We’ve read through many of the most interesting cases in 2018, and as in the previous years, the content doesn’t disappoint. Here are some highlights.
Privilege
Can a former trustee withhold from a successor trustee all of his communications with legal counsel? In California, the court in Morgan v. Superior Court1 said “No!” The court determined that if the settlor’s intent in drafting a trust is to protect beneficiaries from malfeasance, it follows that withholding attorney-trustee communications from a successor trustee doesn’t further that intent, because withholding such communications could effectively allow a trustee to intentionally violate fiduciary duties with no check on his conduct.
Conflicts of Law
How might a court in one state interpret trust laws in a sister state? In In re King,2 the trustee (a resident of Oregon) of a trust argued that the trust’s governing law (Nevada) allowed her to make loans to her non-beneficiary child and another entity that she had an interest in (her late husband’s children were the beneficiaries of the trust). The lower court disagreed with the trustee’s interpretation but didn’t address the issue of whether the trustee’s own interest in the trust could be surcharged. On appeal, the court concluded that the Nevada legislature didn’t intend Nevada law to prohibit a surcharge of the breaching trustee beneficiary’s interest as a remedy for that trustee beneficiary’s own breach of trust and that the Nevada Supreme Court wouldn’t apply the provision that way.
Self-Settled Trust
Traditionally, a trust with spendthrift provisions will protect the assets from being reached by creditors unless it’s determined that the trust is self-settled. In Calhoun v. Rawlins,3 the ex-wife of the beneficiary created a trust as part of the property settlement of their divorce. Subsequent to the divorce, the beneficiary was in a car accident injuring the plaintiff. The plaintiff sued, claiming that any recovery could be satisfied from the assets in the trust. The court concluded the trust was self-settled because the assets used to create the trust were transferred to satisfy an obligation of the divorce and that principal and income were available to the beneficiary during his lifetime. Therefore, the plaintiff was able to reach the assets of the trust.
Disqualifying Fiduciary Counsel
Attorneys will often represent a husband and wife in estate planning and sometimes carry over that representation as the husband and wife’s personal representative or trustee. Matter of Kopet4 shows the downside to this arrangement. The incapacitated wife’s agent under her power of attorney petitioned to remove the drafting attorney/personal representative of the late husband’s estate. The petition alleged that the attorney and his law firm had previously represented the wife in connection with her own estate planning and in joint estate planning with the decedent, among other matters, and that the attorney acted contrary to the wife’s interests in his administration of the decedent’s estate. The court held that although the drafting attorney/personal
representative’s law firm had a prior attorney-client relationship with the wife in connection with her own estate planning, which may have been intertwined somewhat with that of the decedent-husband, the record didn’t reveal that the law firm’s prior representation of the wife was substantially related or materially adverse to the removal proceedings.
Exercise of Power of Appointment
Fiduciaries often interpret documents. As estate-planning shortcuts become more prevalent through the use of non-lawyer technology (for example, holographic wills, digital will services), how strictly should a fiduciary interpret a testator’s instructions to satisfy a trust’s power of appointment (POA) requirements? In Eimers v. Saletta,5 the court held that the exercise of a POA in a decedent’s holographic will didn’t meet the specific reference requirement of a trust, as the requirement of specific reference to the “power of appointment” can’t be satisfied by a reference to the creating instrument alone.
Upset Heirs
Every year, we find one or two cases dealing with disinheritance or unequal distributions causing a lawsuit. In Cecchini v. Kuehn,6 a son’s lawsuit was dismissed after he challenged whether his mother should have been helped by her daughter, attorneys, an investment advisor and a physician to amend her estate plan to equally benefit her two children. In In the Estate of Lee,7 a beneficiary was precluded from agreeing to transfer her testamentary trust interest to a step-grandson/former beneficiary—for purposes of contesting a codicil to a will—by a spendthrift trust provision in the will.
Ambiguous drafting can also upset heirs. The trustee in In the Matter of Payson8 sought instruction from the Probate Court regarding the definition of the terms “children” and “issue.” The trust instructed the trustee to distribute “to the issue of my daughter in equal shares….” The court concluded that “issue” meant the children of the testatrix’s daughter and any children of a deceased child for the purposes of division. The trustee was instructed to pay over in equal shares to the daughter’s four children and not into shares for each of the 11 children and grandchildren.
Qualified Beneficiaries
In jurisdictions that have adopted the Uniform Trust Code (UTC), trustees are often tasked with determining which remainder beneficiaries are required to consent, to be informed and to receive an accounting. In Hadassah v. Melcer,9 the court determined that certain charities were “qualified beneficiaries” entitled to notice in an action on the part of the trustee to resign. In Rachins v. Minassian,10 the court determined that the fact that any remaining principal of a family trust would flow into a new trust created for children, as opposed to being distributed to the children outright, didn’t preclude the children from being qualified beneficiaries of the family trust under the statutory definition.
Access to Information
We know qualified beneficiaries in UTC jurisdictions have a right to an accounting, but do trust protectors have similar rights? No, according to Carberry v. Kaltschmid,11 in which the court held that a trust protector lacked standing to compel an accounting.
Payment of Attorney’s Fees
Are attorney’s fees in a dispute between co-trustees awarded only following a showing of egregious conduct by one of the trustees? In In re Mayette E. Hoffman Living Tr. U/A Dated August 4, 1997,12 the court held that North Carolina law wouldn’t limit a court’s discretion to award attorney’s fees to cases of egregious conduct, and, even if egregious conduct were required, there was sufficient evidence of such conduct when the former co-trustee jeopardized the health of the trust by refusing to cooperate with efforts to sell or lease the trust property.
Are attorney’s fees awarded for breaching fiduciary duties and failing to inform and report? “Yes,” said the court in In re Estate of Forgey,13 in which it ruled that the lower court was wrong in not awarding damages caused by a trustee’s breaches of fiduciary duty. The court held that without an award of attorney’s fees, there’s no penalty for not reporting to the beneficiaries. The court sought to make an example out of the trustee despite the fact that many of the claims against him were unfounded, adding that if it didn’t impose a penalty such as attorney’s fees, then future trustees would believe that the statutory requirement to inform and report has no significance.
Fiduciary Fees
How are a fiduciary’s fees to be calculated if a clause in a will or trust provides only general guidance? In Matter of Johnson,14 a charitable beneficiary of a trust objected to commissions claimed in the account, contending that the trust agreement didn’t permit the trustee to compute commissions based on its published fee schedule and that the trustee’s calculations weren’t supported by proper documentation. The court held that a provision in the trust permitting the trustee to establish minimum annual commissions was an express agreement that permits a trustee to calculate annual commissions in accordance with its applicable published fee schedules.
No-Contest Clauses
Interesting no-contest/in terrorem clause cases were plentiful over the past year. When the trustee is a beneficiary who breaches fiduciary duties and is removed, can a no-contest clause be enforced against the beneficiary? In In re W.N. Connell & Marjorie T. Connell Living Tr.,15 the court denied a motion to enforce a no-contest clause, opining that its enforcement would conflict with a trustee’s power to manage the trust. In contrast, James v. Estate of Wicke16 highlights that when a challenger lacks probable cause for any challenges to trusts, in terrorem clauses will be upheld, and the challenger will be deemed to have predeceased the grantor. The holding in EGW v. First Fed. Sav. Bank17 goes further and states that it isn’t against public policy for a trust’s in terrorem clause to terminate any interest in the trust of any descendant when a beneficiary challenges the trust and such beneficiary’s challenge eliminates his minor children’s interests in the trust.
Early Termination
The best interests of trust beneficiaries “in light of the settlor’s intent” don’t allow trust termination. In Horgan v. Cosden,18 the income and remainder beneficiaries entered into an agreement to terminate the trust early but the trustee didn’t agree, stating that termination was against the settlor’s wishes. The court gleaned from the plain language of the trust that the settlor wanted to provide for her son financially via incremental distributions of income until he died and then give the entire principal to three educational institutions. Accordingly, terminating the trust before this event would frustrate the trust’s purposes.
Corporate Fiduciaries
When corporate fiduciaries are involved, sue-happy beneficiaries tend to point the finger at such deep pocket fiduciaries when litigation is contemplated. In Matter of Wellington Trust,19 the plaintiff failed to establish that the corporate fiduciary violated the Prudent Investor Act when it undertook periodic or annual reviews of the trust assets and respective equity concentrations and tendered investment strategies to a co-trustee for his approval. The court highlighted that the individual co-trustee was a sophisticated investor, rejected the corporate fiduciary’s investment strategy and repeatedly denied consent to diversify the trust assets.
Trustees Behaving Badly
Should a pooled trust trustee keep funds when the identity of the remainder beneficiary isn’t clear from the terms of the trust? When the trustee’s counsel is the drafting attorney, probably not. In National Foundation for Special Needs Integrity, Inc. v. Reese,20 a trust document was drafted ambiguously, causing the Foundation and the beneficiary’s children to disagree on where remaining trust assets should be distributed. This was a pooled special needs trust (SNT) for Medicaid eligibility purposes. The Foundation was the trustee, and its counsel drafted the trust. The court applied Indiana law, which provides that when a contract is ambiguous, it’s construed against the drafter, and ruled in favor of the beneficiary’s children. This case is notable because the court referenced in its opinion that the Foundation’s counsel had his law license suspended indefinitely.
Equitable Justification
Not all trustee cases are decided against a trustee. In Orange Catholic Foundation v. Arvizu,21 an individual trustee was absolved from liability for breach of duty when the trustee believed she was doing the right thing in paying the expenses of the trustor’s friend, who had a life estate in the trustor’s home, and acting in accordance with the trustor’s instructions to take care of the friend (who was elderly, destitute, suffering from dementia and unable to cover the expenses himself).
Similarly, in Lynch v. Barba,22 the trustee and beneficiary were described to “not have the best working relationship.” The court held that the plaintiff failed to show that the trustee violated his fiduciary duties as trustee of an SNT and presented no evidence that the trustee improperly spent or misappropriated trust monies, failed to distribute trust funds consistent with the terms of the trust or to provide the required accounting and other information to plaintiff or acted unfairly in favor of the contingent beneficiaries.
Blood Codicils
Our final case answered a burning question on everybody’s mind: whether a holographic codicil to a will, written with the blood of the decedent, would be admitted to probate. The court in In re Will of Bradway23 opined that when there’s clear and convincing evidence that the codicil is intended to alter the decedent’s will, the codicil will be admitted to probate.
Endnotes
1. Morgan v. Superior Court, 23 Cal. App. 5th 1026 (2018).
2. In re King, 295 Ore. App. 176 (2018).
3. Calhoun v. Rawlins, 93 Mass. App. Ct. 458 (2018).
4. Matter of Kopet, 164 A.D.3d 588 (App. Div. 2018).
5. Eimers v. Saletta, No. A148339, 2018 Cal. App. Unpub. LEXIS 7699 (Nov. 14, 2018).
6. Cecchini v. Kuehn, 2018 IL App (1st) 170382-U.
7. In the Estate of Lee, 551 S.W.3d 802 (Texas App. 2018).
8. In the Matter of Elizabeth S. Payson, 93 Mass. App. Ct. 1124 (2018).
9. Hadassah v. Melcer, 44 Fla. L. Weekly D207 (Fla. 4th DCA Jan. 9, 2019).
10. Rachins v. Minassian, 251 So.3d 919 (Fla. 4th DCA 2018).
11. Carberry v. Kaltschmid, No. A150675, 2018 Cal. App. Unpub. LEXIS 3900 (June 7, 2018).
12. In re Mayette E. Hoffman Living Tr. U/A Dated August 4, 1997, 812 S.E.2d 401 (N.C. Ct. App. 2018) .
13. In re Estate of Forgey, 298 Neb. 865 (2018).
14. Matter of Johnson, 166 A.D.3d 1435 (App. Div. 2018).
15. In re W.N. Connell & Marjorie T. Connell Living Tr., 426 P.3d 599 (Nev. 2018).
16. James v. Estate of Wicke, 382 Wis.2d 830 (2018).
17. EGW v. First Fed. Sav. Bank, 413 P.3d 106 (2018).
18. Horgan v. Cosden, 249 So.3d 683 (Fla. 2d DCA 2018).
19. Matter of Wellington Trs., 165 A.D.3d 809 (App. Div. 2018).
20. National Foundation for Special Needs Integrity, Inc. v. Reese, 881 F.3d 1023 (7th Cir. 2018).
21. Orange Catholic Found. v. Arvizu, 28 Cal. App. 5th 283 (2018).
22. Lynch v. Barba, 2018 Del. Ch. LEXIS 109 (Del. Ch. Ct. 2018).
23. In re Will of Bradway, No. A-4535-16T3, 2018 N.J. Super. Unpub. LEXIS 1505 (Super. Ct. App. Div. June 25, 2018).