As we head into a supposed “economic downturn,” how might fiduciary cases look in 2023 and 2024? In 2022, there were some fascinating cases. Here are a few notable ones highlighting developments we witnessed in the fiduciary field.
Trust Accounting
Does a beneficiary of a revocable trust have any rights to information regarding the trust while the settlor is still alive and healthy? According to In re Va. Worley Trust,1 the answer is no. In this case, Virginia Worley married James in 2006. In 2015, James and Virginia went to a bank, and James demanded that some of Virginia’s assets be placed into joint ownership. Employees of the bank stated that Virginia said she was “afraid” James would take the accounts for himself that she wanted to leave for her son and that James got angry when bank employees met with Virginia alone. The employees reported these actions as highly suspicious of elder abuse. Later in 2015, Virginia and James executed a joint revocable trust, and assets were transferred to the trust. In 2017, Virginia’s son filed a petition against James to remove him as trustee and receive a trust accounting. James claimed that Virginia’s son had no right to receive information about the trust because it was revocable and he was a living settlor. The court ruled in James’ favor. In some states, beneficiaries other than the settlor have no right to receive notice, information or reports from the trustee regarding trust administration while the settlor is still alive because their interest hasn’t yet vested and the settlor can remove them at any time.2
Powers Given to “Beneficiaries”
Matter of Grossman3involved a trust that gave a beneficiary the power to appoint trust assets to a charity. The beneficiary appointed said assets to a charity (American Institute of Indian Studies), and the trustee disagreed with the charity that the beneficiary chose. The court found that despite the trustee’s dismay, this was a valid exercise of the powers given by the trust, and the appointment was valid. The trustee made no showing of fraud, overreaching or misrepresentation nor produced any evidence to support the claim. Settlor beware: Limit those powers of appointment wisely or else risk trustee-beneficiary disagreement.
Can an attorney-in-fact sign on behalf of a disabled individual for an instrument in which the attorney-in-fact had a direct conflict of interest? In Matter of Gower,4 the court ruled that the attorney-in-fact couldn’t. Edward Gower, Sr. passed away survived by his wife, Linda, and his four children. Edward, Sr.’s will left 50% of his residuary estate to Linda and the other 50% to his four children. Edward, Sr. also had a family trust, which was an irrevocable trust naming Linda as income beneficiary, the four children as discretionary principal beneficiaries and remainder beneficiaries per stirpes. Edward, Sr.’s will was admitted to probate in 2021 along with a copy of a “Trust Revocation of the Family Trust” (Trust Revocation), which would transfer the property of the family trust back into the decedent’s estate. Edward, Jr. signed the Trust Revocation on behalf of Linda as her legal attorney-in-fact. The Trust Revocation would have deprived Linda of her right to income from the property within the family trust and instead resulted in the four children, including Edward, Jr., receiving an immediate percent ownership in the property. This presented a conflict of interest in that the attorney-in-fact signed a document that could potentially benefit himself and harm the individual for whom he had a fiduciary duty to protect. For this reason, the court ruled that Edward, Jr. couldn’t sign the Trust Revocation.
Power of Attorney Misfire
Can an attorney-in-fact create a revocable trust on behalf of an incapacitated individual who named him as attorney-in-fact via a validly executed power of attorney (POA)? According to Barbetti v. Stempniewicz,5the answer is yes, but only if the POA expressly grants this power. Lubov Stempniewicz was the mother of two children, one of whom was Edward. Edward had two children, and his sibling had two children. Lubov executed a POA in 2013 without an attorney, and Edward was named attorney-in-fact. In 2017, Edward created and signed the Lubov Trust as: (1) attorney-in-fact for Lubov as settlor; (2) attorney-in-fact for Lubov as co-trustee; and (3) individually as co-trustee. Under the terms of the trust, on Lubov’s death, $25,000 would be distributed to each of Lubov’s four grandchildren, but all remaining assets would be held in trust for the benefit of Edward’s two children. On Lubov’s death in 2018, during the probate of Lubov’s estate, the two disinherited grandchildren contested the validity of this trust.The Uniform Power of Attorney Act states that the power to create a trust may be delegated to an attorney-in-fact acting under a valid POA only if it expressly grants that authority to the attorney-in-fact. Lubov’s POA only expressly granted the agent to act under an already existing revocable trust but didn’t expressly state that it could create a new revocable trust. Therefore, the creation of this trust was ruled invalid, and the assets were to be returned as if the trust never existed.
Adopted Beneficiaries
Can an adopted adult inherit as a “descendant” from a trust? According to Morse v. SunTrust Bank N.A.,6the answer is yes . . . under the right circumstances. Moi Morse died in Georgia in 1967 leaving a will creating subtrusts for each of his grandchildren. The will stated that “in the event an additional grandchild or grandchildren shall be borne to me, whether during my life or after my death . . . the number of trusts shall be increased accordingly, and each afterborn grandchild shall be the primary beneficiary of a separate, equal trust just as if herein designated by name.”7 Additionally, on the death of a primary beneficiary, that beneficiary’s interest passed to their descendants, and if a grandchild died without descendants, their share was divided equally and added to the remaining trusts. Mary Monroe was one of the named grandchildren. Mary had no biological children, but in 2018, she adopted 36-year-old Steven Morse and 34-year-old Stuart Morse. Mary, Steven and Stuart acknowledged that Mary adopted them to at least in part inherit her trust. The other grandchildren opposed this
adoption, arguing that Mary had no descendants and her trust share should thus be divided among the other grandchildren trusts on her death. The court determined that the adoptions were allowed, and Steven and Stuart would be allowed to inherit because: (1) the law in effect in Georgia at the time of Morse’s death (1967) governed the will; (2) Georgia adoption laws in 1967 allowed adult adoptions and gave all adoptions the same beneficial interest in wills as biological children in the absence of an express contrary intent; and (3) Morse’s will didn’t expressly exclude adult adoptees. Therefore, any individual adopted by Mary was deemed to be a natural member of the Morse family and entitled to receive the benefits. Settlors beware: Draft the definition of “descendants” meticulously; can adults be adopted?
Trustee Discretion
In In re Trust of Harrison,8 Sol and Sydria Harrison created an irrevocable gift trust for the benefit of their grandchild, Michael Harrison, with Michael’s father, Theodore, as trustee. The trust principal was worth approximately $540,000 in 2022. The trust provided that on reaching age 30, Michael “shall have the right to withdraw up to one-third of the principal . . . at any time or from time to time”9 and the entire balance after attaining the age of 35. The trust also stated, “[a]ny property distributable to a beneficiary who is under a disability may be retained by our Trustee . . .” and “a beneficiary shall be considered to be under a disability while under the age of twenty-one (21) years or at any time when such beneficiary shall in the opinion of our Trustee be unable by reason of illness or other condition to properly manage his or her affairs” (emphasis added).10 Theodore believed Michael suffered from ADHD and marijuana use, which affected his ability to manage his affairs. The court noted that “while the grant of absolute discretion to a fiduciary is very broad, a trustee is always subject to accountability to remaindermen where discretion is improperly, arbitrarily or capriciously exercised.”11 The court noted that while in the trustee’s opinion, the beneficiary was unable to manage his affairs, the evidence suggested otherwise as Michael graduated from college with a degree in finance, was employed and wasn’t under a legitimate disability. The appellate court followed the trial court by noting that while the trustee “‘would not want to give a large sum of money to his son, whom he considers underemployed and not on a productive life path…’ it was ‘constrained to enforce the terms of the trust as written.’”12 If ADHD and marijuana use are an issue to settlors, they should specify this intention before executing the trust.
Two Wills
In In re Estate of Curvan,13Randolph Curvan died in 2020 leaving a will dated July 31, 2019. At the time of his death, Randolph was married, but he and his wife were separated. Randolph was living with his girlfriend at the time of his death. In May 2020, the girlfriend filed a petition to probate the 2019 will that referenced a trust and provided that the executor of the will “shall be the then-acting trustee” of the trust. The girlfriend was the trustee of the trust, which stated that she would receive the entire estate.Randolph’s wife and her two children petitioned that the will wasn’t the valid last will of Randolph, and, even if it was, it was invalidly executed, as the girlfriend couldn’t serve as a witness of a will of which she was beneficiary. The girlfriend then filed a motion for summary judgment declaring the 2019 will as valid. After filing the motion for summary judgment, the girlfriend filed an earlier will. This earlier will provided that the decedent’s estate would be held in trust for the girlfriend for her lifetime, that she would be sole trustee of the trust, that payments would be made to her at her discretion and, on the girlfriend’s death, the remainder would distribute to Randolph’s descendants. The probate court validated the 2019 will, but the appeals court ruled that the two different wills create an issue of material fact (sending the case back to probate court). Not much to say here readers, other than yikes!
Testamentary Formalities?
Can a letter serve as a valid trust agreement? According to Galavich v. Hales,14if it meets all of the requirements of a trust, then yes. In March 2011, Carol Galavich was in the hospital with pancreatic cancer. She called her attorney to discuss end-of-life estate-planning decisions. Carol wanted to gift her farm to her son, Dennis, but Dennis was having financial problems so Carol decided to gift the farm to her friend, Bonnie Stetson, with the understanding that Bonnie hold the property for Dennis and give it to Dennis once his financial issues were resolved. Carol’s attorney wrote a letter to Bonnie with this understanding. The letter was signed by Bonnie as trustee, and Carol executed a “Transfer of Death Designation Affidavit,” naming Bonnie as trustee. On July 7, 2011, Carol died, and an “Affidavit of Transfer on Death” signed by Bonnie as trustee was recorded. During her tenure as trustee, Bonnie signed many other documents and contracts for the farm. Meanwhile, Dennis filed for bankruptcy in 2011 and represented to the bankruptcy court that he was “disinherited” by his mother. By 2012, Dennis’ bankruptcy was over. Bonnie died in 2020 and transferred the farm to her friend, indicating to her attorney that Carol never actually created a trust and that no trust document existed. Dennis argued that Carol created an express trust for his benefit with the farm as the property and Bonnie as the trustee, and even if there was no express trust, there was a constructive or resulting trust. The court ruled that although there was no trust document, the requirements for a trust had been met, and therefore, Carol’s letter and Bonnie’s actions afterward established an express trust, under which Dennis could inherit the farm. Dennis would have inherited, but Bonnie’s friend argued that the doctrine of judicial estoppel prevented Dennis from inheriting. The doctrine applies if the proponent shows their opponent: “(1) took a contrary position; (2) under oath in a prior proceeding; and (3) the prior position was accepted by the court.”15 Here, because Dennis took the position that he was disinherited by his mother and the bankruptcy court accepted that position, the court ruled that although an express trust was created for the benefit of Dennis, he still couldn’t inherit due to the doctrine. For attorneys, the takeaway is to create a trust. Had there been a valid trust agreement, it follows the settlor’s intent may have been achieved.16
Ambiguous Trustee Removal
Can a named co-trustee remove another named co-trustee without cause, when the trust specifically states a named trustee can’t be removed without cause? According to In the Matter of the Leo Kahn Revocable Trust,17the answer is no if the trust is unambiguous, but maybe yes if the trust is ambiguous. Leo Kahn was married to Emily and created a trust. Leo’s son, Joseph, Theodore Samet, and Emily were named successor co-trustees of the trust on Leo’s death, when the trust was to split into two shares, one being a spousal share with Emily as beneficiary. Leo passed away in 2011. Emily, Joseph and Theodore served as co-trustees together until May 2020, when Emily filed a petition to remove Joseph and Theodore as co-trustees of the spousal share. The trust stated that “the Beneficiary of a trust share may at any time or from time to time remove any Trustee of such Beneficiary’s trust (other than a Trustee or Successor Trustee named by the Donor), with or without cause.”18 Joseph argued that he couldn’t be removed without cause because he was a successor trustee named by the settlor. The trust also stated that a trustee can be removed “for cause,” and the trust defined “for cause.” Because there was ambiguity between whether the settlor intended to differentiate between removal “with cause” and “without cause,” the court ruled that further proceedings were required to help solve the ambiguity, including the settlor’s intent. Message to attorneys: Define terms in the trust to guide parties on removal terms.
Jurisdiction
Is a trustee who lives in Tennessee subject to a California court’s jurisdiction in a claim of breach of fiduciary duty of a California trust? According to Stalnaker v. Cupp,19 the answer is no. In 1981, John Stalnaker and his wife, Mary, executed a revocable trust in California. On the death of the first spouse, the trust continued for the benefit of John Sr.’s son, John Jr. Mary’s sister, Carole, was to serve as trustee of the trust for John Jr.’s benefit.In 2000, John Sr. died in California. In 2001, Mary moved to Tennessee, where Carole resided. In 2009, Mary died in Tennessee. In 2020, John Jr. filed a petition in California requesting an accounting and removal of Carole as trustee. Carole filed a motion to quash service for lack of personal jurisdiction. She asserted a California court didn’t have jurisdiction over her because she was a Tennessee resident, she didn’t own property in California and she hadn’t been there in 20 years. John Jr. argued that the settlors were California residents, the trust was executed in California, the governing law was California and the witnesses and documents were all located in and/or created in California.The court ruled that for jurisdiction to exist, there must be an affiliation between California and the underlying controversy, principally an activity or occurrence that takes place in California. Carole never purposefully availed herself to California, the controversy didn’t relate to or arise out of Carole’s California contacts and the exercise of jurisdiction wasn’t fair or reasonable. The court found that Carole never had activities in California, and thus, the motion to quash service of petition in California was affirmed. Settlors should choose their fiduciaries wisely to avoid these beneficiary-trustee skirmishes.
Endnotes
1. Lewis v. Worley (In re Va. Worley Trust), 318 Ore. App. 127 (2022).
2. The authors acknowledge they didn’t perform a 50-state survey; check your state’s law.
3. Matter of Grossman,N.Y. Slip Op. 30882(U) (Sur. Ct. 2022).
4. Matter of Gower, 2022 N.Y. Slip Op. 22048, 164 N.Y.S.3d 371 (Sur. Ct. 2022).
5. Barbetti v. Stempniewicz, 490 Mass. 98 (2022).
6. Morse v. SunTrust Bank N.A., 364 Ga. App. 571 (2022).
7. Ibid.
8. In re Trust of Harrison, 2022 Pa. Super. Unpub. LEXIS 16*, 272 A.3d 456 (Pa. Super. Ct. 2022).
9. Ibid., at *2.
10. Ibid., at *2-*3.
11. Ibid., at *10 (quoting Rachins v. Minassian, 251 So.3d 919, 924 (Fla. Dist. Ct. App. 2018)).
12. Ibid., at *15.
13. In re Estate of Curvan, 362 Ga. App. 665 (2022).
14. Galavich v. Hales, 187 N.E.3d 664 (Ct. App.).
15. Ibid., at p. 675 (quoting Greer-Burger v. Temesi, 116879 N.E.2d 174, par. 25).
16. The authors acknowledge they aren’t bankruptcy attorneys; consult a bankruptcy attorney prior to creating a trust for the benefit of a beneficiary considering bankruptcy.
17. In the Matter of the Leo Kahn Revocable Trust, 102 Mass. App. Ct. 38 (2022).
18. Ibid., at p. 41 (emphasis in original).
19. Stalnaker v. Cupp, 2022 Cal. App. Unpub. LEXIS 1710 (March 21, 2022).