The Extent of the Trustee’s Attorney-Client Privilege
When the trustee seeks and obtains the advice of
counsel, the trustee cannot automatically assume that it may maintain the
confidentiality of those communications.
The following information was presented by John
Fitzpatrick as part of an October 7, 2014, State Bar of Arizona CLE seminar,
Probate Issues Confronting Trustees, Beneficiaries and New Developments with
the Attorney-Client Privilege. This material was also presented to Valley
Estate Planners on September 18, 2014.
In handling property for the
benefit of another person, a trustee faces competing interests, including:
the trustee’s right to consider
and act in self-defense vis-à-vis a beneficiary;
the beneficiary’s right to
trustee loyalty and to information necessary to protect their interests; and
successor trustee’s rights to information needed to protect the trust and to
address the beneficiaries’ informational rights as expressed above.
When the trustee seeks and
obtains the advice of counsel, the trustee cannot automatically assume that it
may maintain the confidentiality of those communications.
The Hammerman Case
In a recent case, In re The Kipnis Section 3.4 Trust, 235 Ariz. 153, 329 P.3d 1055 (2014), a.k.a.
v. Northern Trust, the Arizona Court of Appeals (the “Court”) addressed the
issue of the trustee’s attorney-client privilege.
In Hammerman, the beneficiary
and successor trustee sought to compel the predecessor trustee to release
information concerning the trust and its administration, and in particular, to
disclose all e-mails exchanged between the trustee and its counsel. There were
more than 1,100 of such e-mails. The trustee produced nearly all of the e-mails
but sought to withhold approximately 4% of them based upon the attorney-client
privilege, asserting those particular communications were focused on the
trustee’s self-defense in the midst of controversy between it and the
beneficiary. Recognizing that the trust paid for the attorney’s time and
advice, the Probate Court granted the beneficiary and successor trustee’s motion
to compel, ordering production of all e-mails between the predecessor trustee
and its counsel, essentially eviscerating the attorney-client privilege. The
Probate Court stayed its ruling to allow for the appeal. The Court reversed the
Probate Court’s ruling and remanded the matter back to the Probate Court to
further address the issue.
Statutory and Common Law Basis
of the Privilege
The attorney-client privilege is
codified at A.R.S. § 12-2234. The Court quoted part of the statute but omitted
language seemingly making it apply only to civil actions. The omission was
almost certainly a function of the fact that the privilege has also long enjoyed
recognition in common law. In 1964, the Arizona Supreme Court acknowledged that
most courts take the view that the attorney-client privilege exists in the
absence of any statute, and that in adopting A.R.S. § 12-2234, the Arizona
legislature merely “affirmed the privilege…” Buell v. Superior Court, 96 Ariz.
62, 68, 391 P.2d 919, 923 (1964).
Statutory Basis of the Trustee’s
Subject to a significant
exception discussed below,
A.R.S. § 14-10813(A) imposes on a trustee the duty to
keep the beneficiaries reasonably informed about the administration of the trust
and of the material facts necessary for them to protect their interests.
The Common Law Basis for the
Trustee’s Disclosure Duty
Although the Court in Hammerman
focused primarily on the statutory basis, it also referenced the trustee’s
common law duty to disclose information to beneficiaries, citing, in particular,
Section 82 of the Restatement (Third) of Trusts (2007), cmt. f.
extent of the trustee’s attorney-client privilege, relative to the rights of the
beneficiaries, the Court held:
a component of a trustee’s duty
under A.R.S. § 14-10813(A) is a duty to disclose ‘legal consultations and advice
obtained in the trustee’s fiduciary capacity concerning decisions or actions to
be taken in the course of administering the trust.’
329 P.3d at 1062.
Under the facts of the Hammerman
case, the Court applied the same principles and standards to the rights of
successor trustees to review the predecessor trustee’s otherwise privileged
communications. That is, even though there may be other bases for recognizing
greater informational rights to a trustee’s successor, the Court held that the
successor trustee’s rights were at least as broad as the rights of the
beneficiary. Until the issue is further addressed, the exceptions to the
privilege are co-extensive.
As noted above, the Court
articulated its holding based upon the trustee’s duty to disclose under A.R.S.
§ 14-10813(A). The Court did not address (perhaps because the parties did not
raise it as an issue) the rather significant exceptions to that statutory duty
of disclosure. The first sentence of A.R.S. § 14-10813(A), which imposes upon
the trustee a duty to affirmatively disclose important information to the
beneficiaries, starts with the words, “Unless the trust instrument provides
otherwise…” The second and final sentence of A.R.S. § 14-10813(A), which imposes
on a trustee the duty to respond to a beneficiary’s requests for information,
begins with the words, “Unless the trustee determines that it is unreasonable
under the circumstances to do so….” Thus, A.R.S. § 14-10813(A) is plainly
The holding’s reliance on the dictates of A.R.S.
§ 14-10813(A) might reasonably lead one to conclude that the extent of the
trustee’s attorney-client privilege is a function of trust drafting and trustee
discretion. While that conclusion is the rational extension of the words used
by the Court and the Legislature, I suggest one not rely exclusively on that
rationale. After all, as the Court noted, there is common law recognition of a
beneficiary’s informational rights, and the common law of trusts continues to
supplant the Arizona Trust Code.
A.R.S. § 14-10106(A).
Also, one must bear in mind the dictates of
§ 14-10105(B)(8) which expressly prohibits the effective drafting around the
“duty to respond to the request of a qualified beneficiary of an irrevocable
trust for trustee's reports and other information reasonably related to the
administration of a trust.”
Although draft-around language
might be successfully employed, the rest of this analysis will assume that no
draft-around has been invoked and the trustee has limited discretion to assert
its determination that “it is unreasonable under the circumstances” to provide
the beneficiary with communications between the trustee and the trustee’s
The Court expressly adopted that
which it called “the fiduciary exception” to the privilege, leaving one to
wonder why the Court did not call it the “trustee exception.” The prospect
exists that the Hammerman holding will someday be extended to fiduciaries other
than trustees, such as personal representatives, guardians, and conservators,
and to other persons who assume fiduciary duties, including agents, partners and
corporate officers and directors.
Application of the Rule
The exception to the privilege
applies only when the trustee is acting in its fiduciary capacity, thus drawing
a distinction between when a trustee is acting in its personal capacity.
Interestingly, the Court also
mentioned several times that the exception does not apply when the trustee is
acting in its “corporate capacity.” The trustee in Hammerman happened to be a
corporate trustee, and perhaps it framed its argument based upon the rather
obvious distinction between its interests and the beneficiary’s interests, but
it seems to be a poor choice of words by the Court given that a trustee’s
corporate status is technically irrelevant to the analysis.
Fiduciary Capacity Distinguished
The Court expressly rejected the
notion, and the Probate Court’s rationale, that the exception issue turned
exclusively on who paid for the legal advice. Other courts have used that as
the criterion and held that if personal funds are used, the trustee’s
attorney-client privilege remains intact, and vice versa. Instead, the Court
indicated that it is the purpose and content of the communication that matters
The Court explained, “a
trustee’s attorney-client privilege vis-à-vis a beneficiary extends to all legal
advice sought in the trustee’s personal capacity for purposes of
self-protection.” Thus, if the legal communication relates to how to handle,
for instance, a trust tax issue, or the negotiations relating to the sale of an
asset things that are purely administrative, then the exception applies and
those legal communications are subject to disclosure. If the legal
communication relates to protecting the trustee from a claim or is otherwise
related to the trustee’s personal interests, the communication remains
In handling a particular trust
situation, a trustee often simultaneously considers: (a) the interest of the
trust and its beneficiaries, and (b) its own personal risks and considerations.
If the trustees seeks and/or receives legal advice with both concerns in mind,
where is that line drawn, and who decides?
Assuming a beneficiary’s request
for all communications has been made, as a first step, the trustee will have to
divulge non-privileged communications and assert the privilege as to
communications it intends to withhold. Naturally, if otherwise privileged
communications are revealed, there is nothing over which to argue. If the
beneficiary takes issue with the trustee’s assertion of the privilege and the
parties cannot satisfactorily resolve the issue, the beneficiary must invoke
judicial assistance or capitulate (at least for the time being). If the
beneficiary submits the controversy to the court, the trustee will again have to
assert the privilege or be deemed to have waived it. The court will have to
decide if the privilege actually applies to each communication. The Court
remanded the Hammerman case to the Probate Court for an in-camera review of all
communications for which the privilege was asserted. Our over-taxed judiciary
will have to take on this new workload.
Choose well when asserting the
attorney-client privilege. In a trust litigation or arbitration matter, the
court/arbitrator has fee shifting discretion.
A.R.S. § 14-11004(B). If the
controversy arises in the context of a discovery dispute, bear in mind that Rule
37, Ariz. Rules Civ. Proc., contains a presumptive sanction.
Some Questions Regarding the
Q. What about the
privilege during the life of the settlor?
A. The life of the
settlor is irrelevant except to the extent it affects the revocability of the
A.R.S. § 14-10603(A) conditions the rights of the beneficiaries to the
control of the settlor while the trust is revocable.
Q. What if only one
settlor has passed?
A. Then, to the extent a
trust has become irrevocable as a result of the death, the surviving settlor
would have to reveal otherwise privileged communications at least as to the
on-going administration of the irrevocable portion of the trust.
Q. After the trust
becomes irrevocable, may the attorney be examined as to administration advice
given while the trust was revocable?
A. It is not clear
whether the beneficiary’s right to access those communications, once sprung,
relates back whether it is retroactive. There is no case law in Arizona that
tells us whether A.R.S. § 14-10603(A) bars the beneficiary permanently from
seeing that information, or if that statute simply postpones during the time the
trust is revocable the beneficiary’s right to review the information. There are
competing interests at play. On the one hand, the settlor/trustee could have
done whatever he or she wanted, and the advice given to such person was nobody
else’s business. On the other hand, communications from the time period when
the trust was revocable might reveal a claim that the beneficiary might want to
see pressed, possibly even against the attorney or the fiduciary.
Q. Why can the trustee
use trust funds to reimburse itself for the legal expenses of defending itself?
A. Because many trusts
expressly grant this right, and, in any event, the law allows the trustee to do
so (A.R.S. § § 14-11004(A) and
14-10816), but legal expenses are subject to court
review, and if already paid for with trust funds, the attorney faces possible
Q. Might the attorney
face a conflict of interest if the attorney is representing the trustee in its
fiduciary capacity and then also begins to attend to the trustee’s individual
A. Yes. The Court even
noted this potential situation in the footnote highlighted in the case. The
better practice is to separate the roles if things start to get dicey.
Q. Can the in camera
review process be exploited by a Machiavellian trustee or attorney intent on
“poisoning the well?” It is, after all, an opportunity for de facto ex parte
communications. If the privilege is upheld as to such a communication, only the
judicial officer will see it.
A. That is certainly
possible, but that doesn’t make it ethical or professional, however fun it might
Q. How shall we act in
A. Carefully and
conscientiously. There is no bright line for when a communication relates to
the trustee’s purely personal interests. Consider having administration counsel
and controversy counsel, and insist that communications between them not
disclose sensitive information. Make certain your counsel/client knows the new
rule early in the representation, and discuss the privilege with client/counsel
anytime the question is in doubt. When writing, try to segregate the two types
of communications, refraining from covering both topics in a single
communication. Designate conspicuously in a written communication that it is
intended to be privileged. Be mindful that it is a myth that digital
communications are less significant than letters. When drafting, consider
draft-around language, possibly along the lines set forth below, to help
preserve the privilege. Keep in mind that disclosure might reveal not only
substantively sensitive information, but embarrassing information too (and
possibly even things that embarrass the attorney). Don’t write anything you
wouldn’t want the judicial officer, your opponent, the beneficiary or your
mother to see. Inasmuch as spoken conversations can sometimes be less well
preserved, talk on the phone, preferably on a land line.
Proposed Draft-Around Language
For those who would like to see
maximum confidentiality given to the attorney-trustee communications, consider
including some synthesis of the following language, perhaps in the “trustee’s
powers” section of the trust document:
In connection with the
administration of the Trust, the Trustee may engage counsel and accountants at
Trust expense to assist the Trustee with administration, tax and related
matters, as well as to defend the Trust, its assets and the governing documents
which constitute the Trustor’s estate plan, and to defend the Trustee, the
Trustee’s administration, conduct and reporting. Communications among the
Trustee, its counsel and/or accountants, even if related to purely
administrative matters, shall be privileged and disclosure may not be compelled
by a beneficiary or successor trustee. In addition, the Trustee shall enjoy the
maximum discretion allowed by law to determine the reasonableness of any request
for such disclosure. The Trustee’s election to reveal some otherwise privileged
communication shall not waive the Trustee’s privilege to decline disclosure of
other privileged communications.
In adopting a derivative of the
above language, the drafter should compare it to other provisions of the
existing trust document to assure substantive consistency and similarity of
2014. John R. Fitzpatrick