Trust and estate disputes present an unusual question that does not arise in most ordinary lawsuits: Whose money is paying the lawyers?

A beneficiary may hire an attorney to challenge an executor or trustee. An executor may retain counsel to defend the administration of an estate.

Beneficiaries may become embroiled in a dispute with each other.

A fiduciary may be accused of self-dealing, mismanagement, withholding information, making improper distributions, or violating fiduciary duties.

And, sometimes, the litigation itself benefits the estate or trust by recovering assets, correcting misconduct, or resolving an issue affecting multiple beneficiaries.

In each situation, substantial attorneys’ fees may be incurred.

But determining who ultimately bears those fees can be complicated.

The answer is not always simply that each party pays its own lawyer. Nor does winning necessarily mean that the losing party personally pays the winner's legal fees.

In New York Trust and Estate litigation, the more important questions may be:

Can the legal fees be paid from the estate or trust?
Should all of the beneficiaries effectively share that expense?
Should the expense instead be charged against a particular person's interest?
And what happens when the fiduciary whose lawyers were paid from estate assets is ultimately found to have acted improperly?

Those questions can significantly change the economics—and the strategy—of a trust or estate dispute.

Trust and Estate Litigation Is Different From an Ordinary Lawsuit

New York generally follows the American Rule: parties ordinarily bear their own attorneys’ fees unless an agreement, statute, court rule, or other recognized exception permits otherwise.

Trust and estate disputes, however, often involve another source of money: the estate or trust itself.

That creates an important distinction.

If an executor uses estate assets to pay attorneys who are performing legitimate legal work necessary to administer or defend the estate, that is not necessarily the same thing as making an opposing beneficiary pay the executor's attorneys’ fees.

The expense is being paid from estate assets.

Economically, however, the beneficiaries ultimately bear that expense because every dollar properly paid from an estate for legal fees is a dollar that is no longer available for distribution.

That distinction can become particularly important when litigation develops between a fiduciary and one or more beneficiaries.

An Executor or Trustee May Be Entitled to Use Estate or Trust Assets for Legal Expenses

Executors, administrators, and trustees have legal responsibilities. They may need attorneys to assist them in carrying out those responsibilities.

Legal services may be necessary to interpret a will or trust, address creditor claims, resolve questions concerning ownership of property, collect assets, address tax issues, defend the estate or trust against claims, pursue claims belonging to the estate, prepare an accounting, or respond to objections from beneficiaries.

Reasonable attorneys’ fees incurred for legitimate estate or trust purposes may therefore be payable from the assets being administered. That makes sense. A fiduciary should not necessarily have to personally finance legal services reasonably required to perform the fiduciary role. But that does not mean that every legal bill incurred by an executor or trustee automatically becomes a proper estate or trust expense. The court retains significant authority to examine the fees.

The Court Can Determine Whether the Fees Are Reasonable

New York Surrogate's Courts have broad authority to review attorneys’ fees associated with an estate.

The fact that a fiduciary hired an attorney, received an invoice, and paid the invoice does not necessarily establish that the full amount should ultimately be borne by the estate.

The court may examine factors including:

the time and labor required;
the difficulty of the issues;
the nature of the legal services;
the skill required;
the attorney's experience and reputation;
the amount of money or property involved;
the benefit resulting from the services;
customary fees for comparable work;
the results obtained; and
the responsibility involved in the representation.

The attorney seeking compensation has the burden of demonstrating that the requested fee is reasonable. This is particularly important in estates involving significant assets. The size of an estate may increase the responsibility associated with the representation, but a large estate does not automatically justify a large legal fee. The court looks at the services actually performed.

Detailed Records Matter

As with other fee applications, documentation can become important.

A lawyer seeking payment from estate assets should be able to explain what services were performed, why they were necessary, and the reasonable value of those services.

Courts have reduced requested fees when the supporting information was too general or did not adequately explain the work performed. That means an estate with substantial assets should not be viewed as an open source of funds for litigation.

The court can scrutinize the legal work and determine the appropriate compensation.

The Fiduciary's Lawyers Represent the Fiduciary—not Every Beneficiary

This is an important distinction that beneficiaries sometimes misunderstand.

If an executor retains a lawyer in connection with administering an estate, the fact that the attorney's fees may ultimately be paid from estate assets does not necessarily mean that the attorney represents every beneficiary.

The fiduciary has duties to the estate and its beneficiaries, but disputes can arise concerning whether those duties have been fulfilled.

A beneficiary may therefore need separate counsel when his or her interests diverge from those of the fiduciary or other beneficiaries. That can produce a frustrating situation for the beneficiary. The beneficiary may be paying his or her own lawyer while watching the executor or trustee use estate or trust assets to pay counsel on the other side of the dispute.

The natural reaction is often:Why am I effectively helping pay the lawyer who is fighting me?

That is where the nature of the dispute—and ultimately the fiduciary's conduct—can become important.

A Fiduciary Does Not Necessarily Get a Blank Check to Litigate Against Beneficiaries

The ability to obtain legal representation at the expense of an estate or trust exists to permit fiduciaries to properly perform their duties.

It is not necessarily intended to protect a fiduciary personally from the consequences of wrongdoing.

That distinction can become critical when beneficiaries allege that an executor or trustee has:

engaged in self-dealing;
misappropriated assets;
improperly favored one beneficiary;
failed to account;
made unauthorized distributions;
wasted estate or trust property;
breached fiduciary duties; or
otherwise caused unnecessary litigation through misconduct.

If the fiduciary's actions are challenged, one issue may be whether the legal expenses incurred defending those actions should ultimately be borne by the estate or trust.

The answer can depend on the circumstances and the outcome of the proceeding.

A fiduciary should not assume that because legal bills were initially paid from estate or trust assets, those payments can never later be questioned.

What Happens if the Fiduciary is Surcharged?

A surcharge generally involves holding a fiduciary financially responsible for losses resulting from a breach of duty or other improper conduct. That can change the attorneys’ fee analysis.

Suppose beneficiaries establish that an executor improperly transferred estate property, engaged in self-dealing, or otherwise caused a financial loss. The court may require the fiduciary to restore money to the estate.

Questions may then arise concerning the attorneys’ fees generated by the misconduct.

Should innocent beneficiaries bear those expenses through a reduction of the estate?
Should the fiduciary be permitted to use estate assets to pay lawyers defending conduct ultimately found improper?
Or should some of those expenses ultimately be borne by the fiduciary?

The answer is fact-specific, but the larger point is important:

Payment of a fiduciary's attorneys’ fees from estate assets during the litigation does not necessarily determine who will ultimately bear that expense.

For fiduciaries facing serious objections—and beneficiaries considering whether to pursue them—that can be a significant financial issue.

Can a Beneficiary Have His or Her Own Attorneys’ Fees Paid From the Estate?

This is another frequent question.

A beneficiary may believe: I had to hire a lawyer because the executor would not do what was required. Why should I have to pay the legal fees necessary to protect the estate?

That argument can have force in appropriate circumstances, but reimbursement is not automatic.

One important consideration can be whether the beneficiary's legal work created a benefit for the estate or trust rather than merely advancing that beneficiary's individual interests.

For example, there may be a meaningful distinction between litigation designed solely to increase one beneficiary's individual distribution and litigation that recovers property for the estate, protects trust assets, corrects misconduct affecting all beneficiaries, or otherwise creates a broader benefit.

That does not mean every successful beneficiary receives attorneys’ fees from the estate.

It means that the purpose and effect of the legal work can matter.

“I Won” Does Not Necessarily Mean “The Estate Pays My Lawyer”

This distinction deserves emphasis.

Trust and estate litigation can involve several different concepts that are easily conflated:

A fiduciary's attorneys’ fees being paid as an expense of administration.
A beneficiary seeking reimbursement from estate or trust assets for legal work that benefited the estate or trust.
A court allocating legal expenses against a particular beneficiary's interest.
A fiduciary being personally responsible for expenses associated with misconduct.
Traditional fee shifting in which one litigant is ordered to pay another litigant's attorneys’ fees.

These are not necessarily interchangeable.

That is why simply asking, “Can I recover my attorneys’ fees if I win?” may be the wrong question in a Trust or Estate dispute.

The better question is: Under what legal theory, and from whose assets, could those fees potentially be paid?

Sometimes the Fight is Really Between Beneficiaries

Not every estate dispute is primarily about fiduciary misconduct.

Family members and other beneficiaries can disagree about wills, trusts, distributions, ownership of assets, the interpretation of estate planning documents, or other financial issues.

When one beneficiary's conduct causes unnecessary expense, questions can arise concerning whether it would be equitable for all beneficiaries to bear that expense equally through the estate.

The economic effect matters.

For example, an estate worth $5 million divided equally between two beneficiaries. If $300,000 of estate assets is spent litigating a dispute primarily caused by one beneficiary, simply charging all legal expenses to the estate effectively requires the other beneficiary to bear a substantial portion of the cost. In appropriate circumstances, courts have tools to address how expenses should be allocated. That possibility can become an important component of litigation and settlement strategy.

The Source of Payment Can Matter as Much as the Amount

Consider two outcomes.

In the first, an estate incurs $200,000 in attorneys’ fees and the entire amount is paid from estate assets before the remaining property is distributed among the beneficiaries.
In the second, the same $200,000 is ultimately charged to the interest of the beneficiary or fiduciary whose conduct generated the expense.

The legal bill is the same. The economic result for the other beneficiaries is very different.

That is why sophisticated trust and estate litigation should not evaluate attorneys’ fees merely by asking: How much are we spending?

Counsel should also consider: Who is paying now, who may ultimately bear the expense, and can that allocation change depending upon the outcome?

Fee Issues Can Affect Settlement Strategy

These issues become especially significant when a trust or estate dispute involves substantial assets.

Suppose a beneficiary is challenging an executor's handling of a closely held business owned by an estate. The dispute may involve millions of dollars in business equity. Both sides may incur substantial legal expenses. The beneficiary may be paying counsel personally. The executor's attorneys may be receiving payment from the estate. But the final economics of the case can depend on much more than whether the beneficiary proves a particular dollar amount of damages.

The parties may also need to evaluate:

whether the fiduciary could be surcharged;
whether legal expenses will remain chargeable to the estate;
whether some expenses could be allocated against a particular person's interest;
whether a beneficiary's legal work created a benefit for the estate;
whether fees already paid from estate assets could later be challenged; and
how continued litigation will affect the assets ultimately available for distribution.

That analysis can affect settlement positions.

Sometimes continuing to litigate a dispute over money causes both sides to consume the very assets they are fighting about.

Sometimes litigation is necessary to protect significantly more value.

Knowing the difference is part of the strategy.

Fiduciaries Should Think About Fee Issues Before the Litigation Escalates

Executors and trustees managing significant assets should not assume that all legal expenses will automatically be approved merely because litigation exists.

Before committing substantial estate or trust resources to litigation, a fiduciary and counsel should consider:

Whose interests are being protected by the legal work?
Is the work necessary to administer or protect the estate or trust?
Is the fiduciary defending the proper exercise of fiduciary responsibilities—or primarily defending personal conduct?
Are the fees reasonable in relation to the issues and assets involved?
Are adequate records being maintained to establish the nature and value of the services?
Could the fiduciary's conduct result in a later surcharge or challenge to the payment of fees?
Would continued litigation preserve value or unnecessarily consume it?

Those questions are particularly important when the estate contains a business, real estate, concentrated investments, or other valuable assets that may themselves be the subject of the dispute.

Beneficiaries Should Also Analyze the Economics

Beneficiaries should conduct a similar analysis. Before spending substantial money contesting an estate or trust matter, a beneficiary should understand not only the merits of the claim but the economics surrounding it.

Questions may include:

What is actually at stake?
What legal fees are likely to be incurred?
Is the fiduciary paying counsel from estate or trust assets?
Can those payments ultimately be challenged?
Is the beneficiary pursuing an individual benefit or protecting assets for the estate or trust as a whole?
Could the beneficiary's legal fees potentially be paid or allocated differently?
What happens to the value available for distribution if the litigation continues for another year?
Is there a business, property, or other asset whose value could be damaged while the parties litigate?

In significant trust and estate litigation, winning a legal argument is only part of the objective.

The ultimate goal should be protecting the client's economic interests.

The Bottom Line

Attorneys’ fees in a New York trust or estate dispute are more complicated than the familiar question of whether the loser pays the winner.

A fiduciary may properly use estate or trust assets for legal services necessary to carry out fiduciary responsibilities. But the court can scrutinize those fees and determine whether they are reasonable.

A beneficiary who hires separate counsel ordinarily should not assume that the estate will reimburse those fees simply because the beneficiary succeeds.

And when misconduct, surcharge, unnecessary litigation, or a benefit to the estate is involved, questions may arise about whether legal expenses should ultimately be borne by the estate, a particular beneficiary, or the fiduciary personally.

That makes one question particularly important in any significant trust or estate dispute: Not just “How much will this litigation cost,” but “Who will ultimately bear that cost?”

When the dispute involves a closely held business, substantial investments, valuable real estate, significant income, or other important family assets, the answer can materially affect both litigation strategy and settlement.

The Glennon Law Firm represents fiduciaries, beneficiaries, business owners, executives, professionals, and families in significant trust and estate disputes and other complex litigation involving businesses, ownership interests, income, and substantial assets.

With offices in Albany, Buffalo, Rochester, and New York City, we can help you across New York State. 

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This blog post is for informational purposes only and does not constitute legal advice. For specific legal counsel, please contact our office directly.  