Fiduciary Law Update September 2013

Fiduciary Law Update September 2013

• Ohio federal court awards temporary restraining order compelling state registrar of death certificates to later record deceased person in same-sex marriage as “married”—In what may be the first post-United States v. Windsor reported decision on same-sex marriage, in Obergefell v. Kasich, Case No. 1:13-cv-501 (S.D. Ohio Western Div. July 22, 2013), an Ohio federal court considered a motion for a temporary restraining order (TRO) in a case seeking to stop enforcement of Ohio’s law forbidding recognition of legal same-sex marriages from other states. James and John are Ohio residents and have been in a committed relationship for 20 years. During the course of John’s hospice treatment, the couple flew to Maryland in a special medically-equipped jet, were married on the tarmac in Maryland and then flew home that same day. The Ohio federal court granted a TRO against the state registrar of death certificates and ordered that on John’s death, he be recorded as “married,” on the grounds that: (1) Ohio law has historically and consistently given full faith and credit recognition to valid out-of-state marriages that wouldn’t have been valid if originally performed in Ohio, (2) following the U.S. Supreme Court decision in Windsor, James and John have a substantial likelihood of prevailing at trial on the merits, (3) without a TRO, the last official record of John’s life will be incorrect; fail to recognize his spouse; hinder his burial with his spouse at a family plot limited to family and spouses (or his burial will be delayed or exhumation will be required); and there will be irreparable emotional hardship during John’s end-of- life period, (4) the state and its citizens aren’t harmed by the order, and (5) the public interest is promoted by the robust enforcement of constitutional rights.


• Trustees must account for corporate-level activities of entities held in trust—In Rollins v. Rollins, 2013 Ga. App. LEXIS 332 (March 29, 2013), O. Wayne Rollins created trusts for the benefit of his nine grandchildren with his sons as co-trustees, along with one of his friends. Wayne also created several family entities to hold the trust assets. The children of one of Wayne’s sons sued the trustees for breaches of fiduciary duty for allegedly changing the business entities held in the trusts to shift power to themselves, making trust assets illiquid and nontransferable and implementing a non-pro rata distribution system contrary to the trust terms. The trial court held that the trustees weren’t required to account for the entities held in the trust because the interests were minority interests and that trustee fiduciary duties didn’t attach to actions taken at the entity level. On appeal, the Georgia Court of Appeals reversed and held that: (1) the trustees were required to account for entity-level actions; (2) the trustees didn’t lack control over the entities and it wasn’t impossible for them to produce information; (3) the trustees are obligated, as fiduciaries, to provide beneficiaries information within their control; and (4) a trustee with a controlling interest is required to account for the entity. The court also held that trustee fiduciary duties attach to the trustees’ entity-level actions because trustees may not shed their fiduciary duties in the management of and distributions from entities held in their control within a trust, the trustees acquired legal authority to manage the family businesses by virtue of their trusteeships and when trustees elect themselves officers and directors, they actually operate the business as representatives of the estate.


• Corporate trustee didn’t breach duties by exchanging insurance policies for new policies obtained through its affiliate—In French v. Wachovia Bank, N.A., 2011 U.S. Dist. LEXIS 72808 (E.D. Wisc. 2011), the U.S. Court of Appeals for the Seventh Circuit affirmed the district court’s finding that a corporate trustee didn’t breach its duties by exchanging insurance policies through an affiliate and earning significant fees on the transaction. The court found that: (1) the commissions were consistent with industry standards, (2) the trust terms clearly waived the common law prohibition on self-dealing, (3) the trust terms waived the prudent investor rule, (4) there was no evidence that the trustee acted in bad faith, (5) the exchange made good business sense due to saving premium costs while maintaining death benefit, (6) the fee earned by the trustee’s affiliate wasn’t bad faith because the trust permits self-dealing, and (7) the trustee kept the family informed throughout the transaction.


• Imposition of state income tax on trust created by state domiciliary, but administered outside state, violates the commerce clause of the U.S. Constitution— In McNeil v. Commonwealth of Pennsylvania, 2013 Pa. Commw. LEXIS 168 (May 24, 2013), the court considered the ability of the state of Pennsylvania to tax a trust created by a Pennsylvania domiciliary, but governed by Delaware law, with a Delaware administrative trustee and with three general trustees residing outside the state of Pennsylvania. The trust had no Pennsylvania assets or income, but all of the trust’s discretionary beneficiaries resided in the state. The trust provided for no mandatory distributions to any beneficiary. The Pennsylvania Department of Taxation assessed taxes, interest and penalties for all of the trust’s income, but the Commonwealth Court held that the application of the state income tax to the trust violated the commerce clause of the Constitution because the trust lacked a nexus with the state where the beneficiaries have only a discretionary interest; the settlor had no retained powers over the trust; the imposition of the tax fails the fair apportionment test; and the taxes weren’t fairly related to the state because the trust had no physical presence in the state, had no in-state assets or income, was governed under Delaware law and didn’t benefit from the state’s roadways, bridges, police, fire protection, economic markets, workforce, courts or laws.


• Continued disagreement whether a trust needs only to account to the settlor or her personal representative for period when the trust is revocable—In Matter of Trimble, 826 N.W.2d 474 (2013), the Iowa Supreme Court reached a different result than the California Supreme Court in last year’s Giraldin v. Giraldin decision and held that, under the Uniform Trust Code (UTC), while a trust is revocable and the settlor is alive and competent, the trustee’s duties are owed exclusively to the settlor. After the settlor’s death, the trustee only has a duty to account to the settlor’s personal representative. In Miness v. Deegan, 2013 N.Y. Misc. LEXIS 1983 (2013), however, the court ruled that a trustee of a New York insurance trust (in a non-UTC state) must account to beneficiaries, regardless of the trust terms providing for accounting only to the settlor during the settlor’s lifetime.


• Communications between client’s financial advisor and estate-planning attorney protected by attorney-client privilege—In Adler v. Greenfield, 2013 Ill. App. (1st) 121066 (2013), an estate-planning attorney was sued for failing to include an exercise of a power of appointment in a revised will. During the course of that litigation, the court directed the parties to seek information from the testatrix’s financial advisor. The advisor objected to the production of communications with the testatrix’s counsel about the estate plan during her lifetime on the grounds of attorney-client privilege. The court overruled objections to production based on the privilege, ordered the issuance of a subpoena to the advisor, ultimately found the advisor in contempt and imposed a sanction of $100 to enable appellate review of the privilege issue. The Illinois Appellate Division reversed the trial court and held that communications between the advisor and the testatrix’s counsel were protected by the attorney-client privilege because the advisor was acting as the testatrix’s agent when he was communicating with her counsel about changes to her estate-planning documents, and communications between an agent and the principal’s counsel during the principal’s lifetime are privileged as though the communications were directly between the principal and counsel.


Arbitration clause in trust enforceable against non-signatory beneficiariesIn Rachal v. Reitz, 2011 Tex. App. LEXIS 5598 (July 22, 2011); 2013 Tex. LEXIS 348 (2013), the Texas Supreme Court reversed the Court of Appeals and held that an arbitration clause in a trust was enforceable against trust beneficiaries who didn’t sign the trust agreement. The court found that Texas courts enforce the settlor’s intent over the objections of beneficiaries who disagree with the trust terms, the Texas Arbitration Act applies to written “agreements” and not just “contracts, and mutual assets to an arbitration provision exist here through “direct benefits estoppels” because the trust beneficiary didn’t disclaim his interest in the trust, didn’t challenge the validity of the trust and attempted to enforce his rights under the trust. (For more information about this decision, see “Mandatory Arbitration Clauses in Trusts,” by Stephen W. Murphy in the August 2013 issue of Trusts & Estates, p. 23.)


• Court applies Washington state law to void an Alaska self-settled trust and voids transfers to trust as fraudulent transfers—In Huber v. Huber, 2013 WL 2154218 (U.S. Bankruptcy Court, W.D. Wash. 2013), a bankruptcy trustee petitioned the bankruptcy court to declare an Alaska self-settled trust invalid, bring its assets into the bankruptcy estate and void transfers to the trust as fraudulent. The court granted the trustee summary judgment voiding the trust on the grounds that Washington state law applies because only Washington has a substantial relation to the trust, and self-settled trusts are void under Washington law. The court also held that transfers to the trust were fraudulent on the grounds that the settlor made the transfers with the intent to hinder, delay or defraud creditors. At the time of the transfers, there was threatened litigation, and foreclosures, for which the settlor had guaranteed bank loans, were increasingly certain. Also, the settlor wasn’t making timely payments on his debts. Moreover, the settlor had transferred substantially all of his property to the trust and effectively retained the property transferred into the trust by receiving substantially all requested distributions. The court stated that the Alaska trust company acted as a mere straw man. The settlor resided in the residence transferred to the trust and received a large monthly stipend for largely personal expenses, all at the expense of his creditors.



Scanlon v. Scanlon, 2013 Ohio 2694 (2013). Beneficiary serving as trustee wasn’t liable for withdrawing all trust assets without complying with trust requirement for a written request to the trustee.

In re Lasdon, 2011 N.Y. Slip Op. 51710U (N.Y. County Surrogate’s Court Aug. 23, 2011); 105 A.D.3d 499 (2013). Appellate Division reversed surcharge award against a trustee for loss in value of Pfizer stock during delay in distributing to beneficiaries.

Matter of Strong, 38 Misc.3d 1210(A) (2013). Court denied summary dismissal of a beneficiary’s claims for market index damages, surcharge for incorrectly determining tax basis of stock and damage adjustment for incorrect tax payments, regarding retention of a concentration of Kodak stock.

Will of D’Elia, 964 N.Y.S.2d 877 (2013). Bequest to revocable trust failed, and trust terms couldn’t be incorporated by reference into will, because the trustee didn’t sign the trust agreement before or contemporaneous with execution of will.

Drake v. Pinkham, 2013 Cal. App. LEXIS 493 (2013). Court of Appeals barred a challenge to revocable trust amendments by laches, when the beneficiary would have had standing to challenge amendments if the beneficiary had proven incapacity and failed to bring claims when becoming aware of the amendments.

Ohio v. Vela, 2013 Ohio 1049 (2013). Appellate court affirmed finding that a non-profit corporation providing foster home placement services for state and local governments is a charitable trust, and its directors are liable for breach of fiduciary duties, self-dealing and unjust enrichment. 

Bright v. Bashekimoglu, Record No. CL10-7348 (Va. Sup. Ct. 2012). Virginia Supreme Court enforced trust terms that override a trustee’s duty to disclose under the UTC.

Bell, et al. v. Bank of America, N.A., 2012 Ark. App. 445 (2012). Discovery of trustee’s itemized legal invoices is denied.

Blickenstaff v. Blickenstaff, 980 N.E.2d 1285 (Ill. App. Ct. 2012). Discovery allowed for an executor’s personal financial records and for itemized legal invoices that were paid out of the estate without prior court approval.

In the Matter of JPMorgan Chase Bank, N.A., 37 Misc.3d 1126(a) (2012). Court rejected a trustee’s request for discovery of information used by the beneficiary and counsel to prepare accounting objections.

Perdue v. Jackson, 2013 Tenn. App. LEXIS 386 (2013). Court of Appeals finds latent ambiguity in the failure to define “kids,” but that ambiguity doesn’t cause the gift to fail.

Muldoon v. Rogers, 2013 WL 1809453 (Cal. App. 4 Dist.). Education trust should reimburse a beneficiary when life insurance proceeds were received by the trust.

Dennis v. Kline, 2013 Fla. App. LEXIS 9614 (2013). Appellate court reversed summary judgment granting reformation of trust under the UTC to exclude an adopted adult as trust beneficiary.

Clairmont v. Larson, 2013 N.D. 85 (2013). Reformation was proper under the UTC to exclude descendants of a child’s ex-husband as trust beneficiaries.

Greene v. Greene, 2013 Conn. Super. LEXIS 1264 (2013). Marital trust can’t be terminated to settle an estate dispute when a widow doesn’t join in petition to terminate the trust, regardless of her breach of terms of mediation settlement in which she agreed to do so.

Kristoff v. Centier Bank, 985 N.E.2d 20 (Ind. App. 2013). Trustee wasn’t required to honor a child’s request to terminate a trust for the benefit of the child and the child’s sister, even though neither had children, if the trustee thought there was some purpose to be fulfilled by the trust.

Buckalew v. Arvest, 2013 Ark. App. 28 (2013). Spendthrift clause is a material purpose of a trust; thus, court approval was required to terminate a trust, approval of which was denied absent a showing of changed circumstances.

Ratcliffe, et al. v. Schwerin, et al., 2013 Conn. Super. LEXIS 751 (Conn. Super. 2013). In settlement of trust dispute, the fact that one settling party selected successor trustee wasn’t grounds to object to the appointment of that trustee on theory that such trustee would “favor” the party who selected it.

Goodman v. Goodman, 2013 Fla. App. LEXIS 4927. Court voided the adult adoption of a girlfriend when no notice was given to the parties whose financial interest was affected.

Unites States v. Grant, 2013 U.S. Dist. LEXIS 57262 (2013). United States may grant an injunction to compel repatriation and attachment of assets of offshore trusts to satisfy a tax lien.

In the Matter of the Estate of King, 269 P.3d 1189 (Ariz. Ap. 2012). Appellate court reversed a probate court determination and held that life insurance proceeds paid to the insured’s revocable trust weren’t subject to the insured’s debts, even if the trust provided for the payment of the insured’s debts.

Weisberger v. Weisberger, et al., 2012 Ill. App. (1st) 111637-U (2012). Trustee maintains burden of proof regarding the propriety of disbursements.

In re Barron Revocable Trust v. Barron, et al., 2013 Mich. App. LEXIS 128 (2013). In a dispute over a trustee’s attorney’s fees, the court: (1) evaluated an attorney-trustee’s fees based on Rules of Professional Conduct Section 1.5 factors; (2) barred effort to dispute fees charged in a prior accounting proceeding based on res judicata; and (3) remanded to determine whether the trustee complied with the trust provision requiring a beneficiary to object within a stated period.  

George McFadden Testamentary Trust O.C. Alexander McFadden Testamentary Trust O.C., 2013 Phila. Ct. Com. Pl. LEXIS 81. After a trust was divided into three separate shares, the beneficiary of one share wasn’t permitted to preclude payment of fees incurred in litigation over the trust from her separate share.

Kleveland v. Siegel & Wolensky, LLP, et al., 2013 Cal. App. LEXIS 293 (4th App. Dist. 2013). Trustee awarded counsel fees in a malicious prosecution of breach of trust action.

Shelton v. Tamposi, No. 2010-634 (N.H. 2013). Authority of “investment directors” to direct the actions of the trustee was upheld.

In re Miller Osborne Perry Trust, 2013 Mich. App. Lexis 321. Confronted with an in terrorem clause, a beneficiary received a ruling from the probate court that he wouldn’t have probable cause to challenge the clause, but seeking that ruling wasn’t itself a challenge that caused the challenger to forfeit his interest.

Palumbo v. Weill, et al., 2013 U.S. Dist. LEXIS 36663. Litigious plaintiff’s efforts to harass a corporate trustee with a subpoena (10 years after the case was concluded) caused a district court to issue a protective order to preclude the plaintiff from contacting trustee or its counsel.

Executor of the New York Estate of Kates, et al. v. Pressley & Pressley, P.A., et al., 2013 U.S. Dist. LEXIS 16873 (U.S. Dist. 2013). After three unsuccessful litigations, a plaintiff was enjoined from filing further litigation regarding trust’s administration.

Schwab, et al. v. The Huntington National Bank, 2012 WL 2906081 (N.D. Ohio 2012). Grantor of irrevocable trust with no retained interest lacks standing to sue a trustee for breach of duty.

Thompson, et al. v. Butler, et al., 2013 Ohio 1075 (Second Appellate Dist 2013). Beneficiaries’ belated attempt to assert tortious interference claims against the recipient of a bequest and the corporate trustee was barred by will contest settlement and statute of limitations.

Boyar v. Dixon, 2013 WL 1342970 (Ill. Sup. Ct. 2013). Beneficiary may contest an amendment that changed the trustee, even if the beneficiary had received trust distributions.