’s retainer agreement, listing his fees, qualify as a published fee schedule? If so, should that attorney’s agreement receive the same favorable presumption of reasonableness under Paragraph A(2)?
o Attorneys serving as trustees or executors at their hourly rates could be more costly than a bank or trust department…would this make attorneys’ rates “excessive” and subject to review, or should attorneys’ rates be measured only against the rates of other attorneys? Should an attorney’s adherence to LEO 1515 be a deciding factor?
o Are Virginia’s general ethical guide-lines applicable to and sufficient to prevent an attorney from making a contract similar to Hypothetical #3, which indirectly circumvents the specific legal and ethical guidance in this area?
• Review your Will and Trust provisions for compensation of fiduciaries, particularly if you are being named as a fiduciary. A fixed fee or percent included in a Will may receive stronger consideration than reference to a fee schedule, or if no reference is made at all.
• Prepare an “LEO 1515” letter for your clients to sign before executing any documents you prepared naming you as fiduciary. This letter should include the potential conflict and the manner in which you will be compensated as a fiduciary, a general description of the duties of the fiduciary, the potential fees that alternate fiduciaries may charge (perhaps disclosing the Guidelines’ fee schedule) and if you plan to retain your firm in a legal capacity, the manner in which legal fees would be charged.
• When a fiduciary retains you for legal ser-vices, be sure to note that your legal fees expended for their administrative duties may reduce their commissions.
• Consider your billing when serving in a dual role – attempt to distinguish same.
• Do not name your law firm as trustee. Name an individual lawyer in the firm, and if needed, include your firm as being able to name a successor trustee. See Virginia Code 6.2-1001 for entities authorized to conduct trust business in Virginia.
• Consider the propriety and fundamental fairness of any fee arrangement for estate administration, irrespective of the specific guidance which may or may not apply to the arrangement.
• We are privileged to practice law. Let us diligently uphold our reputations as lawyers and the reputation of our profession as well.