TOP TEN CASES UNDER THE UNIFORM TRUST CODE Spring Committee Meeting Probate and Trust Committee Missouri Bar. Presented by:

Transcription

1 TOP TEN CASES UNDER THE UNIFORM TRUST CODE 2012 Spring Committee Meeting Probate and Trust Committee Missouri Bar Presented by: Scot Boulton Polsinelli & Shugart David M. English University of Missouri School of Law

2 TABLE OF CASES Non-Judicial Settlement Agreements (Section 111) In re Frank, 910 N.E. 2d 523 (Ohio App. 2009) Charitable Trusts (Section 405) Hardt v. Vitae Foundation, Inc WL (Mo. App., Nov. 10, 2009) Trust Termination and Modification (Sections ) In the Trust Created Under Last Will and Testament of Darby, 234 P.3d 793 (Kan. 2010) Ladysmith Rescue Squad, Inc. v. Newlin, 694 S.E.2d 604 (Va. 2010) Creditor Claims and Spendthrift Provisions (Article 5) In re Tait, 2008 WL (Bkrtcy. S.D. Ala. 2008) Cotrustees (Section 703) Adams v. French, 2010 WL (Del. Ch., Feb. 5, 2010) Duty to Inform (Sections 105, 813) Schembechler v. Schembechler, 2011 WL (S.D. Ohio, Mar. 11, 2011) Wilson v. Wilson, 690 S.E.2d 710 (N.C. Ct. App. 2010) Attorneys Fees (Section 1004) In re Gene Wild Revocable Trust, 2009 WL (Mo. App. Dec. 9, 2009) Retroactivity (Section 1106) McCabe v. Duran, 180 P.3d 1098 (Kan. 2008)

3 NON-JUDICIAL SETTLEMENTS (Section 111) In re Frank, 910 N.E.3d 523 (Ohio App. 2009) Trustee of a testamentary trust was ordered by the probate court to post a bond in double the amount of the value of trust assets, as the governing instrument failed to waive the bond requirement. The trustee moved to reduce the bond as the bond cost would almost deplete the trust s income. The probate court denied the trustee s motion. The trustee then filed a motion to approve a non-judicial settlement agreement between the trustee and the trust beneficiaries to insert a provision in the governing instrument that waived the bond requirement. The probate court denied the motion and the trustee appealed. The decision of the trial court was reversed and the non-judicial settlement agreement was approved. Because of the amendment to the trust s provisions, the mandatory bonding requirement no longer applied and the trustee did not have to post a bond unless the probate court subsequently found that the interests of the trust required it. R.C (c)(4) (UTC 111) authorizes the trustee and trust beneficiaries to enter into an agreement with respect to any matter concerning the construction of, administration of, or distributions under a trust instrument, which includes modifying the trust agreement, if the modification is not inconsistent with any dominant purpose or objective of the trust. But, because R.C (J) (UTC 111) preserves the jurisdiction of the probate court, an agreement under (c)(4) (UTC 111) cannot divest the court of its jurisdiction. However, the probate court was enjoined to construe the non-judicial settlement agreement liberally to favor its validity and enforcement as required by the statute. CHARITABLE TRUSTS (Section 405) Hardt v. Vitae Foundation, Inc., 302 S.W.3d 133 (Mo. App., W.D., 2009) Executors who were granted discretion to distribute the remainder to the estate to charity exercised the power by directing distribution of the estate assets to a Missouri charitable corporation. The gift was accompanied by a written agreement whereby the organization would use the gifted funds to create and execute media campaigns regarding pro-life causes. The gifts from the estate were to be used as matching gifts that would enable the charity to raise additional funds. Approximately a year later the donors, through their counsel, were informed that the funds were being used to hire additional staff and for other administrative purposes, that there 1

4 were no matching funds being raised, and that the promised media campaigns would not happen. Donors subsequently brought an action against the charity (1) to obtain an accounting of the expenditures of the gift, (2) for restoration of part of the gift that was not spent in accordance with the agreement, and (3) for a permanent injunction to prevent future expenditures in contravention of conditions in the gift agreement. The charity s motion to dismiss was granted and the donors appealed. The Court of Appeals upheld the trial court s order. Missouri common law provides that a donor of a charitable gift does not have standing to enforce the gift, Voelker v. Saint Louis Mercantile Library Ass n, 359 S.W.2d 689, 695 (Mo. 1962). It is true that R.S.Mo (UTC 405(c)) changed the common law and grants a donor standing to enforce acharitable trust of which that donor is a settlor. But in this case the donors did not contend that their gifts made to the charity were in the form of a trust. Rather, they contended that R.S.Mo applies to gift to charitable corporations as well as charitable trusts. The court noted that a charitable trust is a trust created for charitable purposes and that a settlor is a person who contributes property to such a trust. The donors in this instance were not settlors and did not create a trust. Therefore, the donors did not have standing to enforce the charitable agreement. TRUST MODIFICATION (Sections ) In the Trust Created Under Last Will and Testament of Darby, 234 P.3d 793 (Kan. 2010) Darby established a testamentary trust for the benefit of his daughter. The trust provided that $12,000 was to be distributed to her annually from the trust for her life, with the trust continuing for her children after her death. Daughter sought modification of the trust to: (i) increase annual distributions to $40,000 a year, (ii) adjust the annual payments for increases in the cost of living, and (iii) confer upon her a power of appointment exercisable only to pay estate taxes. All beneficiaries consented and the trial court approved the modifications. Daughter appealed to the Court of Appeals and requested transfer to the Kansas Supreme Court to make the opinion binding on the Internal Revenue Service under Commissoner v. Estate of Bosch, 387 U.S. 456 (1967). The Supreme Court granted beneficiary's motion to transfer the case from the Court of Appeals, reversed the lower court, and denied the trust modification. The Supreme Court held that (even though all beneficiaries consented) the modification was not permissible under K.S.A. 58a-411 (UTC 411), because the proposed modification was inconsistent with a material purpose of the trust. Furthermore, the modification could not be granted due to circumstances not anticipated by settlor under K.S.A. 58a-412 (UTC 412) because that statute only applies where there are truly unforeseen events resulting in 2

5 economic hardship to the beneficiary. Finally, the modification was not proper under K.S.A. 58a-416 (UTC 416) to achieve settlor s tax objectives in a manner not contrary to the settlor s probable intent. Mere proof that there was a more tax efficient manner in which to draft the trust was not enough to justify a modification under the statute. All estate taxes can be avoided in any situation by dispositions to charity, but many settlors decide to pay estate tax in order to achieve other objectives (e.g. leave assets to non-charitable beneficiaries). Ladysmith Rescue Squad, Inc. v. Newlin, 694 S.E.2d 604 (Va. 2010) Trustees of testamentary charitable remainder unitrust brought an action to divide and partially commute the unitrust. The unitrust was to make the unitrust payment to four individuals for their lives and the life of the survivors, and thereafter to equally distribute the remaining assets to two named charities. After five years of protracted litigation, the surviving noncharitable beneficiaries and one of the two charitable remainder beneficiaries petitioned to divide the trust into two trusts under Code (UTC 417) and commute the new trust held for the benefit of the moving charitable remainder beneficiary on the grounds of unanticipated circumstances under Code (A) (UTC 412). The other charity objected. The trial court ordered the division and partial termination. The trial court was reversed on appeal. The Court of Appeals first observed that while enactment of the UTC in Virginia in 2005 materially changed the law, the framers of the UTC were careful to preserve the guiding principles that have historically been the foundations of trust law. Next the court found that the objective of the trust division was solely to remove the ability of the respondent charity to object to the commutation of one-half of the trust. The commutation was not supportable under the applicable statue because the only circumstance that was unanticipated by the settlor revealed by the record was that the petitioner charity wanted their money today rather than wait. The petitioner had the burden of showing the unanticipated circumstance and failed to carry that burden. Therefore, the division was not in the best interest of the respondent charity and the commutation was not supported by applicable law. CREDITOR S CLAIMS (Article 5) In re Tait, 2008 WL (Bkrtcy. S.D. Ala. 2008) Debtor was named as sole trustee of irrevocable trust created by his parents. It held various properties, including an historic plantation that had been in his family for generations. There was also approximately $500,000 of cash and other investments. Debtor undertook to completely renovate that plantation, spending in excess of $4,000,000, a substantial portion of 3

6 which was debtor s own assets. Debtor was terminated as the CEO of an insurance company and an action was filed against him for withdrawing approximately $4,000,000 from a company trust account for his own purposes. That action was settled and debtor gave a promissory note to the company for $980,000 secured by the plantation and signed by him individually, his wife, and him as trustee of the trust. Foreclosure proceedings were commenced against the plantation. Debtor filed bankruptcy and resigned as trustee. Successor trustee brought action against bankruptcy estate to declare the promissory note unenforceable against the trust and the plantation. The court held that the promissory note was not enforceable against the trust and the security interest in the plantation was void. A trustee acts as a fiduciary and must act in the best interest of the beneficiaries of the trust, Ala. Code 19-3B-801 (UTC 801). He must act as a reasonable, prudent person in investing trust assets, Ala. Code 19-3B-901(b). Using trust assets for personal reasons of the trustee is self dealing and a violation of the trustees duty of loyalty, Ala. Code 19-3B-802 (UTC 802). Although the trust granted broad discretion to the debtor as trustee, it did not abrogate the debtor s fiduciary duties as trustee. Thus, the mortgage against the plantation was void. However, the evidence showed that the debtor expended vast sums of his personal assets on the plantation owned by the trust. A settlor includes a person that contributes assets to a trust, Ala. Code 19-3B-103(16) (UTC 103(15)). While the trust included a spendthrift clause, state law provides that a spendthrift clause will not prevent a settlor s creditors from attaching trust assets, Ala. Code 19-3B-501 and 505 (UTC 501 & 503). Thus, the creditor had an equitable lien on the self-settled remainder interest of debtor in the trust. CO-TRUSTEES (Section 703) Adams v. French, 2010 WL (Del. Ch., Feb. 5, 2010) Dr. Adams and Dr. French formed Adams and French, a Delaware limited liability company, in order to manage property. Dr. Adams assigned her interest in Adams and French to the Diane Adams Family Trust, which was governed by Maine law. Dr. Adams parents, Mr. Adams and Mrs. Adams, were co-trustees of the trust. Dr. French and Dr. Adams sought dissolution of the company and obtained a mediator for the matter. A mediation hearing took place and a written settlement was signed by Dr. Adams, Mrs. Adam, Dr. French, counsel for both parties, and the mediator. Counsel for the Adams requested that the mediation be reconvened to address concerns regarding the outcome of the mediation and filed a motion to withdraw. The motion to withdraw was granted. Respondents filed a motion to enforce the 4

7 mediation settlement agreement. Mr. Adams alleged that he was denied the opportunity to appear at the mediation hearing and asked that the mediation be rendered moot. Dr. French argued that the agreement was enforceable because under Maine trust law, if a co-trustee is absent, the other co-trustee has authority to act unilaterally and bind the trust. Mr. Adams responded that the agreement was unenforceable because he was not informed of the mediation hearing and that Maine law follows the Uniform Trust Code, which requires two trustees to bind the trust. Section 703(d) of the UTC provides that where a co-trustee is unavailable to perform duties because of absence, illness, disqualification or other temporary incapacity, the remaining co-trustee... may act for the trust. The court determined that this language is unambiguous and required no interpretation. Additionally, the trust agreement was silent on the issue of the authority of co-trustees to act jointly or severally. Therefore, since Mr. Adams was unable to perform the duties as trustee at the mediation because he was absent, Mrs. Adams, as co-trustee, had the authority to act for the trust. The court then held that the mediation settlement agreement was a valid and enforceable agreement, and respondent s motion to compel enforcement of settlement agreement should be granted. DUTY TO INFORM (Sections 105, 813) Schembechler v. Schembechler, 2011 WL (U.S. Dist. Ct., S.D. Ohio, Mar. 11, 2011) Glenn E. Schembechler, Jr. ( Bo ) established a trust in September 1998 in Cincinnati, Ohio. Bo served as the trustee during his lifetime, and upon his death in 2006, such duty passed to his wife, Kathryn Schembechler (defendant). The trust provided that Bo s son, Glenn E. Schembechler III (plaintiff), was the residuary beneficiary of the trust. The trust was divided into Fund A (marital trust) and Fund B (unified credit trust), from both of which Kathryn received the net income. She was also allowed to receive money from the principal of Fund A as the trustee deemed necessary and proper to continue living to the fullest degree possible in the manner to which she was accustomed. Additionally, Kathryn received money from the principal of Fund B at the trustee s discretion to provide for her financial requirements, including her accustomed manner of living, education and medical care. Bo s son claimed that Kathryn, as trustee, failed to consider the substantial assets she possessed independently of the trust in evaluating discretionary distributions from Fund B for her 5

8 own financial requirements. He also accused Kathryn of improperly distributing money from the trust to her relatives who were not beneficiaries, buying a house in Colorado and incurring lavish expenses to live well above her accustomed manner of living. The plaintiffasserted that he was entitled to and has requested quarterly statements of administration from the trustee regarding the trust yet failed to receive such information. Thus, Bo s son s complaint included two counts (1) that defendant failed to provide him with information and reports he requested about the trust, and (2) that the trustee was obligated to render an accounting of her administration of the trust upon a court order issued for good cause shown. Kathryn moved to dismiss the plaintiff s complaint for failure to state a claim for relief. The U.S. District Court, S.D. Ohio, Western Division then examined each count to determine whether a claim for relief was stated. With regards to the first count, Kathryn admitted she was not seeking to dismiss this component; thus, the parties cross-motions for summary judgment are pending. Turning to Count 2, however, Kathryn claimed she was only required to provide Bo s son with information regarding securities transactions. The court disagreed and found that since the trust was subject to Ohio law and that the plaintiff met the definition of a beneficiary under the Ohio Trust Code, Count 2 sufficiently stated a claim for relief. Thus, Kathryn s motion to dismiss the plaintiff s compliant was denied. Wilson v. Wilson, 690 S.E.2d 710 (N.C. Ct. App. 2010) Irrevocable trust beneficiaries brought suit against the trustee for breach of fiduciary duty. The beneficiaries requested that the trustee provide an accounting of the trusts, alleging that the trustee had allowed the settlor to take control of the trusts and invest the assets in his personal speculative business ventures. Beneficiaries also alleged that the trustee breached his fiduciary duty by failing to distribute income to the beneficiaries. The trustee, in response to the request for an accounting, claimed that pursuant to the provisions of a trust, information in the nature of inventories, appraisals, reports or accounts was not required to be provided to any court or any beneficiary. The trustee then filed a motion for a protective order. The trial court granted the trustee s motion, citing 36C of the North Carolina UTC (no aspect of a trustee s duty to inform beneficiaries is mandatory). Plaintiff appealed, claiming the trial court misinterpreted the North Carolina UTC. The court of appeals overruled the trial court, concluding that the information sought by the trustees was reasonably necessary to enforce their rights under the trust, and therefore could not be withheld. The court reasoned that although the North Carolina UTC does not include portions of the UTC that require the trustee to keep beneficiaries reasonably informed about the 6

9 trust administration, the North Carolina UTC does provide that the trustee has the duty to act in good faith. Under the Restatement (Second) of Trusts Section 173, the beneficiary is entitled to such information as is reasonably necessary to enable him to enforce his rights under the trust or to prevent or redress a breach of the trust. The court noted that [a]ny other conclusion renders the trust unenforceable by those it was meant to benefit. The court determined that the information sought by the beneficiaries was reasonably necessary to enable them to enforce their rights under the trust. Finally, the court explained that even if the settlor provides in the trust that an accounting is not required to be provided to any court or beneficiary, the trustee will be required in a suit for an accounting to show that he faithfully performed this duty. ATTORNEY S FEES (Section 1004) In re Gene Wild Revocable Trust, 2009 WL (Mo. App. 2009) The settlor created a revocable trust, which she amended multiple times. Amendments created various permutations on establishing charitable remainder annuity trusts (CRATs) for the benefit of two colleges. The second to the last amendment created one CRAT for plaintiff college. The last amendment reinstated a previous plan splitting trust assets into two CRATs, one for plaintiff college and one for defendant college. Plaintiff college filed a petition challenging the validity of the last amendment on the grounds that the settlor lacked mental capacity. The trial court found that the amendment was valid but awarded plaintiff college its attorney fees to be paid from the trust assets prior to those assets being equally distributed into the two CRATs. Both colleges appealed. The Court of Appeals concluded that the settlor had sufficient mental capacity to execute the last trust amendment. The capacity required to create, amend, revoke, or add property to a revocable trust is the same as that required to make a will, Mo. Rev. Stat (UTC 601). Under common law, testamentary capacity requires a testator to (1) understand the ordinary affairs of his life, (2) understand the nature and extent of his property, (3) know the persons who were the natural objects of the bounty, and (4) intelligently weigh and appreciate her natural obligations to those persons and know that he is giving his property to the persons mentioned in the document. Evidence in the record supported that all of these elements were met. The award of attorney fees from trust residue prior prior to its distributions was also proper. A court may, within its discretion, award attorneys fees to any party regardless of whether that party prevailed in the lawsuit, Mo. Rev. Stat (UTC 1004). Here, plaintiff college brought the action in good faith and raised issues that could be settled only by 7

10 way of a judicial determination. Thus, the court s award of attorneys fees was not an abuse of discretion. Further, whether the attorneys fees should be paid out of the trust before or after distribution is a determination for the court to make in its sound discretion, Mo. Rev. Stat (UTC 1004). RETROACTIVITY (Section 1106) McCabe v. Duran, 180 P.3d 1098 (Kan. 2008) After the predecessor trustee s death, the successor trustee brought an action against the predecessor trustee s estate, alleging that the predecessor trustee engaged in self-dealing and had otherwise mishandled trustee obligations. After the jury returned a verdict finding that the predecessor trustee had intentionally misappropriated funds, the District Court awarded the plaintiff double damages under K.S.A. 58a-1002(a)(3). This double damage provision is a Kansas modification not included in original UTC Defendant appealed on the grounds that the action accrued prior to the enactment of the Kansas UTC. The court of appeals held that retroactive application of the double-damages provision of the Kansas UTC, K.S.A. 58a-1002(a)(3), would violate due process. The Kansas UTC applies to all trusts created before, on or after its effective date, K.S.A. 58a-1106(a)(1) (UTC 1106(a)(1)). However, an act performed before the effective date of the Kansas UTC is not affected by the Code, K.S.A. 58a-1106(a)(5) (UTC 1106(a)(5)). While the purpose of the effective date provision is to apply the Kansas UTC as broadly as possible, it is subject to constitutional limits. Retroactive application of the Code is not permitted when such application would substantially interfere with the proceedings or prejudice the rights of the parties, K.S.A. 58a-1106(a)(3) (UTC 1106(a)(3)). Given that the double damages penalty did not exist when the breach of trust occurred, the court refused to apply this provision of the Kansas UTC. 8