Trustee-Beneficiary and Attorney-Client Relationships: 
General Overview and Hawai‘i Case Study

Professor Randall Roth*

	Trusts have traditionally been described as relationships between trustees and beneficiaries, not separate entities.  Unlike corporations, for example, trusts do not own assets.  So-called trust property is actually owned by trustees.
	As legal owners of trust property, trustees have the power (though not the right) to do just about anything they want to do with it.  The potential for abuse is obvious and is the reason why trust law imposes strict fiduciary duties on trustees, including a duty of undivided loyalty to the interests of the beneficiaries.  Trustees’ use of trust property to serve their own personal interests is strictly forbidden.
	The attorney-trustee relationship.  Trustees, acting in their fiduciary capacity, often hire lawyers and other professionals to assist in the administration of the trust estate.  It is both logical and appropriate for such lawyers to be paid with funds from the trust estate and that they be called “Trust Counsel,” meaning simply that they do legal work that is directly related to the administration of the trust and that is intended to serve the best interests of the trust beneficiaries.  The clients are the trustees, but the trustees’ duty of undivided loyalty prevents them from using such lawyers in any way that would put their personal interests ahead of those of the beneficiaries.  Trust Counsel, so defined, are said to represent trustees in the trustees’ “representative” or “fiduciary” capacity.
	It also is possible for trustees to retain counsel primarily to further the trustees’ personal interests (“Personal Counsel”).  This sometimes happens in reaction to, or anticipation of, an action against trustees by, or on behalf of, trust beneficiaries.  Such lawyers may or may not be paid out of trust funds initially.  The cost of a trustee’s Personal Counsel in the context of a dispute involving the trust ultimately should be borne by the losing party (i.e., a trustee who initially uses personal funds to pay such a lawyer is entitled to full reimbursement upon prevailing; a trustee who initially uses trust funds to pay such a lawyer must fully reimburse the trust estate upon failing to prevail).  A trustee’s Personal Counsel is said to represent trustees in their “personal,” “individual,” or “nonrepresentative” capacity.
	Personal Counsel have no special duties to trust beneficiaries--they owe loyalty only to the trustee-client.  Trust Counsel do owe duties to trust beneficiaries, although the nature of these duties and the terminology used to describe them varies greatly from jurisdiction to jurisdiction.  Attorney-client privilege generally applies to communications between attorneys and their clients, including when the clients are trustees or other fiduciaries.  But because the privilege frustrates the search for truth, its use “must be strictly limited to the purpose for which it exists.”  That purpose is to encourage candid communications.  Trustees seeking advice from their Personal Counsel need the assurance of confidentiality provided by the privilege.  In the case of trustees seeking legal advice from Trust Counsel, however, there is no need to encourage candid communications.  Trustees have a duty to be fully forthcoming when discussing trust administration with such lawyers, and also when responding to beneficiaries who want information reasonably needed to hold trustees accountable.  After all, at the core of the fiduciary relationship is the duty of trustees to put the interests of the beneficiaries ahead of their own.  Clearly, trustees “cannot subordinate the fiduciary obligations owed to the beneficiaries to their own private interests under the guise of attorney-client privilege.”
	Conflicts of Interest.  Trustees are required to avoid conflicts of interest.  When a conflict develops, trustees must act in the best interests of the beneficiaries.  If the conflict is great, trustees may be required to step aside temporarily or even permanently.  Should they not do so voluntarily, a court of competent jurisdiction can order them to step aside.  Any such decision should be based on the best interests of the beneficiaries, not the personal interests of the trustees.  The trustees’ mission as spelled out in the governing instrument is the context within which the best interests of the beneficiaries must be determined. 
	Attorney-Client Privilege in the Bishop Estate Controversy.  Following the publication of the “Broken Trust” essay, the five KSBE trustees individually retained separate Personal Counsel to represent their respective individual interests.  Together, the five trustees unanimously agreed to retain various Trust Counsel to assist them in their capacity as trustees in dealing with the Attorney General’s investigation, master’s inquiry, Internal Revenue Service (“IRS” or “Service”) audit, and related matters.  Whereas Trust Counsel conferred with all five trustees from time to time and were paid with trust funds, Personal Counsel conferred only with each one’s respective individual client.  Personal Counsel were paid by either their respective client or KSBE’s errors and omissions insurance carrier.  Two of the trustees (the minority trustees) instructed Trust Counsel to cooperate fully with the various investigations, but the other three (the majority trustees) directed Trust Counsel not to cooperate fully.  From that point forward, Trust Counsel followed instructions from the majority trustees.  In-house attorneys for KSBE (General Counsel) also took orders from the majority trustees during this period of time.
	In the context of an action by the minority trustees to remove one of the majority trustees, the minority trustees asked the trial court to disqualify Trust Counsel, arguing that these lawyers had clients (i.e., various trustees) on opposite sides of the controversy.  The minority trustees also asked that the majority trustees not be allowed to use attorney-client privilege to prevent Trust Counsel and General Counsel from testifying about matters relating to trust administration.
An expert witness hired by the majority trustees argued against the minority trustees’ attempt to disqualify Trust Counsel, and against the minority trustees’ efforts to elicit testimony from Trust Counsel and General Counsel.  In the course of doing so, this expert consistently stressed that Trust Counsel and General Counsel had but one client, an entity known as “the trust.”  Two trial courts disagreed.  Citing basic principles of trust law, both courts ruled that the trustees as fiduciaries were the clients.  Since trustees effectively were suing each other, a joint-client exception to the attorney-client privilege rule applied.
	Conflict of interest in Bishop Estate.  The minority trustees argued in a separate action that all five trustees had a conflict of interest in dealing with the IRS.  The IRS had been auditing KSBE for some years, and it generally was believed that KSBE’s tax-exempt status was in jeopardy, especially if the trustees continued in office.  Also, the five trustees faced exposure to intermediate sanctions imposed by the Service.  Such action by the IRS would result in the trustees not only having to pay a substantial penalty to the IRS, but also being forced to reimburse the trust estate for any “excess benefits,” such as trustee compensation that might be determined by the IRS to have been unreasonably high.
	After reviewing 2,500 pages of relevant materials and considering the recommendation of a three-person panel, the trial judge found that the five incumbent trustees had a conflict of interest that was “actual, apparent, adverse and material.”  He then appointed five special-purpose trustees to represent KSBE interests in the IRS audit.
	Privilege issue as viewed by majority trustees’ expert.  The majority trustees’ expert, Professor James McCall, wrote a law review article in which he cited Rule 1.13 of the Hawai‘i Rules of Professional Conduct for the proposition that attorneys retained by trustees to represent them in their fiduciary capacity really have but one client, the trust entity.  His position was that only the trust (and not individual trustees) can waive the privilege, and that such decisions are properly made by majority vote of the trustees.  The rule he cited basically says that attorneys hired by agents of an organization to represent interests of the organization have but one client, the organization.  But neither Rule 1.13 nor its companion comments mention trusts, much less suggest that they are “organizations.”  As big a departure from the common law as it would be to start treating trusts as organizations rather than relationships, one would expect the question to be addressed.  That it is not suggests that Professor McCall’s interpretation was not intended or even anticipated when the rule was adopted.
	Professor McCall then stated that Rule 503 of the Hawai‘i Rules of Evidence “explicitly adopts the entity theory.”  But this rule simply defines a client as “a person ... or ... organization or entity ... who is rendered professional legal services by a lawyer ....”  Nowhere in the rule or companion comments is it even suggested that a trust is a person, organization or entity.
	Professor McCall then quoted Hawai‘i Probate Rule 42(a): “An attorney employed by a fiduciary for [a] ... trust represents the fiduciary as client as defined in Rule 503(a) of the Hawaii Rules of Evidence and shall have all the rights, privileges, and obligations of the attorney-client relationship with the fiduciary[,]” and suggests that the word fiduciary in this context refers to a trust entity, rather than trustees. A close look at the comments to Rule 42, however, demonstrates that the drafting committee used the word fiduciary to describe a natural or juridical person responsible for the administration of a trust estate, not the trust estate itself.
	Professor McCall incorrectly wrote that commentators and modern appellate opinions “uniformly adopt” the entity theory.  The theory has other proponents, and at least one court has adopted it, but Professor McCall is wrong when he suggests it is the favored approach, and that his interpretation and application of the theory have been embraced by many others.  Professor McCall also is mistaken in thinking that a Hawai‘i Supreme Court opinion has adopted and applied the entity theory.
	Professor McCall also asserted that “HRP Rule 42(c) provides that the attorney for a trust ... has an independent duty to inform the probate court if the attorney ‘knows’ of the commission or possible commission of a crime that could injure the trust.”  That is how he characterized the rule. Here is the language of the rule itself:

An attorney for an estate, guardianship, or trust is an officer of the court and shall assist the court in securing the efficient and effective management of the estate.  The attorney ... shall have an obligation to bring to the attention of the court the nonfeasance of the fiduciary.

There is a world of difference between the “nonfeasance of the fiduciary,” as stated in the rule, and the “commission of a crime,” as Professor McCall described the rule.  And one can only wonder why he emphasized that the attorney must actually know about wrongdoing.  The rule itself does not use that word.  In fact, attorneys are required by Rule 42(c) “to monitor ... and to ensure that required actions [are taken].”  
	Professor McCall expressed concern that the trial court’s decision effectively eliminates the attorney-client privilege whenever trustees sue one another, and that this will prevent effective representation of trustees: “Unless rejected, the trial court ruling will force fiduciaries to avoid any type of confidential communications with [Trust Counsel].”  But this ignores that individual trustees always are free to retain Personal Counsel with their own funds (and sometimes with funds from the trust estate) to watch out for their personal interests.  Each of the five KSBE trustees did exactly that.
	Unsurprisingly, Personal Counsel were never called upon to testify about communications with their respective clients.  Presumably, each individual trustee was candid when conferring with his or her respective Personal Counsel.	
	Trust Counsel are supposed to be working for the ultimate benefit of beneficiaries, not the personal interests of trustees.  The attorney-client privilege has no place in a lawsuit by beneficiaries, or by a co-trustee on behalf of beneficiaries, where the attorney in question was retained as Trust Counsel.
	Conflict issues per majority trustees’ expert.  Professor McCall claimed that a judge found conflicts of interest requiring the appointment of special-purpose trustees despite “no evidence relevant” to the conflict claim.
	The judge’s order in that matter indicates otherwise.  Furthermore, Professor McCall neglected to mention the implications of a Hawai‘i statute and rule that enables the court to appoint special-purpose trustees once a conflict has been found.  Hawai‘i Revised Statutes section 554A-5(b) states, “If the duty of the trustee and the trustee’s individual interest ... conflict in the exercise of a trust power, the power may be exercised only by court authorization ....”  This means that the court must get involved once a conflict of interest has been established.  A panel composed of a master, General Counsel, and KSBE’s long-time tax counsel, after reviewing 2,500 pages of relevant materials and conferring with senior IRS personnel, unanimously found an “actual, apparent, adverse and material” conflict, and recommended the appointment of special-purpose trustees to represent KSBE interests in the IRS audit.  Hawai‘i Probate Rule 56(e) provides for appointment of special administrators, such as the special-purpose trustees, where a conflict of interest arises or a fiduciary cannot or should not act for any other reason.
	There also is case-law support in Hawai‘i for appointing additional trustees.  In the case of In re Estate of Ikuta, the Hawai‘i Supreme Court appointed an additional trustee over the objection of the sole incumbent trustee.  The Supreme Court noted that there was a conflict between the sole trustee and the beneficiaries, and held:  “[W]e find that the lower court was empowered to ‘appoint additional trustees, and not merely fill vacancies by appointment, when the circumstances are such that the appointment of such additional trustees would be conducive to the better administration of the trust.’”  It should be remembered that the special-purpose trustees were appointed to represent KSBE interests in the IRS audit at a time when the Attorney General, acting as parens patriae, was calling for the permanent removal of incumbent trustees who appeared to have lost the trust of many key parties, including the IRS.
	Professor McCall overreacted to a fact-driven decision.  According to his analysis, this particular conflict of interest ruling means that any trustee now can be forced to the sidelines by any third party who “asserts that the trustee, acting on behalf of the trust, committed a mistake or wrongful act for which the trust or the trustee could be held liable.”  As if this possibility is not shocking enough, he then extends it to every claim against a trust, whether or not a trustee is personally implicated: “[A]ny assertion of a claim against a trust by a third party would result in the limited removal of the trustees, as long as it is possible to imagine a theory on which the trustees might have ultimate liability to the trust for the claim.”  According to Professor McCall, a trustee would be prevented from defending a lawsuit where “a trust employee allegedly operates an automobile in a negligent manner while on trust business, thereby causing an accident that injures a third party.”
	This radical departure from current law, according to Professor McCall, is the logical consequence of the court in this KSBE case finding a conflict of interest and appointing special-purpose trustees.  But, the court did not act simply because a claim of wrongdoing had been asserted.  The court’s decision reflected its evaluation of specific claims, including the potential impact on the interests of the trust beneficiaries.  It should be remembered that the IRS was at that time contemplating the revocation of KSBE’s tax-exempt status, a move that would have reduced the trust estate by $750 million, or more.  It also is relevant that a master had already found dozens of serious breach of trust,and that in Hawai‘i, a master’s report carries an inordinate amount of weight, perhaps even as much as a jury verdict.
	Professor McCall wrote that the interests of the trustees and the trust beneficiaries were “actually identical, rather than conflicting.”  Perhaps he did not consider the implications of the federal intermediate sanctions law.  That 1996 legislation was not mentioned in his declaration that was submitted to the court by the majority trustees, nor was it cited in his article.  For example, by arguing that they had not paid themselves unreasonably high compensation, the trustees would be arguing against reimbursement to KSBE of an “excess benefit.”
	How to frame the conflict issue.  Trustees should not automatically be removed simply because someone has accused them of wrongdoing.  When, however, the stakes are high and trustees have a serious conflict of interest, a court of competent jurisdiction should do whatever it determines to be in the best interests of the trust and trust beneficiaries.  In short, a judgment call must be made.
	Trustees with a conflict of interest are not legally entitled to continue to act on behalf of the trust without regard to the nature of the claim or the seriousness of the conflict.  Common sense alone suggests that some conflicts are simply too great.  For example, if a trust is owed money by a trustee who recently put his assets in his spouse’s name, should that trustee be the one to decide on behalf of the trust whether to accuse himself of a fraudulent transfer?  This extreme example of a conflict simply points out that a line has to be drawn somewhere, by someone.  The judge is the best person in such cases to draw the line, and the judge in the KSBE situation made what appears to be a reasonable decision, especially in light of the three-person panel’s findings and recommendation.  Even if Hawai‘i did not have a statute explicitly calling for court involvement once a conflict of interest has been determined, and a rule authorizing the appointment of special purpose trustees, the court would have been justified in responding as it did to the minority trustees’ petition.  In fact, this particular court had the power and responsibility to remove the trustees permanently on the basis of the master’s report or conflict among the trustees, and to take such action sua sponte.
	How to frame the privilege decision.  Trust Counsel in the KSBE controversy were determined by two separate trial court judges to have multiple clients (the five trustees), rather than a single client (the trust entity).  As a result, the joint-client exception to the applicable attorney-client privilege rule prevented three of the joint clients from using the privilege to withhold attorney-client communications from the other two joint clients of those attorneys.  If the judges instead had adopted Professor McCall’s entity approach, the three-trustee majority would have been able to assert the privilege.  In Professor McCall’s words, this is because the trust entity “must be directed by the majority of the Board [or trustees].”  Under this thinking the trust entity remains constant as individual trustees come and go and the makeup of the controlling majority changes.  This suggests that no trustee, not even one who currently is part of the controlling majority of a multi-trusteed trust, can safely rely on the privilege being available when it is “needed.”
	If a trustee wants to know that the privilege will be his or hers individually to assert, that trustee must retain Personal Counsel, not Trust Counsel.  If a trustee uses personal funds and clearly documents that the representation is to be of the trustee in the trustee’s individual capacity, and if the attorney is not involved in the administration of the trust, then the privilege clearly will be available.  If one or more of these factors is missing, there will be some degree of doubt.  In such cases, trustees should give serious thought to petitioning the court for instructions.
	What this suggests is that any debate about the trust as a relationship or an entity misses the main point.  When a trustee hires a lawyer, the important question is “what role is this lawyer playing?”  If the lawyer is to be paid out of trust funds, that suggests (but does not finally determine) that the lawyer will be involved in the administration of the trust and therefore is representing the trustee in the trustee’s representative capacity.  If the lawyer is paid out of the trustee’s personal funds, that suggests (but does not finally determine) that the lawyer will be watching out for the personal interests of the trustee, not involved in the administration of the trust, and is therefore representing the trustee in the trustee’s individual capacity.  Lawyers should not accept an assignment from a trustee without first making sure that all key parties understand the nature of the relationship and the implications.  In some cases, this will include notification to the beneficiaries.  Such relationships do not need to be of the “one-size-fits-all” variety.  So, for example, if the lawyer and the trustees want to create a relationship more or less patterned after a corporate or entity model, that clearly can be done.
	The traditional treatment of a trust as a relationship rather than an entity can lead to some hair-pulling situations in the case of a multi-trusteed, wheeling and dealing trust like KSBE.  For example, any one trustee effectively can disqualify or waive the attorney-client privilege with respect to Trust Counsel, even when the majority disagrees.  That can be chaotic.  But rather than contend that the law of corporations applies to trusts, or even to argue that it should apply (i.e., that the entity approach should be embraced), lawyers and commentators should recognize that traditional trust law and typical codes of ethics make possible the crafting of customized relationships that fit perfectly the parties’ needs and expectations.  This fact and its implications is stated beautifully by Professor John Price in the Reporter’s Note to the ACTEC Commentaries:

	Anticipating and Avoiding Conflicts.  This edition ... continues to emphasize the advantages to clients and lawyers of anticipating and attempting to avoid potential problems ....  Estate planners not infrequently encounter difficult problems of professional responsibility, particularly ones involving confidentiality and conflicts of interest.  Serious problems can often be reduced or eliminated by advance discussion and planning.  In particular, in many instances uncertainties regarding the lawyer’s duty of confidentiality can be eliminated with sufficient advance planning and consent.  Disclosure and agreement may also allow the same lawyer to represent the interests of multiple parties who have somewhat conflicting interests, but not clients whose interests are seriously adverse, such as adverse parties in litigation.

Conclusion.  Readers might consider the roles played by many lawyers and jurists in the KSBE controversy.  For example, the now-former KSBE trustees were selected by state Supreme Court justices, seemingly on the basis of politics rather than merit.  The selection of justices themselves seems to have been inextricably intertwined with the selection of trustees, and justices who picked trustees regularly decided cases in which those same trustees were parties.  That it took so many years even to begin to hold wayward trustees accountable suggests something less-than-complimentary about Hawai‘i’s probate judges and attorneys general, especially when one realizes that many of the most egregious breaches of trust had been public knowledge for years.  Arguably, there are lessons to be learned.  Unfortunately, relatively few of the many important legal and factual issues were resolved in a public forum, making it difficult to articulate lessons with authority.  A global settlement swept the controversy away.  For reasons never made clear, the details of that settlement are not available to the public.