Friday, April 19, 2013

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.

While the Cleo Trust contained some provisions that dealt in general terms with the fiduciary duties that the trustees have “to the beneficiaries”, the terms of the Cleo Trust did not specifically identify to whom these provisions referred during various periods of the trust administration, particularly during Cleo’s lifetime. As a result, the Court turned to an analysis based on who was serving as a trustee during the various periods of administration. Cleo initially served as a sole Trustee of the Cleo Trust, and then as a co-Trustee with Angella during the last 9 years of her life. During that period, Cleo had the right to amend or revoke the Cleo Trust. As the Court reasoned, if Cleo and Angella as co-Trustees had a fiduciary duty to the remainder beneficiaries, they would have a duty to prevent Cleo from amending or revoking the Cleo Trust, so that a purported fiduciary duty to Cleo could not be reconciled with Cleo’s reserved right to amend or revoke the Cleo Trust. For this reason, the Court concluded that the terms of the Cleo Trust did not impose on the trustees any fiduciary duty to the remainder beneficiaries during Cleo’s lifetime and that the trustees only had a fiduciary duty to Cleo during that time. Thus, the Court ruled that when dealing with a revocable trust, the very revocable nature of such a trust made it inconsistent with the trustee having any duty to the remainder beneficiaries during the life of the settlor.

The Court did not end its analysis there, however, since the remainder beneficiaries had asserted issues relating to a breach of fiduciary duty to Cleo prior to Cleo’s death. The Court then proceeded to consider whether the remainder beneficiaries had standing to raise after Cleo’s death a breach of fiduciary duty owed to Cleo during her lifetime. The Court 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.

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