I. Standard of Care for Fiduciaries:
A. Prudent Person Standard: The standard of care to which a fiduciary is held in Pennsylvania is that of “common skill, prudence and caution as a prudent man, under similar circumstances, would exercise in the management of his own estate.” In re Estate of Denlinger, 449 Pa. 393, 396, 297 A.2d 478, 480 (1972); In re Musser’s Estate, 341 Pa. 1, 9-10, 17 A2d 411, 415 (1941); In re Estate of Lohm, 440 Pa 268, 269 A.2d 451 (1970); In re Estate of Lerch, 399 Pa. 59, 159 A.2d 506 (1960).
B. Specialized Skill or Expertise:
i. When a fiduciary has greater skill than that of a man of ordinary prudence the fiduciary is required to exercise that greater skill as a fiduciary. In re Estate of Killey, 457 Pa. 474, 326 A.2d 372 (1974); In re Mendenhall, 484 Pa. 77, 398 A.2d 951 (1979); Estate of Pew, 440 Pa. Super. 195, 236, 655 A.2d 521, 542 (1994).
ii. A fiduciary that represents that he possesses specialized skill or knowledge will be held to that standard of care even if the representation was a falsehood. Killey Trust, 457 Pa. 474, 477, 326 A.2d 372, 375 (1974).
C. Standard of Care Set Forth in Governing Instrument:
i. Where there is a governing instrument that defines the standard of care to which the fiduciary shall be held, that standard of care prevails. 20 Pa.C.S. §7319(a).
ii. Exceptions: The fiduciary will not be held to the standard of care as defined in the governing instrument when:
a. The standard is a restriction on the fiduciary’s investment powers such that adhering strictly to the standard of care is impractical or deprives the beneficiaries of the full benefits of the trust property because of changed economic conditions. 20 Pa. C.S. §7319(b).
b. Adherence to the standard of care would cause the fiduciary to act in bad faith. Gouley v. Land Title Bank & Trust Co., 329 Pa. 465, 471, 198 A. 7, 9 (1938).
D. Standard of Care for Trustees:
i. Duty of Care:
a. 20 Pa.C.S. §7771: “The trustee shall administer the trust in good faith, in accordance with its provisions and purposes in the interests of the beneficiaries and in accordance with applicable law.”
b. 20 Pa.C.S. §7774: “The trustee shall administer the trust as a prudent person would, by considering the purposes, provisions, distributional requirements and other circumstances of the trust and by exercising reasonable care, skill and caution.”
c. 20 Pa.C.S. §7776: “A trustee who has special skills or expertise relevant to a trust or who is named trustee in reliance upon the trustee’s representation that the trustee has special skills or expertise relevant to a trust shall use those special skills or expertise in the administration of the trust.”
ii. Specific Duties and Responsibilities:
a. Preservation of Trust Property: 20 Pa.C.S. §7779: “The trustee shall take reasonable steps to take control of and protect the trust property.”
b. Duty to Keep Records/Not Commingle Assets: 20 Pa.C.S. §7780: “A trustee must keep adequate records of the administration of the trust, must not commingle funds, and must designate trust property so that the interest of the trust appears in trust records.”
c. Duty of Loyalty: A trustee is under a duty to the beneficiary to “administer the trust solely in the interest of the beneficiary.” Flagg Estate, 365 Pa. 82, 87, 73 A.2d 411, 414 (1950). The fiduciary duty of loyalty “prohibits both self-dealing and conflicts of interest. Therefore, the trustee may not (1) deal with trust property for the benefit of himself or third parties, . . . nor (2) place himself or herself in a position that is inconsistent with the interests of the trust.” See Estate of McCredy, 323 Pa. Super. 268, 290-91, 470 A.2d 585, 597 (1983).
d. The Prudent Investor Act: The Prudent Investor Act applies to trustees and guardians. The Act sets forth the degree of care that a trustee or guardian must possess when making investment and management decisions. Prior to the adoption of the Act a fiduciary was held to the common law standards of care in making investment decisions. Pursuant to 20 Pa.C.S. §7303(a), a fiduciary is held to the prudent person standard with respect to investment decisions: “A fiduciary shall invest and manage property held in a trust as a prudent investor would, by considering the purposes, terms, and other circumstances of the trust and by pursuing an overall investment strategy reasonably suited to the trust.” Under 20 Pa. C.S. §7203(b), a fiduciary must consider the following factors all investment and management decisions:
1. The size of the trust;
2. The nature and estimated duration of the fiduciary relationship;
3. The liquidity and distribution requirements of the trust;
4. The expected tax consequences of investment decisions or strategies and of distributions of income and principal;
5. The role that each investment or course of action plays in the overall investment strategy;
6. An asset’s special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries, including, in the case of a charitable trust, the special relationship of the asset and its economic impact as a principal business enterprise on the community in which the beneficiary of the trust is located and the special value of the integration of the beneficiary’s activity with the community where that asset is located;
7. To the extent reasonably known to the fiduciary, the needs of the beneficiaries for present and future distributions authorized or required by the governing instrument; and
8. To the extent reasonably known to the fiduciary, the income and resources of the beneficiaries and related trusts.
Duty to Diversify: Under 20 Pa. C.S. §7204, a fiduciary must “reasonably” diversify such investments, “unless the fiduciary reasonably determines that it is in the interests of the beneficiaries not to diversify, taking in account the purposes, terms, and other circumstances of the trust . . . .”
Duty of Impartiality: A fiduciary has a duty to deal impartially with all beneficiaries, whether current or successor, income or principal. A fiduciary “is under a duty to the [life income] beneficiary to take care not merely to preserve the trust property but to make it productive so that a reasonable income will be available for [the life income beneficiary]. He is under a duty to the [successive] beneficiary to take care to preserve the principal of the trust property for [the successive beneficiary]. He is not under a duty to the beneficiary entitled to the income to risk the safety of the principal in order to produce a larger income, but he is under a duty to him not to sacrifice income for the purpose of increasing the value of the principal.” Estate of Hamill, 487 Pa. 592, 599, 410 A.2d 770, 773 (1980) (quoting III Scott, Law of Trusts 1895, §232 (3d ed. 1967)).
Loss: A fiduciary is not liable for an investment that causes a loss in trust property or fails to make a profit if the fiduciary acted in good faith. See In re Dentler Family Trust, 873 A.2d 738, 746 (Pa. Super. 2005). But “”if the trustee commits a breach of trust, he is chargeable with (a) any loss or depreciation in value of the trust estate resulting from the breach of trust; or (b) any profit made by him through the breach of trust; or (c) any profit which would have accrued to the trust estate if there had been no breach of trust.” Id.
Delegation: Under 20 Pa. C.S. §7204(a), “a fiduciary may delegate investment and management functions that a prudent investor of comparable skills might delegate under the circumstances.”
1. Decisions of the Investment Advisor: “A fiduciary shall not be responsible for the investment decisions or actions of the investment agent to which the investment functions are delegated if the fiduciary exercises reasonable care, skill, and caution in selecting the investment agent, in establishing the scope and specific terms of the delegation, and in reviewing periodically the investment agent’s actions in order to monitor the investment agent’s performance and compliance with the scope and specific terms of the delegation.” 20 Pa. C.S. §7206(b).
2. Delegation to a Co-Fiduciary: A co-fiduciary may delegate investment and management functions to another co-fiduciary if the delegating co-fiduciary reasonably believes that the other co-fiduciary has greater investment skills that the delegating co-fiduciary with respect to those functions.” 20 Pa. C.S. §7206(e). The delegating co-fiduciary is not responsible for the investment decisions or actions of the other co-fiduciary, as long as the delegating co-fiduciary complies with 20 Pa. C.S. §7206(b).
E. Principal and Income Act: The Principal and Income Act applies to all Pennsylvania trusts and estates of decedents who died on or after July 15, 2002 unless the governing instrument specifically excludes its application. Prior to the adoption of the Principal and Income Act Pennsylvania law required a trustee to strictly adhere to the categorization of assets, receipts, and distributions as either income or principal. Act now allows a trustee to adjust between principal and income out of fairness to both income and principal beneficiaries. The Act also permits a trustee to convert the trust to a unitrust that allows for annual payments to the income beneficiaries of a fixed 4 % of the trust’s net fair market value.
i. Purpose: The purpose of the Principal and Income Act’s power to adjust is to allow a trustee to compensate for the unfairness that could result under the strict categorization of principal and income. The power to adjust should not be used to increase or decrease the beneficiary’s entitled benefits from the trust. A fiduciary could be liable to a beneficiary if the power to adjust is used improperly, so trustees should be careful when utilizing this power.
ii. Discretionary Power: In exercising a discretionary power of administration regarding a matter within the scope of [the Principal and Income Act], whether granted by the governing instrument or [the Principal and Income Act] . . . a fiduciary shall administer a trust or estate impartially based on what is fair and reasonable to all of the beneficiaries, except to the extent that the governing instrument clearly manifests an intention that the fiduciary shall or may favor one or more of the beneficiaries. A determination in accordance with [the Principal and Income Act] is presumed to be fair and reasonable to all of the beneficiaries.” 20 Pa. C.S. §8103(b).
iii. Power to Adjust: Pursuant to 20 Pa. C.S. §8104(a), “a trustee may adjust between principal and income by allocating an amount of income to principal or an amount of principal to income to the extent the trustee considers appropriate if: (1) the governing instrument describes what may or must be distributed to a beneficiary by referring to the trust’s income; and (2) the trustee determines, after applying the rules in section 8103(a), that the trustee is unable to comply with section 8103(b).” Some adjustments are prohibited under 20 Pa. C.S. §8104(c). The power to adjust provides investment flexibility for the fiduciary because the fiduciary may invest on a total return basis rather than being concerned with the strict categorization of investments as either income or principal. A fiduciary must consider the following when deciding whether to adjust:
(1) The size of the trust.
(2) The nature and estimated duration of the trust.
(3) The liquidity and distribution requirements of the trust.
(4) The needs for regular distributions and preservation and appreciation of capital.
(5) The expected tax consequences of an adjustment.
(6) The net amount allocated to income under the other sections of this chapter and the increase or decrease in the value of the principal assets, which the trustee may estimate as to assets for which market values are not readily available.
(7) The assets held in the trust; the extent to which they consist of financial assets, interests in closely held enterprises, tangible and intangible personal property or real property; the extent to which an asset is used by a beneficiary; and whether an asset was purchased by the trustee or received from the settlor or testator.
(8) To the extent reasonably known to the trustee, the needs of the beneficiaries for present and future distributions authorized or required by the governing instrument.
(9) Whether and to what extent the governing instrument gives the trustee the power to invade principal or accumulate income or prohibits the trustee from invading principal or accumulating income and the extent to which the trustee has exercised a power from time to time to invade principal or accumulate income.
(10) The intent of the settlor or testator.
(11) The actual and anticipated effect of economic conditions on principal and income and effects of inflation and deflation.
iv. How to Adjust: The Principal and Income Act merely explains the adjustment powers of fiduciaries, it does not provide any guidance on how to exercise this power. As such, fiduciaries have a great deal of freedom in determining how to exercise this power. A general rule for exercising the adjustment power is establish a “target” amount of income a beneficiary will receive and a “target” growth rate for the trust principal.
F. Additional Fiduciary Duties and Responsibilities:
i. Investment: Pursuant to 20 Pa. C.S. §3316, “the personal representative [of an estate] may invest the funds of the estate but shall have no duty to do so.” If an executor decides to invest estate funds, the types of investments the executor may make are limited. See 20 Pa.C.S. §3316. In McCullough Trust the court reasoned that succeed in a surcharge action against a trustee based on poor investment performance a beneficiary must prove actual losses and not mere failure to keep pace with inflation. McCullough Trust, 21 Fiduc. Rep. 2d 135 (Allegh. 2001).
ii. Taxes and Patent Errors: Certain breaches of fiduciary duty that concern tax issues are viewed as patent errors. In re Estate of Campbell, 692 A.2d 1098, 1104 (Pa. Super. 1997), In re Estate of Geniviva, 450 Pa. Super. 54, 675 A.2d 306, 311 alloc. den., 546 Pa. 666, 685 A.2d 545 (1996). A patent error is one that is obvious on its face. In an action for surcharge, when patent errors are made, the burden of proof shifts to the fiduciary and attorney to demonstrate the prudence of the action. In re Estate of Ellis, 460 Pa. 281, 333 A.2d 728 (1975). For example, where a large overpayment in taxes was shown the burden then shifted to the fiduciary to present, if possible, exculpatory evidence to avoid the surcharge” In re Estate of Lohm 440 Pa. 268, 274, 269 A.2d 451, 455 (1970), citing Maurice Estate, 433 Pa. 103, 108, 249 A. 2d 334, 336 (1969).
iii. Debts Due to the Decedent: It is the duty of the personal representative to use “diligent efforts” to collect debts due to the decedent and the personal representative “is responsible for the want of ordinary diligence” and will be surcharged if “he has suffered years to pass by without an effort to collect such a debt or offering any excuse for his failure to proceed.” Neff’s Appeal, 57 Pa. 91, 97 (1868).
iv. Record Keeping: A fiduciary must provide proof of his or her entitlement to all credits he or she claims in his or her account in the form of vouchers or receipts of payment. Strickler Estate, 354 Pa. 276, 47 A.2d 134 (1946). Unsupported testimony regarding such payments is insufficient to establish entitlement to reimbursement. Estate of Salus, 421 Pa. Super. 87, 617 A.2d 737 (1992). Further, “a trustee must keep adequate records of the administration of the trust, must not commingle funds, and must designate trust property so that the interest of the trust appears in trust records.” 20 Pa.C.S. §7780. Where an accountant must incur attorney’s fees to restate an account due to the defectiveness or insufficiency of prior accountings, “any cost…must be borne by [the executor] rather than the estate” Marcella Estate. 12 Fiduc. Rep. 2d 224, 228 (Phila. 1992).
v. Preservation of Assets: 20 Pa.C.S. §3311 requires a personal representative to make “all reasonable expenditures necessary to preserve the real and personal estate of the decedent.” Similarly, 20 Pa.C.S. §7779 provides that “The trustee shall take reasonable steps to take control of and protect the trust property.” See Inter Estate, 17 Fiduc. Rep. 2d 75 (Warren 1996).
vi. Claims Against The Decedent’s Estate or Trust: A fiduciary owes the same general responsibilities and duties of care to creditors that he owes to beneficiaries and should always ensure that he or she complies with the provisions of the Pennsylvania Probate, Estates, and Fiduciaries Code when dealing with creditors.
a. A personal representative is required to advertise the grant of letters per 20 Pa.C.S. §3162. Prompt advertising is important because it serves to place creditors on notice of the administration. The personal representative is not liable to any claimant who has not given notice of his or her claim within one year after the first complete advertisement of the grant of letters. See 20 Pa.C.S. §3532(a). Similar rules apply to trustees of revocable trusts under 20 Pa.C.S. §7755.
b. In order to preserve a claim a claimant must give notice of his or her claim to the personal representative or to the personal representative’s attorney. 20 Pa.CS §3384. The following qualify as written notice under 20 Pa.C.S. §3384: (1) Instituting a proceeding to compel the filing of an account; (2) Bringing an action against the personal representative to compel payment; and (3) Receiving written acknowledgment from the personal representative or from his attorney acknowledging existence of the claim.
c. Where an estate is solvent proper claims may be paid from the estate when funds are available. If an estate is insolvent, there is an order of preference in which claims must be paid pursuant to 20 Pa.C.S. §3392.
d. A personal representative is required to address all valid claims against a decedent’s estate. If the personal representative questions the validity of a claim, he or she should file his or her account with the Orphans’ Court and provide notice to all known claimants under 20 Pa.C.S. §3532. The claimant is then required to prove the claim at audit per 20 Pa.C.S. §3521.
e. As previously mentioned, the personal representative has no personal liability toward a creditor of a decedent’s estate if the creditor fails to provide notice within the one-year post-advertising period. If a personal representative makes distribution without addressing the claim of a known creditor, the personal representative is personally liable for such claim. Ray’s Estate, 345 Pa. 210, 214, 25 A.2d 803, 805 (1942). However, a fiduciary is protected from liability if he makes distribution knowing that a creditor may have a claim, but that creditor does not bring formal notice of that claim within the one-year period. See Doster Estate, 346 Pa. 455, 458, 31 A.2d 142, 144 (1943).
vii. Duty to Monitor Actions of Co-Fiduciary: Each co-fiduciary is obligated to use diligence in protecting the estate against the careless or improper conduct of another co-fiduciary. Irvine’s Estate, 203 Pa. 602, 53 A. 502 (1902). 20 Pa.C.S. §3317 directs that “where one of two or more personal representatives shall be individually liable to the estate, the other or others shall take any legal action against him necessary to protect the estate.”
II. Discharging the Fiduciary of Liability and Responsibility: A fiduciary remains at risk for future claims and actions by beneficiaries, interested parties, and creditors if he or she fails to obtain a proper discharge. A fiduciary may complete his or her administration and may be discharged of liability in one of two ways:
A. Court Accounting and Adjudication: Pursuant to 20 Pa.C.S. §3501.1 a fiduciary may file his or her accounting at any time after four (4) months from the first complete advertisement of the original grant of letter but shall not file it earlier unless directed to do so by the court.” When filing an accounting a fiduciary should ensure that he or she complies with the notice requirements set forth Section 3503 of the Probate, Estates and Fiduciaries Code and Pennsylvania Supreme Court Orphans’ Court Rule 6.3 to ensure that all interested parties are notified of the filing. Under 20 Pa.C.S. §3514 “no account shall be confirmed, or statement of proposed distribution approved, until an adjudication or a decree of distribution is filed in conformity with local rules by the court or by the clerk of the court, expressly confirming the account or approving the statement of proposed distribution and specifying or indicating by reference to the statement of proposed distribution the names of the persons to whom the balance available for distribution is awarded and the amount or share awarded to each.”
B. Settlement Agreement: The Settlement agreement is recognized as a valid means of ending estate administration and to release a fiduciary of liability. See 20 Pa.C.S. §3532(c).
III. Breach of Fiduciary Duty and Surcharge Actions: In instances of a breach of fiduciary duty it may also be possible to initiate a surcharge action against the fiduciary for damages sustained by the fiduciary’s breach of duty. A surcharge is viewed as a penalty for failure to exercise common prudence, common skill and common caution in the performance of fiduciary duties. In re Estate of Dobson, 490 Pa. 476, 484 A.2d 138 (1980).
A. Burden of Proof:
i. The objector in a surcharge action bears the burden of proof and must establish the following by a preponderance of the evidence: (1) a breach of fiduciary duty; and (2) related loss. In re Estate of Geniviva, 450 Pa. Super 54, 675 A.2d 306 (1996 Pa. Super.); Wade’s Estate, 343 Pa. 520, 23 A.3d 493 (1942). Once the objector proves breach of fiduciary duty and related loss, the burden then shifts to the respondent to prove no connection between the breach and the loss. In re Nola’s Estate, 333 Pa. 106, 3A.2d 326 (1939).
ii. Where a fiduciary commits a patent error the burden of proof shifts to the fiduciary to demonstrate prudence in his or her actions. If he or she fails to demonstrate the prudence of his or her actions, he or she will be found to have breached his or her duties. In re Estate of Ellis, 460 Pa. 281, 333 A.2d 728 (1975).
B. Defense to Surcharge:
i. Reliance Upon Counsel: In awarding executor’s fees, courts look at the reasonableness of the initial choice of counsel upon whom the executor relied, but must also look to whether “the subsequent decision to continue to rely upon counsel’s advise [was] a reasonably wise and prudent choice” In re Estate of Geniviva, 450 Pa. Super 54, 64. In Geniviva, the executor blamed his attorney for his [the executor’s] failure to pay the estate taxes; however, the court held that his continued reliance on counsel was not reasonable in light of the circumstances. Id. at 65. In another case, the court found that the defense of reliance of counsel was unsuccessful where the executrix permitted counsel to take inappropriate actions which the executrix had the experience or intelligence to question (such as the late filing of tax returns). Izzard Estate, 29 Fiduc. Rep. 2d 66 (Phila. 2007).
The Smyrl case is another example of a surcharge case in which the defense of reliance upon counsel was unsuccessful. Smyrl Estate, 23 Fiduc. Rep. 2d 85 (Phila. 2001). In Smyrl, the accountant negligently overpaid the Federal estate tax by $41,871.00 and failed to file the Federal estate tax return when due, resulting in interest and penalties in the amount of $33,930.11. The accountant also negligently overpaid the Pennsylvania inheritance tax in the amount of $4,548.38. The objectors were forced to compel the accountant to restate his account due to inaccuracies. The accountant failed to explain adjustments from his prior account. The accountant failed to timely file fiduciary income tax returns for the estate resulting in interest and penalties and causing the objectors to file amended personal tax returns. The accountant failed to make timely distribution to the beneficiaries under the decedent’s will. The accountant took over two years to file the inventory for the estate and the accountant did not take appropriate initiative to determine whether the appropriate tax filings were made. The accountant in Smyrl employed the defense of reliance upon counsel for all actions which he failed to take or negligently took as fiduciary of the estate; however, the court did not find the defense a reasonable excuse, stating “in short, the accountant abrogated his entire responsibility in the execution of the matter in favor of the attorney. At best, he chose to stick his head in the sand and play ostrich.” Id. at 89.
Similarly in Lohm the fiduciary overpaid the Federal estate tax and subsequently paid the tax late. The fiduciary argued that he relied upon the advise of his attorney; however the court did not find the defense to be reasonable for reasons similar to those set forth in Smyrl. See In re Estate of Lohm, 440 Pa. 268, 269 A.2d 451 (1970).
ii. Consent or Acquiescence: In some cases if a beneficiary approves of a fiduciaries actions or fails to object to specific actions of a fiduciary that are made known to the beneficiary he or she may be deemed to have acquiesced to the act and may be barred from instituting an action against the fiduciary. In re: Jones, 442 Pa. Super 463, 660 A.2d 76 (1995); Ward Estate, 350 Pa. 144, 38 A.3d 50 (1944); In re Clabby’s Estate, 338 Pa. 305, 12 A.2d 71 (1940).
IV. Surcharge in the Context of Fees: It is not uncommon for a surcharge action to be instituted with a challenge to the reasonableness of the fiduciary’s fees and the fees of the fiduciary’s counsel. Even in instances in which a surcharge action is not instituted against a fiduciary, it is still important for the fiduciary to be cognizant of the rules and limitations of the law concerning the reasonableness of fiduciary fees and counsel fees.
A. Reasonableness of Trustee Fees: The burden of claiming that a trustee’s commission and fees are unreasonable is upon the objecting party. Estate of Stephenson, 469 Pa. 128, 364 A.2d 1301 (Pa. Sup. Ct. 1976). Once the initial burden is met the fiduciary have the burden of proving both the value of its services and the reasonableness of its fees. In re Estate of Rees, 425 Pa. Super 490, 625 A.2d 1203 (1993 Pa. Super); Feise Estate, 21 Fid. Rep. 2d 317 (O.C. Mont. Co. 2001); Broadwater Estate, 12 Fiduc. Rep. 2d 287 (O.C. Bucks); aff’d 433 Pa. Super. 640 (1993); appeal denied Estate of Broadwater v. Heins, 538 Pa. 670 (1994).
B. Reduction, Elimination, and Surcharge of Trustee Fees: In Pennsylvania courts generally view a fiduciary’s compensation as “the reward of faithful execution of the trust confided.” Hermanson Estate, 12 Fid. Rep. 2d 407, at 414 (O.C. Bucks 1992). Commissions will be reduced or eliminated if the fiduciary was negligent and caused loss to the estate. Card’s Estate, 337 Pa. 82 (1939); Brennan Estate, 15 Fiduc. Rep. 2d 425 (Bucks 1995); Birely Estate, 30 Fiduc. Rep. 522 (Chester 1980). The Orphans’ Court has denied a trustee his or her fee entirely in situations where the trustee failed to fulfill his or her duties. For example, in Cantelmi Trust, the Montgomery County Orphans’ Court denied compensation to a trustee who failed to keep records and commingled funds, thereby failing to fulfill the essential duties of a trustee. Cantelmi Trust, 7 Fiduc. Rep. 2d 76 (Mont. 1986).
C. Reasonableness of Executor Fees:
i. General Overview: Pursuant to 20 Pa. C.S. § 3537, “the Court shall allow such compensation to the personal representative as shall in the circumstances be reasonable and just, and may calculate such compensation on a graduated basis.” 20 Pa. C.S. §3537. While as a matter of convenience, the compensation of a fiduciary may be determined by way of percentage, the true test is always the value of the services rendered. In re Williamson’s Estate, 368 Pa. 343, 349, 82 A.2d 49, 52 (1951); In re Estate of Rees, 425 Pa. Super 490, 625 A.2d 1203 (1993 Pa. Super.); In re Estate of Geniviva, 450 Pa. Super 54, 675 A.2d 306 (1996 Pa. Super.).
In order to determine the value of the services rendered, the courts look to the “responsibility incurred and the service and labor performed.” Gardner’s Estate, 323 Pa. 229, 238, 185 A. 804, 808 (Pa Sup. Ct. 1936). Compensation shall be “fair and just” based “upon the extent and character of the labor and responsibilities involved.” Reed Estate, 462 Pa. 336, 339, 241 A.2d 108, 110 (Pa Sup. Ct. 1975). The determination of whether an executor’s fees are reasonable is left to the sound discretion of the Orphans’ Court. In re Estate of Rees, 425 Pa. Super. 490, 625 A.2d 1203 (Pa. Super. 1993).
D. Burden of Proof: The burden of claiming that commissions and fees are unreasonable is upon the objecting party. Estate of Stephenson, 469 Pa. 128, 364 A.2d 1301 (Pa. Sup. Ct. 1976). Once the objector meets this initial burden, the burden of proof shifts to the executor(s) to prove both the value of their services and the reasonableness of their fees. In re Estate of Rees, 425 Pa. Super 490, 625 A.2d 1203 (1993 Pa. Super); Feise Estate, 21 Fiduc. Rep. 2d 317 (O.C. Mont. Co. 2001); Broadwater Estate, 12 Fiduc. Rep. 2d 287 (O.C. Bucks); aff’d 433 Pa. Super. 640 (1993); appeal denied Estate of Broadwater v. Heins, 538 Pa. 670 (1994). In doing so, the executors have the burden of establishing facts that show their entitlement to the compensation claimed. In re Estate of Rees, 425 Pa. Super 490, 65 A.2d 306 (1996 Pa. Super).
E. Reduction, Elimination, and Surcharge of Executor Fees: Ultimately, the courts have the authority and power to reduce or eliminate a fiduciary’s commission if the fiduciary was negligent and caused loss to the estate. See generally In Re Estate of Geniviva, 450 Pa. Super 54; 675 A.2d 306 (1996 Pa. Super); See also Cord’s Estate, 337 Pa. 82; 9 A.2d 557 (1939). The court may disallow any commission for a fiduciary guilty of, but not limited to, supine negligence, faithlessness, mismanagement, repeated failures to perform duties, and general negligence. Jones Estate, 400 Pa. 545, 162 A.2d 408 (1960); Lewis Estate, 349 Pa. 455, A.2d 559 (1944).
The court also has the power to completely deny the executor any compensation. When there is fraud, dishonesty, faithlessness, or gross negligence, commissions are “always denied”. Valentine Estate, 16 Leh. 282. For example, in D’Alessio Estate, the court issued a surcharge against an executrix and denied her any commission based upon the executrix’s complete failure to perform or understand her duties as executrix. D’Alessio Estate, 26 Fiduc. Rep. 2d 236 (Phila. 2004).
For example, in In re Estate of Geniviva, an executor who mismanaged the estate, including filing an inventory and death tax returns more than three years late, was surcharged and his commission was reduced from $20,000.00 to $5,000.00 despite the executor’s contention that he relied on the advice of counsel. In re Estate of Geniviva, 450 Pa. Super 54, 675 A.2d 306 (1996 Pa. Super.) Similarly in Janiga Estate, the court surcharged an Executrix where she had no credible explanation for paying taxes late and delaying distributions to charitable beneficiaries. Janiga Estate, 28 Fiduc. Rep. 2d 219 (Phila. 2007), annot. Fiduc. Rev., July 2008, p. 1, aff’d, 970 A.2d 487 (Pa. Super. 2009). In another case, the court reduced the Executrix’s commission because the administration of the estate was “unnecessarily drawn out”. McGough Estate, 29 Fiduc. Rep. 207 (Phila. 1979).
F. Reasonableness of Counsel Fees: Pennsylvania Rule of Professional Conduct 1.5(a) states that a lawyer’s fee cannot be “….an illegal or clearly excessive fee”. In Pennsylvania the responsibility for determining the reasonableness of counsel fees rests primarily with the auditing judge. Thompson Estate, 426 Pa. 270, 232 A.2d 625 (1967); McClatchy Estate, 492 Pa. 352, 424 A.2d 1227 (1981); Bruner Estate, 456 Pa. Super. 705, 691 A.2d 530 (1997); Canjar Estate, 20 Fiduc. Rep. 2d 175 (Allegh. 2000); Ciaffoni Estate, 20 Fiduc. Rep. 2d 21 (Wash. 1999); Abdoe Estate, 45 Pa. D & C 4th 564 (1999).
In determining the reasonableness of counsel fees, the courts may use as a means of “guidance” the “schedule of fees approved by the Attorney General.” Johnson Estate, 4 Fiduc. Rep. 2d 6, 7 (Chester County O.C. 1983). The problem with the Johnson schedule is that it assumes that the work performed by the attorney was performed correctly, efficiently, and appropriately. Johnson Estate, 4 Fiduc. Rep. 2d 6 (Chester County O.C. 1983); Feise Estate, 21 Fiduc. Rep. 2d 317 (Montg. 2001); Carr Estate, 22 Fiduc. Rep. 2d 364 (Montg. 2002); Gutner Estate, 7 Fiduc. Rep. 2d 192 (Montg. 1987), annot. Fiduc. Rev., June 1987, p. 4; Novotny Estate, 24 Fiduc. Rep. 2d 214 (Montg. 2004). Therefore, it is important to look to cases other than Johnson to determine if a fee is reasonable. LaRocca case sets forth specific factors to be considered in determining the reasonableness of counsel fees. LaRocca evaluates the following factors in ultimately determining whether counsel fees are reasonable:
1. the amount of work;
2. character of services;
3. difficulty of problems involved;
4. importance of the litigation;
5. the amount of money or value of the property in question;
6. the degree of responsibility incurred;
7. whether the fund was created by the attorney;
8. the professional skill and standing of the attorney;
9. the results the attorney was able to obtain; and
10. the ability of the client to pay a reasonable fee for services rendered.
In re Trust Estate of LaRocca, 431 Pa. 542, 546 (Pa. 1968).
In determining whether counsel fees are reasonable, the courts look primarily to the factors of LaRocca, which include the amount and the character of the services rendered, the extent of the work and the time involved, the novelty and difficulty of the questions presented, the character and importance of the litigation, the responsibility assumed by counsel, the value of the property affected, the professional skill and experience called for, the standing of the attorney in his profession, the ability of the client to pay, the benefit derived from the services, and the advantage accruing to the estate. Freeman Estate, 26 Leh. 34, 1 D. & C. 2d 178 (1954); Grier Estate. (No. 2), 31 D. & C. 2d 66 (1963).
Burden of Proof: As stated previously, the burden of claiming that commissions and fees are unreasonable within the account is upon the objecting party. Estate of Stephenson, 469 Pa. 128, 364 A.2d 1301 (Pa. Sup. Ct. 1976). Once this initial burden is met, an attorney seeking compensation from an estate has the burden of establishing facts that demonstrate that he is entitled to such commission. See Estate of Sonovick, 373 Pa. Super 396, 541 A. 2d 374 (1988).
Reduction, Elimination, and Surcharge of Attorney’s Fees: In situations where the court determines that the counsel fees were not reasonable in light of the circumstances the Orphans’ Court may impose a surcharge by reducing or eliminating the counsel fees where counsel fails to exercise the required degree of skill, knowledge, and diligence, resulting in loss to the estate. Albright Estate, 376 Pa. Super. 201, 545 A.2d 896 (1988).
The Orphans’ Court has denied a fee altogether to an attorney. For example, in Smyrl the court denied the estate attorney his counsel fees and surcharged him for neglect in handling the estate. Smyrl Estate, 23 Fiduc. Rep. 2d 85 (Phila. 2001). Similarly, where the court found that the executor’s law firm breached its fiduciary duty, the court also denied the firm any counsel fees, surcharged the law firm for the estate’s losses, and ordered the firm to pay counsel fees incurred by the beneficiaries. Albright Estate, 6 Fiduc. Rep. 2d 235 (Allegh. 1986).
In other cases, the Orphans’ Court substantially reduced the counsel fees. For example, the court reduced an executor/attorney’s fees because of his delays in performing duties and due to duplication of services of the executor and attorney. Shillito Estate, 8 Fiduc. Rep. 2d 365 (Allegheny County O.C. 1988). As another example, the courts also substantially reduced counsel fees where a simple estate was delayed and grossly mishandled and there was no proof of the lawyer’s time and the nature and value of his services. Marcella Estate, 12 Fiduc. Rep. 2d 224 (Phila. 1992). Attorney’s fees have also been substantially reduced for failure of counsel to prove the services which he rendered to the estate. Karbiwnyk Estate, 24 Fiduc. Rep. 2d 28 (Phila. 2002).
Duplication of Services: The Role of Fiduciary and Attorney: It is important that a person serving in the capacity as an attorney and as an executor distinguish between the time he or she spends in both capacities. Taylor Estate, 3 Fiduc. Rep. 2d 410 (O.C. Montg. 1983); Phillips’ Estate, 21 D. & C. 464 (1934); Heltzel’s Estate, 52 D. & C. 337 (1945); Schooley’s Estate, 56 Dauph. 328 (1945). Any commission paid in both capacities must not be based upon duplication of time. Taylor Estate, 3 Fiduc. Rep. 2d 410. As such, when a lawyer serves as both counsel and in a fiduciary capacity, it is important to maintain records that demonstrate the services rendered in each capacity. Taylor Estate, 3 Fiduc. Rep. 2d 410 (Montg. 1983), annot. Fiduc. Rev., Feb. 1984, p. 1. Rice Estate, 10 Fiduc. Rep. 2d 59 (Bucks 1990). The court sua sponte may reduce an executor’s commission and the attorney’s fees where the same person occupied both positions. Perry Estate, 27 Chester 379 (O.C. Chest. 1979); Gutner Estate, 7 Fiduc. Rep 2d 192 O.C. Mont. 1987). Where an attorney-executor kept no time records and was unable to allocate time between the services he performed as executor and as attorney, the court reduced the fees that the attorney received in half. See Perry Estate, 27 Chester 379 (O.C. Chest. 1979).
V. Removal Actions: The Orphans’ Court has the exclusive jurisdiction over the removal of all fiduciaries of estates and trusts in Pennsylvania. 20 Pa.C.S §711(12). It is important to note that breach of fiduciary duty or failure to perform a duty imposed by law is cause for the removal of a fiduciary pursuant to 20 Pa.C.S. §3182(1); See also DiMarco Estate, 435 Pa. 428, 437, 257 A.2d 849, 853 (1969); Beichner Estate, 432 Pa. 150, 247 A.2d 779 (1968). The standard of proof necessary to justify the removal of a fiduciary is “clear and convincing”. Scientific Living, Inc. v. Hohensee, 440 Pa. 280, 270 A.2d 216 (1970), cert. denied, 402 U.S. 1012, erh’g denied, 404 U.S. 874 (1971).