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The attorney-client privilege in California belongs to the office of trustee, not to the incumbent in that office, thus generally allowing successor trustees to obtain confidential communications that their predecessors had with counsel.  We blogged last year about an appellate opinion that reinforced this concept.

Last month, in Morgan v. Superior Court (2018) 23 Cal.App.5th 1026, the Court of Appeal found that a clause in a trust instrument expressly allowing a trustee to withhold attorney-client communications violates public policy and is unenforceable.  California estate planning attorneys take note: there is no way to draft around the rule that the attorney-client privilege stays with the office of trustee.

What Happened with the Morgan Trust?

Beverly Morgan restated her trust shortly before she died in 2014.  She named her son Thomas Morgan to serve as successor trustee.  Upon her death, litigation erupted in Orange County Superior Court between Thomas (now trustee) and her sister Nancy Morgan Shurtleff.

After a flurry of initial petitions, Nancy filed a motion to suspend Thomas as trustee for allegedly misusing his powers to further his own litigation objectives to the detriment of the other trust beneficiaries.  The trial judge denied the motion to suspend, but precluded Thomas from using trust funds to pay for his personal defense of the claims against him, prohibited Thomas from impairing the trust’s assets, and required him to account for his use of trust assets to pay litigation expenses.

The court then found Thomas’ accounting to be inadequate, suspended him as trustee, and appointed Bruce and Lee Ann Hitchman, private professional fiduciaries, as interim co-trustees.  Thomas was required to turn over records to the Hitchmans, including attorney-client communications and billing invoices.

Thomas and his counsel refused to turn over the invoices, relying on an unusual provision in the trust instrument that provided in part: “The time, place, subject matter, and content of any such consultation with legal counsel, all communication (written or oral) between the Trustee and legal counsel, and all work product of legal counsel shall be privileged and confidential and shall be absolutely protected and free from any duty or right of disclosure to any successor Trustee or any beneficiary and any duty to account.”

The court overruled Thomas’ objections and required him to produce his fee agreement and unredacted billing invoices.  When Thomas and his counsel indicated they would disobey the order, the judge threatened to hold them in contempt.

Thomas filed a writ petition with the Court of Appeal on the ground that the order would require him to turn over documents protected by the attorney-client privilege.

Appellate Court Finds that Need to Protect Beneficiaries Outweighs Confidentiality Clause

For the most part, people who create trusts (known variously as settlors, trustors and grantors) are free to craft provisions that control how their trusts will operate, both as to distributive provisions and administrative aspects.  California probate courts, when overseeing trusts, follow the intent of the settlor as expressed in the written trust instrument.

Yet the instrument is not always controlling.  For example, California Probate Code section 16461 provides that an instrument cannot relieve a trustee of liability for a breach of trust committed intentionally, with gross negligence, in bad faith, or with reckless indifference to the interest of the beneficiary.  In other words, if Mom wants to reduce Son’s exposure to breach of trust claims that may be brought (rightly or wrongly) by his siblings, she can absolve him of liability for ordinary negligence, but not gross negligence or worse.  To protect the legitimate interests of beneficiaries, public policy does not allow trustees to act however they please.

With respect to the Morgan Trust, Beverly (through the lawyer who drafted her trust instrument) apparently shielded Thomas from liability for ordinary negligence claims, as permitted by section 16461.  The trust instrument went on to encourage Thomas as successor trustee to consult with counsel on “any matters” related to trust administration, to permit Thomas to pay legal fees from the trust estate, and to shield as “absolutely protected” all communications between Thomas and counsel.  The confidentiality clause is quoted above.

Thomas reasonably argued that he could rely on the confidentiality clause to avoid turning over his counsel’s billing invoices to the Hitchmans as interim co-trustees.  The appellate court, however, found the clause to violate “clear public policy” because “allowing a former trustee to withhold from a successor trustee communications with the trust’s former legal counsel would permit a trustee to intentionally (or with gross negligence or reckless indifference) violate duties with no check on his or her conduct.”

While the court’s reasoning is not entirely clear, the analysis seems to be that since (1) the attorney-client privilege generally belongs to the office of trustee, and (2) trustees cannot be absolved of liability for bad behavior, it is fair and necessary to allow successor trustees to access the attorney-client communications of their predecessors so that the successors can properly administer the trust, which includes reviewing (and if necessary taking action to correct) the expenditures and other acts of their predecessors.

Why Does It Matter?

Parents frequently (perhaps too often) name one or more of their children to act as successor trustee, setting the stage for conflict between the trustee/beneficiary and the nontrustee/beneficiaries.  Estate planning attorneys who anticipate such conflicts may draft trust instruments with the objective of giving successor trustees wide latitude within which to operate.

The Morgan case, however, removes pixie dust from the estate planner’s pouch.  A planner cannot shield a trustee’s communications with counsel from scrutiny by successor trustees merely by adding a special sentence to that effect to the trust instrument.  Instead, trustees who want to keep their attorney-client communications under wraps should, as indicated in prior case law, hire separate counsel when a sensitive issues comes up and use personal funds to pay such counsel.