A new year has come and gone with no absence of fascinating cases. The following notable cases highlighted developments we see surfacing in the fiduciary field.
Distributions and Equitable Division
A court in Massachusetts ruled on whether a discretionary trust should be included when dividing marital property in a divorce case. In Levitan v. Rosen,1 the wife had a beneficial interest in a discretionary trust created by her father. The trust provided that she could withdraw up to 5% of the trust principal each year, generally referred to as a “5 x 5 power.” The Massachusetts Appellate Court, vacating a portion of the trial court’s ruling, found that even though the withdrawal right is governed by the spendthrift provision, it may be included in the marital estate because such a right isn’t a mere expectancy. The court looked to the holding in Pfannenstiehl v. Pfannenstiehl, 475 Mass. 105 (2016), in making its ruling.
A Promise Isn’t a Promise
A promise from one brother to another to share in their father’s estate isn’t a recognized cause of action against the estate. The decedent in Matter of Estate of Fogel2 left his whole estate to one of his sons. A second son and daughter were both disinherited. The second son alleged that his brother promised to share the estate equally between the two brothers and requested the court place a constructive trust on half of the property. The court held that the second son had no standing to proceed against the estate and, at best, was a general creditor of his brother.
Beneficiary List Doesn’t Exist
In In re Will of Katz,3 the decedent’s will instructed the executor to distribute an estate worth over $10 million to “people and charities on a list to be provided to him by the testator.” The problem was that the list was never created. The Surrogate’s Court held that despite the lack of existence of the list, the will is a valid testamentary instrument and granted the executor’s motion for examinations likely to find evidence as to the testator’s intention regarding the list that was never presumably created. For those drafting estate plans, be sure to create a list when drafting the plan.
Need for Original Will
The lesson of Trowbridge v. Estate of Trowbridge4 is to know the location of original documents. In this case, the probate court couldn’t determine whether the original will offered for probate was a copy or an original, as the estate’s attorney testified that the document offered for probate was a copy and the original was to be found in a safe, but the safe didn’t contain the purported will. The appeals court followed a previous Indiana decision, noting that when a copy of a missing will is offered for probate, the burden of proof remains on the contesting party to establish that the original will was revoked. The appeals court remanded the case as the probate court had failed to determine whether the decedent had possession of the original will: A predicate finding that the decedent had possession of the will in the first place was necessary for something to be “missing” from one’s possession.
Beloved Stepchildren
In In re Estate of Bialas,5 a niece and nephew of the decedent challenged the interpretation of the residuary clause for purposes of determining whether the decedent meant to include his stepchildren as beneficiaries of the residue of his will. The court examined the decedent’s will in its entirety and found that because he’d referred to stepchildren previously in the will as his “beloved children,” the phrase “to my issue by representation in substantially equal shares” meant that the decedent intended to leave his property to his stepchildren. The court examined the decedent’s will in its entirety and liberally interpreted the word “issue” to make its decision. Note to testators with stepchildren and adopted children: Make sure your attorney defines the terms “children,” “issue” and/or “descendants” when drafting your estate-planning documents.
Inherently Ambiguous Trust
In Harbin v. Williams,6 a joint trust provided that while both settlors were living, either could withdraw property from the trust, but on the death of the first settlor and while the surviving spouse was acting as sole trustee, the trust didn’t specifically grant the power to the surviving spouse trustee to withdraw the property. The trustee could only exercise powers conferred on a trustee under South Carolina law. The appellate court found that a trust subject to different, reasonable interpretations is inherently ambiguous. Based on the finding, the court held that this ambiguity in the trust presented a question of fact that was properly subject to a jury’s interpretation. This case presented the issue of whether the surviving spouse could withdraw a farm from the trust. In deciding on whether to draft or administer a joint trust, special care is warranted to prevent these types of problems.
Broad Discretion and Fiduciary Duty
No matter how broad the discretionary language is in a trust, the trustees are still bound by their fiduciary duties to all of the beneficiaries. In Couture v. Zagami et al.,7 the court found that the two brothers, who were the trustees and co-members of a limited liability company (LLC), were in breach of their fiduciary duties for failing to make equal distributions of income from the LLC and the trust. The trust included a provision requiring equal distributions absent a direction from the majority of the beneficiaries. The court found no evidence of such a direction and, therefore, the brothers’ exercise of the discretion was subject to their fiduciary duty to their sister.
Cormier v. Koning8 is another case in which a family faces the concept that fair and equal aren’t the same within the context of a family business. The grantor transferred all of his voting and non-voting shares of his company to a grantor trust for the benefit of his four children, two sons and two daughters, and four grandchildren. The two sons, who were both active in the business, were the trustees. Following the creation of the trust, the trustees (the two brothers), acting pursuant to the terms of the trust, distributed all of the shares to each other. The brother receiving the shares didn’t participate in the decision to distribute to himself. One of the sisters sued, alleging, in part, breach of fiduciary duty and requesting the brothers be removed from office. The court found that the trustees (brothers) acted within their discretion and that one of the primary purposes of the trust was to manage the income tax liability of the grantor. There was no evidence to show that the trust was created to provide the daughter with a stream of income.
Substantial Benefit Theory Applied
In Smith v. Szeyller,9 the beneficiaries and trustees, children of the family trust grantors, litigated over the management of the family trust and distribution of its monetary assets. The parties settled; however, one of the nonparticipating beneficiaries objected. One key issue was the court upholding the award of trustees’ fees from trust assets on the substantial benefit theory. The court used its equitable powers to award the fees, opining that the litigation substantially benefited all beneficiaries: litigation preserved trust assets when the accounts were frozen; spending and borrowing stopped; a post-death loan was repaid; trustees’ fees were waived; and the trustees assumed trust liability for tax penalties and interest.
In Terrorem Clause
Although this case involved numerous issues including the payment of legal fees from the estate, one issue of particular interest is whether a beneficiary petitioning for supervised administration of the estate triggered the in terrorem clause in the decedent’s will. In In the Matter of Estate of Connolly,10 the lower court ruled that the beneficiary forfeited her interest under the will pursuant to the in terrorem clause, in part because the petition amounted to a contest of the probate of the will. The appeals court reversed the lower court’s decision, stating that even if “the petition [was] successful, the will still would have been carried out in accordance with its terms.”
Additionally, in In re Estate of Barger,11 the court explained that an in terrorem clause is unenforceable if probable cause exists for instituting proceedings, noting that probable cause exists if, at the time of instituting a will contest proceeding, there’s evidence that would lead a reasonable person, properly informed and advised, to conclude that there’s a substantial likelihood that the challenge would be successful. Here, the litigants possessed corroborating evidence that the tortfeasor was in a position of influence over the decedent in her daily life and farming operations and attended the execution of a 2006 will, all while the decedent was in a deteriorating physical and mental condition, had executed six wills in a relatively short amount of time and lived in poor conditions despite her land holdings.
Duty to Diversify
A trustee’s reliance on the decedent’s emotional connection to a concentrated holding doesn’t absolve that trustee of his duty to diversify. In Matter of Kenney,12 the estate and subsequent charitable trust’s largest single asset was comprised of General Electric stock that the decedent had held for decades. The Charities Bureau of the New York Attorney General’s Office alleged the executor, who was also the trustee of the charitable trust, was slow to settle the estate and diversify out of the concentrated holding. The Surrogate’s Court found the executor “did not act prudently in retaining the GE stock,” which he held for a significant time after the decedent’s death. The court surcharged the executor approximately
$3.5 million, which represented the value of the lost capital.
Termination of Trust
You can’t just file a lawsuit in a state without providing a basis for that state’s courts to assert jurisdiction over the proceedings. The facts of Kaminsky v. Hecht 13 illustrate this point. The Florida appellate court found that when the trustee never resided in Florida, the settlor of the trust never resided in Florida, the trust was administered from either New York or New Jersey, no trust assets were located in Florida and there were no allegations of acts or misconduct by the trustee in Florida, Florida’s long-arm statute exercising personal jurisdiction over a non-resident defendant-trustee didn’t take effect.
Often, families who have a shared summer compound want to maintain the property for the enjoyment of future generations. As a family expands, its needs and wants change, as was the case in Matter of the MacMackin Nominee Realty Trust.14 Generation 1 put two summer cottages in one trust and the adjoining vacant lots in a second trust, all located in Martha’s Vineyard, Mass. for the benefit of Generation 2. Subsequently Generation 2, consisting of two daughters, disagreed about certain aspects of the property. The trust stated that the two families should be treated equally. The trustee filed a petition to terminate the trust. The court found that under the Massachusetts Uniform Trust Code (UTC), because of certain unanticipated circumstances, one of the daughter’s “ability to enjoy the benefits of the trust property” was eliminated and, therefore, the termination would further one of the trust’s purpose, which was equal treatment of the sisters with respect to the property.
Mandatory Distribution Direction
In Trolan v. Trolan,15 one of six sibling co-trustees/beneficiaries wanted to terminate a trust and require a distribution of her share, while five others wanted to keep it intact. The co-trustees had the power to act by majority vote. While the trustees could “continue to hold any property received in trust,” the trust provided that once a beneficiary attained age 30, the trustee “shall” distribute to such beneficiary the balance of his trust. The appellate court agreed with the trial court and upheld the distribution of the trust assets based on the “shall” distribute language. While the appellate court didn’t agree that liquidation was required, the court concluded that the trust wasn’t ambiguous: The provisions clearly required the distribution of assets and termination on the death of the last surviving spouse if the beneficiaries all reached age 30. Note to fiduciaries: “Shall” distribute “upon attaining age 30” requires distribution.
Carrying Out Charitable Intent
Ensuring that a client’s charitable intent is carried out can be challenging when the original instructions are very specific. The decedent’s will in Matter of Ruhle16 stated that a scholarship was to be created and awarded to “a male student, of specific German ancestry, enrolled in certain engineering courses offered by Brooklyn Technical High School.” The executor filed a cy pres petition requesting, in part, to broaden the candidate pool and further define the academic requirements. The trustee filed another cy pres petition because he was having problems finding qualified applicants. Although the court allowed the modification, the court overrode the trustee’s plan and applied its own plan. In doing so, the court found that the trustee’s plan failed to properly carry out the decedent’s intent, and the court exercised its power to select an alternate plan.
Consent to Appointment is Consent
Once a client gives consent to the appointment of an administrator, can that consent be revoked? The Surrogate’s Court in Matter of Corey17 says “no.” The three children and two grandchildren of a deceased child all consented to the appointment of an administrator of the decedent’s estate. Eight months later, the children filed a petition for removal, arguing that their consent was revocable and they, representing a majority of the beneficiaries, now revoke such consent. New York law provides 12 grounds for removing a fiduciary, of which revocation of consent isn’t one. The court held that the consent can’t be subsequently revoked, and the petitioners’ other argument that there was a conflict of interest didn’t rise to the level necessary for removal of a fiduciary.
Removal of Corporate Trustee
There have been a few recent cases disallowing the removal of corporate trustees,18 with each case reaching its conclusion on different grounds. In In re Fenske,19 the court reasoned that removal would be inconsistent with a material purpose of the trust, even though all qualified beneficiaries supported removal. The court placed great significance on the settlor’s initial choice of a bank to serve as trustee, noting that the UTC and the Restatement (Third) of Trusts commentary indicate that replacement of a selected trustee with another individual or entity that lacked the desired qualities of the initial trustee would be inconsistent with a material purpose. Here, the replacement of a bank with a beneficiary’s attorney-spouse as trustee was deemed to be inconsistent.
Endnotes
1. Levitan v. Rosen, 95 Mass. App. Ct. 248 (2019).
2. Matter of Estate of Fogel, No. 2006-1234/B (Kings Sur. April 10, 2019).
3. Will of Katz, 2019 WL 1750684 (N.Y. Sur. April 16, 2019).
4. Trowbridge v. Estate of Trowbridge, 131 N.E.3d 630 (Ind. App. 2019).
5. In re Estate of Bialas, No. A-18-023, 2019 Neb. App. LEXIS 39 (Ct. App. Feb. 12, 2019).
6. Harbin v. Williams, No. 5695, 2019 S.C. App. LEXIS 190 (Ct. App. Dec. 18, 2019).
7. Couture v. Zagami et al., 95 Mass. App. Ct. 1113 (2019).
8. Cormier v. Koning, 95 Mass. App. Ct. 1118 (2019).
9. Smith v. Szeyller, 31 Cal. App. 5th 450 (2019).
10. Matter of Estate of Connolly, 95 Mass. App. Ct. 1113 (2019).
11. In re Estate of Barger, 303 Neb. 817 (2019).
12. Matter of Kenney, 64 Misc.3d 1232(A) (Albany Sur. July 19, 2019).
13. Kaminsky v. Hecht, 272 So.3d 786 (Fla. 4th DCA 2019).
14. Matter of the MacMackin Nominee Realty Trust, 95 Mass. App. Ct. 144 (2019).
15. Trolan v. Trolan, 31 Cal. App. 5th 939 (2019).
16. Matter of Ruhle, 2019 N.Y. Misc. LEXIS 685 (Queens County Sur. 2019).
17. Matter of Corey, 65 Misc.3d 524 (Erie Sur. Aug. 27, 2019).
18. See, e.g., In re Trust Under Agreement of Taylor, 640 Pa. 629 (2017).
19. In re Fenske, 303 Neb. 430 (2019).