It’s been quite a year health and politics wise. Due to countless shutdowns in the courts, there were less reported cases. But, like in previous years, of the reported cases, there was no shortage of fascinating ones. The following notable cases highlighted developments we witnessed in the fiduciary field.
Elder Abuse
Breach of fiduciary duty in wealth management. Although this case wasn’t litigated in a court of law, it offers a warning to those who entrust significant sums of money to family members. The “plaintiff” in this matter alleged that her two grandsons and the wealth management firm they worked for at the time charged her large commissions and invested in inappropriate investments without her knowledge. This matter was brought before an arbitration panel from the Financial Regulatory Authority (FINRA). After months of testimony, the FINRA panel ruled that the bank and the two brothers abused their fiduciary duties and were liable for elder abuse. Whether it’s a family member or someone unrelated, it’s important to watch for red flags or have a system of checks and balances to avoid a similar situation.1
Immediate family members. In the United States each year, up to 5 million elderly individuals are abused to the tune of $36.5 billion.2 These figures are expected to rise as the Baby Boomers age. Perpetrators are often other family members. Keading v. Keading3 illustrates many of the typical elder abuse facts: two siblings; their father (Lewis), a widower; one sibling (Hilja) steps out of the picture, and the other sibling (Kenton) gains power of attorney; the widower becomes ill; and then the “bad” sibling (Kenton) transfers assets to himself (in this case, 99,678 shares of stock and the family residence). Hilja sued Kenton for elder financial abuse against Lewis. The court held for Hilja, finding that Kenton had committed elder financial abuse under California law. The court ordered Kenton to pay double damages and vacate the family residence. It ruled that the successor trustee was entitled to immediate possession of the trust property.
Corporate Fiduciary Sued
In Rogers,4 a predecessor corporate fiduciary of a trust was held not liable for claims brought by the successor trustee. The case had it all: breach of fiduciary duty, an equitable fraud claim and alleged financial elder abuse. The trust contained an exculpation clause that limited the trustee and trust advisor’s liability to “fraud, willful misconduct or gross negligence.” This was a bar the plaintiffs couldn’t clear. Additionally, the plaintiff-beneficiary was described as having “little knowledge of or interest in financial matters except insofar as she spent a lot of money and was always desirous of more money to spend.” We expect to see more of these successor trustee/beneficiary lawsuits in the future, especially when asset values decrease or individuals with a position of trust in a beneficiary’s life begin to meddle in a trust’s affairs.
Trustees Behaving Badly
The trustee in Roenne v. Miller5 took all of the trust assets for himself and his wife, to the detriment of his siblings. To the shock of the beneficiary-siblings, the trial court held for the trustee. On appeal, the appellate court noted that while the trial court may have read the trust, it neglected to do a thorough analysis of the law of trusts: “Absolute discretion” doesn’t allow a trustee the freedom to deplete the trust for himself. Grantors need to thoroughly consider all options in making trustee decisions, especially when there are multiple sibling-beneficiaries.
A Class is Determined at Death
Ackers v. Comerica Bank & Trust, N.A.6 was a will construction case. Larry Ackers, the beneficiary of a testamentary trust created by his father’s will, requested the court to determine who would be deemed his descendants on his death and be entitled to share in the remainder of his trust. The term “descendant” was undefined in the instrument, and Larry didn’t want two of his biological children to receive a distribution. He had relinquished his parental rights to both, and they were subsequently adopted by other families. The court ruled that this case isn’t ripe for adjudication because such a class isn’t ascertained until the occurrence of the contingency, in this case, Larry’s death.
Restitution and Unjust Enrichment
On his mother’s passing, Thomas Fargen Jr. sued her estate alleging restitution and unjust enrichment for the work he performed on the farm during his mother’s life. The estate asserted, among other things, latches, that Thomas was barred from bringing this claim because “waiting 34 years to make a claim for unjust enrichment is unreasonable.” The trial court in Estate of Fargen v. Fargen7 treated the jury’s verdict as advisory and awarded Thomas the entire farm. The appeals court reversed the lower court’s decision and remanded, directing that the court address its reasoning for the unjust enrichment award and the estate’s latches defense.
Gifts and Authority Under POA
During his life, Ralph Lindvig executed a durable power of attorney (POA) naming his wife, Dorothy, as the attorney-in-fact. Years later, Ralph had an accident requiring significant care until his passing a couple of years later. During that time, Dorothy sold portions of his land and conveyed other parcels of land to herself. In Estate of Lindvig v. Jellum,8 the personal representatives of Ralph’s estate sued Dorothy’s estate alleging that she breached her fiduciary duty and acted beyond her authority under the POA. The court held that Dorothy had the authority to make the transfers under the real estate transfer provisions. The court didn’t need to rely on the POA’s gifting provisions, which were a consideration of the lower court’s findings.
Duty to Inform
In Holiday v. Horst (In re Estate of Ella E. Horst Revocable Trust),9 a beneficiary of the trust objected to the trustee’s petition to confirm the validity of the fourth amendment. Previously, the trustee sent notice to the beneficiaries regarding the trust becoming irrevocable with copies of the trust and first three amendments. The trustee argued that the beneficiary’s objection to the fourth amendment was beyond the 120-day limitation set by Nevada statute. The court held that the interpretation of the notice provision requiring “[a]ny provision of the trust instrument which pertains to the beneficiary” includes “all.” Therefore, the trustee’s failure to include the fourth amendment in her original notice didn’t comply with the Nevada statute.
Future Spouse Not Beneficiary
When the settlor executed her trust, her son had been married to his first wife for 30 years. Subsequently, he divorced her and got remarried shortly thereafter. On the settlor’s death, the son’s ex-spouse and current spouse filed motions asking the court to define “spouse.” The court in Ochse v. Ochse10 held that it wouldn’t redraft the document and that “[w]hen the language is unambiguous and expresses the grantor’s intent, the appellate court need not construe the instrument because it speaks for itself.” In this case, “spouse” refers to the spouse at the time the instrument was created, being the son’s first wife. When drafting, consider the effect of divorce on a future class of beneficiaries.
Patience Prior to Contest
In Habal v. Habal,11 a disinherited beneficiary sued, challenging his grantor-father’s ability to amend his trust and arguing the trustees committed tortious interference with his testamentary expectancy. The grantor was still living at the time of the lawsuit. The trial court judge, affirmed on appeal, ruled that the beneficiary’s lawsuit was premature: The trust contest wasn’t ripe under Florida trust law while the grantor was alive, regardless of whether the grantor was incapacitated when the trust was amended.
Executrix Personal Liability
In United States v. Estate of Kelley,12 the decedent’s brother was appointed as co-executor. The estate incurred an estate tax liability of over $688,000. The brother transferred all the assets to himself as sole beneficiary, rendering the estate insolvent. Subsequently, the brother entered into an installment agreement with the Internal Revenue Service to pay the estate tax due. Before full payment, the brother died, and his daughter was appointed executrix of his estate. She distributed all assets to herself, leaving no assets in either estate. The court granted the government’s motions for summary judgment against the daughter as executrix of her father’s estate for transferee liability and for fiduciary liability. Even though the daughter wasn’t the executrix of the first estate, she was found to have knowledge of the outstanding tax liability and, therefore, the court was able to find her personally liable.
Trust Can’t Plead the Fifth
The IRS sent the defendant two summonses requesting documents related to their investigation of offshore bank accounts. The defendant, in his capacity as trustee, asserted his Fifth Amendment privilege. The Fifth Amendment privilege applies only to a natural person. In United States v. Fridman,13 the court held that a trust is a collective entity, defined as an organization that has “an institutional identity separate from that of its individual members.” The defendant isn’t able to assert his Fifth Amendment privilege in his capacity as trustee and must produce the requested documents.
Discharge of Personal Liability
In United States v. Paulson,14 Michael Paulson was appointed as the executor of Allen E. Paulson’s estate and trustee of the his living trust. On filing the estate tax return, Michael also filed a letter requesting a discharge under 26 U.S.C. Section 2204. The IRS conducted an audit and assessed an additional estate tax liability that the estate elected to pay under a 15-year installment plan. Michael was removed as trustee and then as executor. At that point, all installment payments due at that time had been made. Subsequently, the estate failed to make its installment payments. The issue arose as to whether Michael was discharged in his role both as executor and trustee. The court held that Michael’s letter titled “Request for discharge of fiduciaries from personal liability” was sufficient to address Michael in both his capacity as trustee and executor, and Section 2204 doesn’t require that a separate letter for each office be sent.
More Isn’t Always Better
The decedent died, leaving her estate to her two daughters and one son. The two daughters were named as co-executors of the estate. The two daughters were unable to cooperate, one petitioned to remove the other and the court removed them both. The Surrogate’s Court in Matter of Hudis15 ordered that 75% of the fees incurred by the first daughter be paid from her share, while 25% of the fees incurred by the second daughter be paid from her share. The appeals court affirmed the lower court’s decision, stating that the first daughter created more litigation and work for her attorneys. In addition, the excessive fees were a result of the first daughter’s “extensive communication, duplicative reviewing of the documents related to the administration of the estate necessitated by [her] multiple substitutions of counsel, and other fruitless services that only benefited [the first daughter] individually and did not benefit the estate.”
Patience Prior to Payment
Following a troubled grantor’s passing, the corporate trustee in Wing v. Goldman Sachs Tr. Co.16 paid distributions pursuant to the terms of an amendment to the trust. Plaintiffs, two adult children from the grantor’s first marriage, challenged the validity of such amendment (and the grantor’s capacity to execute such amendment) and, in doing so, sought to freeze the trust assets to prevent further distributions by the corporate trustee. The appellate court ruled in favor of the plaintiffs and held that the corporate trustee breached its duty of neutrality by attempting to decide who the rightful beneficiaries of the trust were before pending litigation had been resolved.
No Reimbursement to Losing Party
Former co-trustees decanted trusts and, in doing so, removed beneficial interests of certain beneficiaries in Hodges v. Johnson.17 The former beneficiaries sued and asked the court to declare those decantings void ab initio and to remove the former co-trustees. The trial court sided with the beneficiaries, and the Supreme Court of New Hampshire affirmed on appeal. Despite the adverse ruling, the former co-trustees subsequently sought reimbursement for the fees and costs they personally incurred while defending the decantings from the trust. In a decision that once again reached the Supreme Court of New Hampshire, the trial court’s decision to negate reimbursement was upheld. The court found that justice and equity required the former co-trustees to personally reimburse the trusts and, by that same reasoning, declined the former co-trustees reimbursement from the trusts. The takeaway here is that trustees need appropriately to analyze the pros and cons of decanting, especially when removing future beneficiaries.
Better to Get Promises in Writing
Former hedge fund managers Malcolm and Emily Fairbairn donated a large block of stock to an institutional donor-advised fund (DAF) in Fairbairn v. Fidelity Investment Charitable Gift Fund.18 The institution allegedly made promises that “enticed” the Fairbairns to donate this stock. But, the Fairbairns alleged that by selling all donated stock in the last 21/2 hours of the last trading day of the calendar year, the institution drove down the price of the stock, thus reducing their tax deduction and the amount of money in their DAF. In a highly publicized case (as highly publicized as estate planning gets), the court held that while the institution may not have handled the trading as a highly sophisticated hedge fund manager would have, the institution didn’t violate the standard of care for a DAF. When parting with an asset, it’s pivotal to keep in mind that the donee may have less sophistication than the donor. It behooves the donee to research the potential donor, rather than relying on a “promise.”
Endnotes
1. Tom Schoenberg, “At 93, She Waged War on JP Morgan and Her Own Grandsons,” Bloomberg Wealth (Feb. 17, 2021).
2. National Council on Aging, Get the Facts on Elder Abuse (Feb. 23, 2021), www.ncoa.org/article/get-the-facts-on-elder-abuse.
3. Keading v. Keading, 60 Cal. App. 5th 1115 (2021).
4. Rogers v. Wilmington Tr. Co., Civil Action No. 18-116-CFC, 2021 U.S. Dist. LEXIS 35293 (D. Del. Feb. 25, 2021).
5. Roenne v. Miller, 475 P.3d 708 (Kan. Ct. App. 2020).
6. Ackers v. Comerica Bank & Trust, N.A., 2020 Tex. App. LEXIS 10442 (2020).
7. Estate of Fargen v. Fargen (In re Estate of Fargen), 944 N.W.2d 349 (2020).
8. Estate of Lindvig v. Jellum, 951 N.W.2d 214 (2020).
9. Holiday v. Horst (In re Estate of Ella E. Horst Revocable Trust), 478 P.3d 861 (Nev. 2020).
10. Ochse v. Ochse, 2020 Tex. App. LEXIS 8922 (Tex. App. Nov. 18, 2020).
11. Habal v. Habal, 303 So.3d 960 (Fla. 4th DCA 2020).
12. United States v. Estate of Kelley, 2020 U.S. Dist. LEXIS 196336 (D.N.J. Oct. 22, 2020).
13. United States v. Fridman, 974 F.3d 163 (2d Cir. 2020).
14. United States v. Paulson, 445 F. Supp. 3d 824 (S.D. Cal. 2020).
15. Matter of Hudis, 2020 NY Slip Op. 05751, 130 N.Y.S.3d 738 (App. Div.).
16. Wing v. Goldman Sachs Tr. Co., N.A., 851 S.E.2d 398 (N.C. Ct. App. 2020).
17. Hodges v. Johnson, 244 A.3d 245 (2020).
18. Fairbairn v. Fidelity Investment Charitable Gift Fund, No. 18-cv-04881-JSC, 2021 U.S. Dist. LEXIS 36799 (N.D. Cal. Feb. 26, 2021).