The second day of the 57th Annual Heckerling Institute on Estate Planning in Orlando, Fla. concluded with Craig M. Frankel’s presentation, “You’re No Good, You’re No Good, You’re No Good, Baby, You’re No Good ” – Saying Goodbye to the Recalcitrant Trustee.” As aptly put in the title, the session served as a primer on how a beneficiary can force the removal of a recalcitrant corporate or individual trustee.
Practice Environment
The presentation opened with a brief discussion about today’s practice environment, specifically the use of dynasty trusts and rules against perpetuity spanning 300+ years, with Frankel positing that it’s not surprising that beneficiaries may want to change trustees or co-trustees, especially in situations in which the selected trustee didn’t turn out to be whom the grantor wanted.
Talk it Out
The first resolution suggested by Frankel is a common sense one: try to talk to the beneficiary and solve the problem before it becomes one. Of course, in theory, that’s much easier said than done, so Frankel discussed the different methods available for removal. He underscored during his discussion that the available options are state specific.
Trust Document
The first step when considering removing a trustee is to look at the trust document, said Frankel. Often, the drafting attorney has included provisions in the trust instrument that provided for non-judicial removal and replacement of trustees. For example, the power for a grantor or adult beneficiaries to remove and replace trustees, a delegation of the power to a trust protector, trust director or other person or even a no-fault power of a court to remove and replace.
If there’s no language in the trust addressing the issue, Frankel advised that the next step is to carefully examine what state law applies. Is it possible to move situs to a more favorable jurisdiction?
Governing Law
When the trust instrument doesn’t provide a “workable roadmap,” one must turn to the governing law. The rest of Frankel’s presentation identified the seven available choices, in order from least onerous to the more difficult. The options he presented are: (1) non-judicial settlement agreement entered into by the trustee and all interested persons; (2) trust modification; (3) court-authorized modification due to circumstances not anticipated by the settlor; (4) court-ordered removal for lack of cooperation among co-trustees that “substantially impairs the administration of the trust” or when the court determines that it’s in the “best interests of the beneficiaries” because of the trustee’s “unfitness, unwillingness, or persistent failure ... to administer the trust effectively”; (5) court-ordered removal when there’s been a “substantial change in circumstances” and removal is in the best interests of the beneficiaries; (6) court-ordered removal for cause or “serious breach of trust”; and (7) initiation of an adversary proceeding of some kind in the appropriate court of jurisdiction and allege breach of fiduciary duty.
UTC and Restatement
Frankel then delved into a discussion of the applicable Uniform Trust Code or Restatement (Third) of Trusts statutes for each of the aforementioned approaches, throwing in relevant case law as well as some advice based on personal experiences. For example, he reminded the audience that it’s common practice to have normal negotiation leverage using the relevant statute(s) to see if a solution can be reached with soft threat of litigation (he posits that often, a trustee will just step down). He also advises to hire someone, such as a fiduciary litigator, who understands what the options are likely better than an estate planner. Finally, he warns that removal for cause is the most expensive and longest path and least successfully likely because of the burden to prove the trustee did something wrong, such as a serious breach of trust, etc.
Material Purpose Hurdle
Frankel also spent a considerable amount of time discussing the “material purpose” hurdle that frequently arises when litigation arises under consent modification statutes, noting that the Restatement (Third) of Trusts Section 65, UTC Section 411 and the state statutes modeled on these provisions don’t define the phrase “material purpose.” He suggests that practitioners drafting new trusts avert this question by including language in the trust spelling out all of the settlor’s material purposes in creating the trust, rather than leaving it in the hands of the courts to figure it out.
He concludes the presentation with some wisdom to try and avoid the issue by drafting better trusts.