Almost invariably, settlors give their trustees broad powers regarding trust property. Often these broad powers include the power to convey and encumber trust property and the power to loan trust property. But, sometimes, the settlor also gives the trustee specific instructions with respect to specific trust property. In Hamel v. Hamel, the Kansas Supreme Court interpreted a trust instrument that gave the trustee broad general powers, but also specific directions regarding a specific piece of real property, and examined the interplay between the two provisions.
Arthur L. Hamel’s trust instrument gave the trustee broad authorization to control and administer trust property, including “the power to do all acts that might legally be done by an individual in absolute ownership and control of the property” and provided the trustee with “the power to lend money to . . . any beneficiary under [the] Trust . . . as may be agreed upon between my Trustee and such parties, provided, however, that any such loan shall be adequately secured and shall bear a reasonable rate of interest.” The trust also granted to the trustee “any power my Trustee needs to administer my Trust Estate, which is not hereinafter listed.” This same paragraph provided the trustee with “the power respecting property in [the] Trust Estate that an absolute owner of such property would have.”
Part 3 of a 3 part series.
In a trilogy of new cases decided in the last couple of months, the courts in three states have addressed the issue of whether the trustee of a revocable trust has a duty to account to, and can be held liable to, the remainder beneficiaries of the trust, for a period during which the trust was revocable, after the death of the settlor. In reviewing the discussion of the courts in these three decisions, it is clear that, while a trust is revocable, the trustee has a duty only to the settlor, and that even after the death of the settlor when the interests of the remainder beneficiaries has vested, the trustee continues to have no duty to the remainder beneficiaries for any actions taken while the trust was revocable. In Part 1 of this series, we reviewed the case of Pennell v. Alverson and in Part 2 of this series, we reviewed the case of In re Estate of Giraldin; now, we turn to In the Matter of Trust # T-1 of Mary Faye Trimble.
In the latest case in this trilogy, the Iowa Supreme Court, in In the Matter of Trust # T-1 of Mary Faye Trimble, 2013 WL 275637 (Iowa, January 25, 2013), reviewed all the cases on this point, including the Giraldin case previously discussed, to conclude that the trustee had no duty to account to the remainder beneficiaries for the period during which the trust was revocable. (more…)
Part 2 of a 3 part series.
In a trilogy of new cases decided in the last couple of months, the courts in three states have addressed the issue of whether the trustee of a revocable trust has a duty to account to, and can be held liable to, the remainder beneficiaries of the trust after the death of the settlor, for a period during which the trust was revocable. In reviewing the discussion of the courts in these three decisions, it is clear that, while a trust is revocable, the trustee has a duty only to the settlor, and that even after the death of the settlor when the interests of the remainder beneficiaries has vested, the trustee continues to have no duty to the remainder beneficiaries for any actions taken while the trust was revocable. In this series of blogs, we review these cases. In Part 1 of this series, we reviewed the case of Pennell v. Alverson; now, we turn to In re Estate of Giraldin.
The Court in the Pennell case agreed that, to the extent that the remainder beneficiaries were raising issues concerning breaches of fiduciary duty to Cleo during her lifetime, the remainder beneficiaries have standing to pursue those claims.
This distinction was picked up and further refined in December of 2012 by the California Supreme Court in In re Estate of Giraldin, 150 Cal. Rptr. 3d, 290 P.3d 199 (Cal.2012), reversing the result in the decision of the Court of Appeals (199 Cal.App.4th 577 (2011). In that case, Bill Giraldin created a revocable trust in early 2002 and designated his son, Tim, to serve as the trustee. The trust provided that Bill was the only beneficiary during his lifetime, and in the event of Bill’s incapacity, the trustee was to make liberal distributions for Bill’s needs, and that “the rights of remainder beneficiaries shall be of no importance.” The trust also contained a provision that during Bill’s lifetime, “the trustee shall have no duty to provide any information regarding the trust to anyone other than [Bill].” (more…)
Part 1 of a 3 part series.
In a trilogy of new cases decided in the last couple of months, the courts in three states have addressed the issue of whether the trustee of a revocable trust has a duty to account to, and can be held liable to, the remainder beneficiaries of the trust after the death of the settlor, for a period during which the trust was revocable. In reviewing the discussion of the courts in these three decisions, it is clear that, while a trust is revocable, the trustee has a duty only to the settlor, and that even after the death of the settlor when the interests of the remainder beneficiaries has vested, the trustee continues to have no duty to the remainder beneficiaries for any actions taken while the trust was revocable. In this series of blogs, we will review these cases.
In the first of these three cases to be decided, in September of 2012, the Arizona Court, in Pennell v. Alverson, 2012 WL 4088679 (Ariz.App. Div 1, September 18, 2012) interpreted the revocable trust created by Cleo Hubbard (the “Cleo Trust”) during her lifetime under Michigan law, and held that Angella Alverson, one of Cleo’s daughters, as a co-Trustee and ultimately a sole Trustee, did not owe any fiduciary duty during Cleo’s lifetime to the remainder beneficiaries. In this family dispute brought by Angella’s sister and her children and one of Angella’s grandsons, the Court first found that under Michigan law, the duties of the trustee and the rights of the beneficiaries are governed solely by the terms of the trust. (more…)
Right now we are all in the peak of tax return filing season. As part of the tax return process, many tax practitioners file information returns for the entities they represent. Any person, including a corporation, partnership, individual, estate, and trust, who makes a payment (such for as rent, wages, salaries, and annuities) must file an information return with the IRS to report the payment. But what happens if a false information return is filed with the IRS?
In 1996, Congress enacted 26 U.S.C. § 7434(a), which gives victims of fraudulent filing activities a damage remedy against the perpetrators. The provision applies whenever “any person willfully files a fraudulent information return with respect to payments purported to be made to any other person.” It allows the subject of the false information return to recover from the person filing the return the greater of $5,000 or actual damages flowing “as a proximate result” of the fraudulent return including costs incurred in dealing with deficiencies resulting from the return, court costs and, in the court’s discretion, “reasonable attorneys fees.” (more…)
Time to get into the weeds on the scope of a trustee‘s powers. There are basically two sources of power for a trustee – the trust instrument and state law. Where those two intersect, overlap, conflict, or diverge is where you will likely find the bulk of fiduciary litigation about trustee powers. (more…)
When it comes to so-called ‘rejected’ adopted children, many of us are most familiar with the outrage in 2010 when a Tennessee woman sent her adopted son back to Russia on a one-way flight after claiming the 7-year-old had bouts of violence. But what about the inheritance rights of these adopted children? Do they have any? (more…)
Litigation over powers of attorney is pretty popular right now. And a lot of the dispute is whether an attorney-in-fact is authorized to perform some act under the authority granted in the power of attorney.
In Harris v. Peterson, the Georgia Court of Appeals is one of the latest courts to weigh in on these issues. It tackled the question of whether an attorney-in-fact can perform an act that the principal refused to perform.
The background facts can be distilled to this:
Dennison Williams and Darius Peterson are brothers who jointly owned some real property. Williams executed a financial power of attorney appointing his sister-in-law, Anita Peterson, as his agent. Anita was Darius’ wife. Among other things, Williams authorized Anita to sell real property.
Williams wanted to sell his interest in some of the jointly owned property to Eugene Harris and entered into some sale contracts with Harris. When Anita learned of those contracts, she presented Williams with a quitclaim deed transferring his interest in the property to her husband, Darius. Williams said he didn’t want to transfer his property and refused to sign the quitclaim deed.
So, Anita signed the quitclaim deed as Williams’ attorney-in-fact and filed both the power of attorney and the quitclaim deed in the superior court. A couple of months later Williams filed a quitclaim deed transferring his interest in the property to Harris.
Darius filed a complaint against Harris claiming trespass and damage to property. Harris filed a third-party complaint against Anita and Williams claiming fraud. Darius and Anita moved for summary judgment claiming that she acted under the authority of the power of attorney. The trial court agreed and granted summary judgment to Anita.
The appellate court, however, disagreed. It found that there was an issue of fact whether Anita exceeded the scope of her authority in executing the deed conveying Williams’ interest in the property after he refused to sign the quitclaim deed himself.
The appellate court relied on two rules of Georgia law in sending this case back to the trial court. First, while a power of attorney authorizes an agent to do what the grantor principal could do with respect to the recited subject matter, the grantor still retains the right to act in his own name. Here, not only had Williams retained the right to act in his own name with respect to real estate transactions, he entered into a contract to sell his interest in the real property to Harris and filed a quitclaim deed transferring his interest to Harris. Thus, there was a fact issue whether Anita’s actions were authorized in light of their apparent direct contravention of Williams’ actions and intent.
Second, Georgia law prohibits those acting under a power of attorney from benefiting from their position to their principal’s detriment. Here, Anita transferred all of Williams’ property rights to her husband without any apparent benefit flowing to Williams, even though she did have the legal right under the power of attorney to make the transfer.
Applying Michigan law, in Pennell v. Alverson the Arizona Court of Appeals recently came out with a well-written opinion explaining when a trustee owes fiduciary duties to the remainder beneficiaries of a revocable trust.
Cleo Hubbard executed a revocable trust that provided that Cleo was the sole income and principal beneficiary of the trust during her lifetime, and that the remainder beneficiaries were Cleo’s daughters and grandchildren. The trust also named Cleo as trustee and Angella Alverson, one of Cleo’s grandchildren, as successor trustee in the event of Cleo’s death or resignation. Cleo later amended the trust to appoint Angella as co-trustee.
Cleo died and the remainder beneficiaries sued Angella alleging breach of fiduciary duty and a number of other claims. Angella sought to dismiss the claims on the grounds that they were based on acts that were alleged to have occurred before Cleo’s death. Angella argued that, until Cleo died, she didn’t owe a fiduciary duty as co-trustee to the remainder beneficiaries. The trial court agreed with Angella and so did the appellate court.
After sorting through some conflict of laws issues, the appellate court determined that Michigan law applied. Under Michigan law, the trust instrument frames the duties that a trustee owes the beneficiaries. The remainder beneficiaries contended that the trust instrument imposed on the trustee a fiduciary duty to them at all times, including during Cleo’s lifetime.
It’s a lengthy provision, but we’ll include it here because the court found that this language did not impose a duty to the remainder beneficiaries of a revocable trust prior to the grantor’s death:
Trustee may freely act under all or any of the powers by this agreement given to them in all matters concerning the trust herein created, after forming their judgment based upon all the circumstances of any particular situation as to the best course to pursue in the interest of the trust and the beneficiaries hereunder, without the necessity of obtaining the consent or permission of any person interested therein, or the consent or approval of any court. Trustee may so act notwithstanding that they may also be acting individually, or as Trustee of other trusts, or as agent for other persons or corporations interested in the same matters, or may be interested in connection with the same matters as stockholder, director, or otherwise. However, Trustee shall exercise such powers at all times in a fiduciary capacity primarily in the interest of the beneficiaries hereunder.
Trustee shall have the power to do all acts, institute all proceedings, and exercise all rights, powers and privileges that any absolute owner of the trust property would have, subject always to the discharge of Trustee’s fiduciary obligations.
While it lacks some clarity, there’s nothing terribly unusual about that language. Still, we know this was a revocable trust. So, by reserving the right to alter the trust, Cleo implicitly reserved the right to change or eliminate the remainder beneficiaries up until her death or until the trust became irrevocable. The court reasoned that the trust instrument could not sensibly impose on the trustee a duty to the remainder beneficiaries when, in creating the trust, Cleo reserved the right to modify the trust terms to eliminate the interests of one or more of the remainder beneficiaries. Because Cleo could change the remainder beneficiaries up until the time of her death, no duty was owed to the remainder beneficiaries until Cleo’s death.
Side note: Arizona has a statute that actually should have made this a much easier analysis for the court had Arizona law applied: “While a trust is revocable by the settlor, the rights of the beneficiaries are subject to the control of, and the duties of the trustee are owed exclusively to, the settlor.” A.R.S. § 14-10603. Under Michigan law, however, the terms of the trust could prevail over statutory provisions governing the duties and powers of a trustee: “the duties and powers of a trustee. . .and the rights and interests of a trust beneficiary” will be governed by any applicable “terms of the trust” (subject to some exceptions). Mich. Comp. Laws Ann. § 700.7105.
The underlying lesson, at least under Michigan trust law, is still to remember that the trust instrument controls. So conceivably, the trust instrument could impose on a trustee of a revocable trust a fiduciary duty owed to remainder beneficiaries prior to the grantor’s death (or the trust otherwise becoming irrevocable).
In French v. Wachovia Bank, N.A., 2011 WL 2649985 (E.D. Wis., July 6, 2011), the court issued an order granting Wachovia Bank’s (“Wachovia”) motion for summary judgment in an action by the beneficiaries of the French Trusts for breach of fiduciary duty. Wachovia was the successor trustee of the French Trusts that owned two whole life policies as well as significant other assets having a total value of about $30 million. Wachovia was appointed as such successor trustee in conjunction with its review of the policies and its recommendation to replace the whole life policies with a no-lapse John Hancock policy. The settlor (“French”) had his attorneys review the recommendation and provide him an analysis of the proposed exchange.
After an extensive year-long analysis of the advantages and disadvantages of the proposed policy exchange, including multiple detailed memoranda from his attorneys and discussions of the transaction with his attorneys and Wachovia, French completed the application for the exchange, which was then placed through an affiliate of Wachovia. The extensive discussion prior to the exchange included Wachovia’s conflict of interest in using an affiliate for the exchange, waivers of the conflict of interest by the beneficiaries, negotiations with Wachovia concerning a fee credit for the amount of the commission to be earned by Wachovia’s affiliate, the diminishing amount of cash value of the no-lapse policy, that such a policy was inappropriate if the policy would be cashed in prior to maturity, and that this policy provided a guaranteed death benefit and certainty as to performance that other trust investments lacked. However, Wachovia had not disclosed the amount of the commission ($512,000). (more…)