Magnifying GlassOne challenge that California trustees face is the prospect that confidential attorney-client communications will pass to successor trustees if they resign or are removed from office.  The attorney-client privilege belongs to the client, but the client is the office of the trustee, not the incumbent who holds that office.  Hence, the successor trustee generally gets to see the privileged communications of the predecessor, as the California Supreme Court explained in Moeller v. Superior Court (1997) 16 Cal.4th 1124.

A new opinion from the Court of Appeal, Fiduciary Trust International of California v. Klein (2017) 9 Cal.App.5th 1184, further shows the insecure nature of the attorney-client privilege in the context of California trust administration and may lead successor trustees to be more aggressive in seeking privileged communications of former trustees.

What was the case about?

Since Herbalife founder Mark Hughes died in 2000 at the age of 44, his family trust has been mired in litigation.  In Fiduciary Trust International, the appellate court dealt with privilege issues following the removal of three co-trustees.  The probate court in Los Angeles had permitted the outgoing trustees to withhold 45 documents from the successor trustee based on the attorney-client privilege.  The appellate court reversed that ruling, sending the privilege issue back to the probate court for closer scrutiny.

The withheld documents pertained to the beneficiary’s petitions for trustee surcharge and/or removal.  The outgoing trustees argued they were entitled to withhold the documents because they were “relevant to the defense of actual or anticipated charges raised by the beneficiary against them rather than to trust administration matters.”

The successor trustees, on the other hand, argued that their predecessors had to turn over all communications in their counsel’s files unless they can demonstrate that they retained counsel “in a personal capacity and took affirmative steps to distinguish the purported personal advice from advice obtained in a fiduciary capacity.”

Siding with the successor trustees, the appellate court framed the key issue as whether the “character of the relationship” between trustee and counsel is personal or fiduciary – the dominant purpose of the relationship must be personal for the privilege to remain with the outgoing trustee.  Also, the trustee must take affirmative and contemporaneous steps to avoid the disclosure of confidences to a successor.

Like the Supreme Court in Moeller, the appellate court in Fiduciary Trust International declined to provide a particular set of instructions to follow to protect the privilege.  Yet, the court observed that the trustee must “undertake some process to establish that a trust communication was intended to be confidential at the time the communication was elicited or obtained from counsel, not, as here, many months or years later when a communication is actually withheld on privilege grounds.”

What can a California trustee do to retain the privilege even after a successor is appointed?

The opinion suggests the following approach for California trustees who are concerned about their confidences falling into potentially hostile hands: hire personal counsel using non-trust money and carefully segregate the information provided to and advice given by that personal counsel from the trust administration attorney who is paid with trust funds.  While the trustee and his/her personal counsel might be tempted to loop in the trust administration attorney, doing so may compromise the integrity of the privilege in the event the trustee leaves office.

California courts have not ruled out the possibility that an attorney may be able to advise a trustee in personal and fiduciary capacities, with the trustee retaining the privilege when receiving advice in the former capacity.   If the attorney maintains separate files and bills for the matters separately, the privilege may be upheld for the “personal” work.

On the other hand, the successor trustee who seeks disclosure may point to Fiduciary Trust International for the proposition that a trustee who does not engage separate counsel will not have distinguished his or her own interests from those of the beneficiaries as “scrupulously and painstakingly” as California law requires.

Probate courts will shine the spotlight on privilege assertions by former trustees – looking for proof that “at the time the legal advice was sought, the purpose of obtaining the advice was protection against personal liability.”

Indeed, as a practical matter, the Moeller case and its progeny (now including Fiduciary Trust International) make it quite difficult for California trustees to shield attorney-client communications from their successors especially in garden variety trust administrations where the trustee may not have the resources to have separate counsel for “personal” matters, i.e., counsel to assess potential exposure to the beneficiaries for aspects of trust administration.

What’s the takeaway?

California trustees and their lawyers should assume that their confidential communications likely will pass to any predecessor trustee and govern themselves accordingly.  If that is a major concern, the nominated trustee might either decline to serve or be proactive in engaging separate personal counsel at an early juncture of trust administration.  As the Fiduciary Trust International court reminds us (quoting from Moeller), “the office of the trustee is thus by nature an onerous one, and the proper discharge of its duties requires great circumspection.”