With courts reopening and a global pandemic seemingly under control, we noticed an uptick in fiduciary-related cases. Cases remain fascinating with a plethora of interesting characters. The following notable cases highlight developments we witnessed in the fiduciary field.
Caretaker Exerted Undue Influence
Bates v. Bates1reminds us that the elderly in declining health continue to be taken advantage of by younger caretakers. Austin Bates, at age 78, divorced Kay, his wife of 57 years, and married his caretaker. Before finalizing the divorce, Austin created an irrevocable trust leaving assets in continuing trust mostly to Kay and their children and a small percentage to the caretaker. The trust protector later amended the trust at Austin’s direction in favor of the caretaker, by removing Kay’s portion, adding the caretaker’s children as beneficiaries and giving a much larger share to the caretaker during her life. The trust protector and corporate trustee both noted that the caretaker did “all the talking” in meetings and “demand[ed] changes to the Trust that would be in her favor,” and that Austin was “obvious[ly]” incapacitated. While the claim of undue influence was against the caretaker over the trust creator, the trust protector was actually the individual who amended the trust. There was no claim that the caretaker directly exercised undue influence over the trust protector. The court ruled that because the caretaker exerted undue influence over the trust’s creator “to pressure or direct the trust protector to amend the Trust,” the claims were valid, and the dismissal of the initial case was reversed and remanded.
Executor Personally Liable
An estate of a decedent must pay its estate taxes before distributing assets to the beneficiaries. In Estate of Kwang Lee v. Commissioner,2this wasn’t the case. The decedent died testate, and a licensed attorney and municipal court judge was named executor. The executor filed the estate tax return and distributed assets to the beneficiaries. The Internal Revenue Service determined a deficiency in estate tax and mailed a “notice of deficiency” to the executor years later. The executor timely filed a petition and proceeded to distribute more estate assets to beneficiaries. The court entered a decision finding a deficiency in estate tax due of over $500,000; however, following the distributions, the balance of estate assets was approximately $180,000, rendering the estate unable to satisfy the claim. The court ruled that it was the executor’s fault for distributing estate assets prior to paying estate taxes, and the executor was held personally liable for the estate tax obligation.
Duties of Successor Trustee
Is it the job of a successor trustee of a trust to review all acts of the prior trustee to find fraud? Antley v. Small3 determined that the successor trustee is obligated to perform reasonable diligence, but if the acts of the prior trustee were too concealed, complex or convoluted for the successor trustee to find or understand, then the successor trustee wouldn’t be found liable. In this case, two former trustees defrauded a trust of millions of dollars, and the attorneys for the trustees conspired with, aided and abetted these thefts by creating the documents necessary to accomplish these transactions and misrepresenting the transactions to the beneficiaries. The statute of limitations was able to be tolled, as: (1) a previous trustee has no duty to impute knowledge of prior trust activity to a successor trustee, (2) the attorneys’ letters to the beneficiaries regarding the transactions didn’t provide enough information for the beneficiaries or a successor trustee to suspect a fraud was committed, and (3) the transactions were so complex and convoluted that it was unclear if the beneficiaries failed to exercise reasonable diligence.
Discretionary Distribution Dispute
As trustee, it’s important to exercise caution when making discretionary distributions. When you “give” money to one beneficiary, you’re “taking it away” from another. In re Estate of Calvin4 is a reminder to all trustees to perform the appropriate due diligence, correctly interpret trust terms and consider the needs of all beneficiaries (including remaindermen). The grantor created a trust for the benefit of their son, with the remainder to descendants. Following the grantor’s death, the grandchildren sued the estate of their father (the son) alleging the trustee erroneously and fraudulently distributed principal. While the income distributions were mandatory, the discretionary terms of the trust were somewhat ambiguous. The court determined that pursuant to the terms of the trust, the principal distributions were correct, and it was irrelevant whether the son misrepresented his personal wealth to the trustee, as no part of the trust required the trustee to consider the beneficiary’s personal wealth or other sources of income in determining discretionary distributions.
Asset Valuation
There’s an inherent conflict of interest when valuating assets on the death of an individual. Nies v. Probate Services, LLC (In re Estate of Nies)5is a reminder to use professional appraisers when valuing assets and to bring witnesses when entering houses, opening safe deposit boxes or entering other locations. In this case, two of the six beneficiaries claimed that assets were worth more than they received and that the executors stole, concealed or mismanaged the assets. Their claim was based on an appraisal of the estate-owned farmland real estate that valued the property at $923,000, but the property sold at auction for only $643,500. They also claimed that the life insurance policy was worth more than the proceeds paid and that the cash in the safe deposit box was greater than reported. The court ruled that there was no foul play as: (1) the house was sold at fair market value to the highest bidder, and the sales price doesn’t always align with the appraised price; (2) the life insurance company handled the policy appropriately; and (3) there was insufficient evidence to prove mishandling of cash in the safe deposit box.
Defining “Beneficiaries”
In Zutavern v. Zutavern,6 not clearly defining whom the beneficiaries were led to unintended consequences. The Zutaverns had a family business (the William Zutavern Cattle Company (WZCC)). On William Zutavern’s death, the shares of WZCC stock were to be held in further trust until his spouse, Meredith, died, and then distributed “to those of [William’s] children and/or grandchildren who are [then] actively involved in the operation and management of [WZCC].” At the time of William’s death, he had four children, and they were all involved in the operation and management of WZCC. After a family falling out, one son, Shawn, who had worked at WZCC for 37 years, was terminated along with his son, Russell. At this time, they stopped receiving financial reporting of WZCC, an asset of the trust. Shawn and Russell brought an action against the trustee, Meredith, claiming they were still beneficiaries of the trust and Meredith was breaching her fiduciary duties as trustee. The court ruled that William unambiguously intended for the WZCC stock to pass to his children and/or grandchildren who were actively managing or operating WZCC at the time of Meredith’s death. Therefore, all of William’s children and/or grandchildren are beneficiaries if they’re currently working at WZCC or could potentially work at WZCC in the future, until Meredith’s death. The fact that a beneficiary may ultimately take nothing doesn’t remove them from being a potential contingent beneficiary. Therefore, pursuant to the terms of the trust, the trustee must act in the best interest of all beneficiaries and not exclude some beneficiaries from the duties owed.
In Breslin v. Breslin,7 the trustee filed a petition to determine the trust beneficiaries, and those potential beneficiaries (including 24 charities) received notice of the petition. When the matter was ordered to mediation, some “beneficiaries” didn’t participate, and the nonparticipating parties were excluded as “beneficiaries.” Only five charities appeared. Nonparticipating parties, including some of the charities, appealed the court’s approval of a settlement. On appeal, the court affirmed the approval of the settlement. This case highlights that if you’re a “beneficiary” asked to participate in mediation, it might be worthwhile to participate.
Problematic Beneficiary-Spouse
In Huny & Bh Assocs. v. Silberberg,8 a seed was planted for future disputes between a daughter and her father when the daughter’s fiancé was reluctant to sign both religious and secular prenuptial agreements (prenups) presented by his future father-in-law. Later, the daughter and son-in-law complained that a purported decanting to a trust for the benefit of the daughter contained forged documents, allowing for the son-in-law and others to be named as trustees and later assert certain claims. In a lengthy appellate opinion (that followed a lengthy bench trial and trial court opinion), the daughter and son-in-law’s claims against her father, the law firm who drafted the trust and others (including former trustees) were dismissed or rejected. Allowing beneficiaries to marry without irrevocable trusts and prenups in place is a bad idea, especially when the future in-law declines to sign.
Bank Seizes Guarantor’s Assets
What happens when a longstanding client feuds with his bank? Will the client get his way? Answer: The bank will operate like a bank, not a buddy. The plaintiff-appellee in Zipkin v. FirstMerit Bank N.A.9 learned the hard lesson that when faced with a maturing debt, a bank will forgo its longstanding relationship and seize assets to pay its debt. The plaintiff was a “longstanding customer” of the bank. The plaintiff guaranteed a loan. When the obligor didn’t satisfy its debt, the bank seized assets from plaintiff’s personal bank account and revocable trust bank account. The appellate court reversed the holding of the trial court, repeating the premise that assets held in a revocable trust have no creditor protection from the grantor’s creditors; assets held in a revocable trust aren’t exempt from a pledge after that pledge isn’t fulfilled and the creditor seizes those assets.
NJSA Violated Trust Purpose
“Irrevocable” doesn’t mean “unchangeable.” There are actions that beneficiaries of an irrevocable trust can take to amend it. A nonjudicial settlement agreement (NJSA) is one. In McGregor v. McGregor,10 the court held that an NJSA can’t violate a material purpose of the trust. When Clifford McGregor died, the C.A. McGregor Family Trust became irrevocable. The trust was to continue for the benefit of his spouse, remainder to his children in continuing trust. The trust included a spendthrift provision. The surviving spouse and grantor’s two children entered into an NJSA stating that on the surviving spouse’s death, the trust would distribute outright to the two children. After entering into this agreement, the children filed an action in court seeking approval of this agreement, and the surviving spouse filed an answer alleging the agreement was invalid because it didn’t include all potential beneficiaries, violated a material purpose of the trust and lacked consideration. The court found that the changes made by the agreement were substantial and constituted a violation of a material purpose of the trust, which was for the trust to continue in trust for the benefit of the two children and then pass to their issue on their deaths. The NJSA was ruled invalid.
Unauthorized Practice of Law
Schaake v. City of Lawrence11 reminds us that in some states, a nonlawyer trustee can’t represent a trust as a lawyer without engaging in the unauthorized practice of law. A trust owned two properties in the same city. After the approval of a new funding project in that city, the properties were subject to special taxes. A co-trustee hired a law firm to file suit alleging illegal taxation. The firm then withdrew from the case before the court considered the merits of the trust’s claims. The co-trustee was unable to hire a new lawyer and attempted to move forward pro se. The court ruled that the co-trustee, acting pro se, couldn’t act on behalf of the trust without an attorney and lacked standing to appeal on behalf of the several beneficiaries. The lawsuit was dismissed because the party lacked standing to challenge the action or request relief.
Troubles With Fiduciaries
In the investment space, there’s a standard warning that “past performance is no guarantee for future results.” This appears to also apply to fiduciary actions. In In re Probate Appeal of McIntyre,12 the fiduciary of a Uniform Transfer to Minors Act (UTMA) account clearly breached his fiduciary duty but wasn’t removed as custodian because there was no indication that his past bad behavior would continue in the future. Ian McIntyre was custodian of a UTMA account for the benefit of his son, Douglas. Ian withdrew money from his son’s UTMA account to pay personal legal expenses related to the divorce of his now ex-wife. The ex-wife filed a petition in court requesting that: (1) the funds be returned to the UTMA account; and (2) Ian be removed as custodian. The court ruled that because removal of a fiduciary is an extraordinary remedy, and that, due to the evidence submitted, there was little threat of future misconduct, Ian could remain custodian of the UTMA account.
Can an arbitration clause be invoked to settle a dispute between an individual and fiduciary? Maybe, but not if you waive it. In re Estate of Kane13 dealt with the denial of an interested party’s motion to compel arbitration. The interested party, a successor individual co-trustee and contingent remainder beneficiary, sought to become sole trustee for her incompetent mother using a power of attorney. The corporate fiduciary co-trustee (trustee) fought the interested party’s motion, won and then sought attorney’s fees and costs. At a certain point, the interested party sought to compel arbitration with trustee. The appellate court, upholding the lower court, held that the interested party had waived her right to compel arbitration by not raising it sooner in the proceedings. By not raising the defense of arbitration by preliminary objection, the defense was waived.
Family Dynamics Causing Problems
Ide Hersch Marital Trust vs. Hersch14 is a warning of the dangers of naming a child from a first marriage trustee of a stepmother’s marital trust. The stepmother was beneficiary of a marital trust established by her deceased husband. One of the husband’s sons was trustee. The trust was to distribute all net income to the surviving spouse during her lifetime, and, on her death, all remaining principal would be distributed to the husband’s children. The stepmother sued the trustee, alleging that the trustee reallocated the trust assets to reduce the amount of income the trust produced and violated fiduciary duties by failing to provide monthly accountings. The matter was tied up in litigation for years with motions ranging from breach of fiduciary duty, to removal of the trustee, to remainder beneficiaries’ responsibility for the payment of attorney’s fees. Might an independent third-party trustee prevented some of this litigation?
Might one outside third-party fiduciary prevent arguments of conflicts of interest when a family business is involved? But can a grantor insist that certain people serve as fiduciaries in a trust and business, despite conflicts of interest? In Al J. Schneider Co. v. Moseley,15 a trust with 21 beneficiaries allowing three daughters to hold positions as trustee, beneficiaries and board members of a closely held company, a court held that yes, conflicts are okay. Even after certain beneficiaries sought to remove the daughters-trustees, the court found that if a grantor allows trustees to hold conflicting positions, alleged conflicts of interest wouldn’t void actions of the trustees. But the court noted that other facts, including bad faith and reckless indifference to the interest of other beneficiaries, could result in action against these same trustees on remand to the lower court.
Endnotes
1. Bates v. Bates (In re A B B Trust), 2021 Ariz. App. LEXIS 95 (May 11, 2021).
2. Estate of Kwang Lee v. Commissioner,T.C. Memo. 2021-92.
3. Antley v. Small, 360 Ga. App. 617 (June 28, 2021).
4. In re Estate of Calvin, 2021 S.D. 45 (July 28, 2021).
5. Neis v. Prob. Servs., LLC (In re Estate of Nies), 2021 Wisc. App. LEXIS 293 (June 22, 2021).
6. Zutavern v. Zutavern (In re William R. Zutavern Revocable Trust), 309 Neb. 542 (June 25, 2021).
7. Breslin v. Breslin, 60 Cal. App. 5th 167 (Jan. 26, 2021).
8. Huny & Bh Assocs. v. Silberberg, 2021 N.J. Super. Unpub LEXIS 3161 (Dec. 27, 2021).
9. Zipkin v. FirstMerit Bank, N.A., 2021-Ohio-2583 (July 29, 2021).
10. McGregor v. McGregor (In re McGregor), 308 Neb. 405 (Feb. 12, 2021).
11. Schaake v. City of Lawrence, 60 Kan. App. 2d 88 (May 7, 2021).
12. In re Probate Appeal of McIntyre, 207 Conn. App. 433 (Sept. 14, 2021).
13. In re Estate of Kane, 2021 Pa. Super. Unpub. LEXIS 2871 (Oct. 27, 2021).
14. Ida Hersch Marital Trust v. Hersch, 2021 Wisc. App. LEXIS 159 (April 6, 2021).
15. Al J. Schneider Co. V. Moseley, 2021 Ky. App. Unpub. LEXIS 510 (Aug. 27, 2021).