• Trustee may request releases and indemnification before making trust distributions—In Hastings v. PNC Bank, N.A., 2012 Md. LEXIS 614 (Sept. 27, 2012), a sharply divided Maryland Court of Appeals considered whether a trustee acted properly by requesting that the beneficiaries execute a broad release and indemnification agreement before receiving distributions following a trust termination. The husband of one of the beneficiaries, who was a lawyer, objected that the release agreement was too favorable to the trustee and shouldn’t be required before distributions. The beneficiaries sued the trustee. The trial court dismissed the beneficiaries’ claims based on its finding that the trustee had “requested” rather than “required” the release agreement, and the court couldn’t locate any Maryland law against a trustee requesting a release. The Maryland Court of Special Appeals affirmed the trial court. A sharply divided Maryland Court of Appeals (with four judges in the majority and three in the dissent) affirmed the trial court on the grounds that: (1) Maryland law permits a trustee to request a release; (2) the terms of the release agreement track closely (although not perfectly) to the terms the trustee could receive in a court order; and (3) because the trustee could obtain releases from the court and possessed a lien against the trust assets for reasonable expenses, the release agreement wasn’t a radical departure from the protections already afforded the trustee under Maryland law. In dicta, the majority cautioned that trustees seeking similar indemnification agreements in the future should provide full information to allow the beneficiaries to make informed decisions.
The three-judge dissent would have reversed the trial court on the grounds that there were material differences between the release agreement and the protections afforded a trustee under state law; therefore, there was a breach of duty, and the trustee didn’t provide the beneficiaries with full information explaining their rights or the consequences of their signing the release agreement. The majority’s decision is consistent with its prior decision in Allen et al. v. Ritter, 2011 Md. LEXIS 733 (Dec. 15, 2011), in which it held that a personal representative may obtain a release prior to making distributions because:
. . . without a release, heirs could sue the personal representative for alleged malfeasance, improper distribution, or other claims, and with all the estate assets distributed, the personal representative would have no assets with which to fund a defense, or if appropriate, settle or satisfy the claim.
• Surcharge reversed on appeal—In Matter of Knox, 2012 N.Y. App. Div. LEXIS 4880 (June 19, 2012), the New York Appellate Division reversed the surrogate’s $21 million surcharge against a bank trustee for not diversifying investments and taking investment directions from a non-fiduciary family member. The Appellate Division found that the trust terms: (1) gave the trustee the power to invest without regard to diversification and retain its own stock, and (2) allowed the trustee to consult with “counsel” (which the court found wasn’t limited to legal counsel) and provided that the trustee would be protected for acting in good faith in accordance with the opinion of counsel. The Appellate Division found that the trustee acted prudently because the family member consulted was co-trustee of other family trusts, had a vested interest in the success of the trust for his children and was a knowledgeable and savvy investor. With respect to concentrations of the bank’s own stock and Woolworth stock, the Appellate Division held that as inception assets, those stocks may be prudently retained, even when it might be imprudent to purchase those assets during the administration, and it would be unreasonable to find that a trustee acted imprudently in retaining assets that had both appreciated in value and provided significant income to the trust. The Appellate Division sustained the surcharge award only as to the retention of the Woolworth stock after the date it stopped paying dividends.
• Surcharge of trustee for purchase of prepaid variable forward contracts that caused sale of stock subject to retention clause—In Matter of the Trust of Carolyn S. Burford, Case No. PT-2006-013 (Oct. 9, 2012), the Tulsa, Okla. district court surcharged a bank trustee for $18 million in damages, plus costs and punitive damages to be later determined, in connection with: (1) the sale of oil company stock subject to a retention clause, (2) the purchase of variable prepaid forward contracts (VPFs) for the trust from its affiliates that resulted in the sale of other oil company stock subject to a retention clause, and (3) other actions that the court found favored the current beneficiary (who was also a co-trustee but not held responsible by the court) to the detriment of the remainder beneficiaries. W.G. Skelly, the founder of Skelly Oil, created the trust in 1955 to provide for his daughter and granddaughter for their lifetimes and, thereafter, to an Oklahoma church and surviving descendants. The trust was originally funded with Skelly Oil stock and Socony Mobil stock (which by merger became Exxon stock) and included a provision that recommended retention of the stock without regard to diversification. The bank co-trustee recommended diversification of the stock, but the individual co-trustee refused. When the granddaughter was appointed as co-trustee in 1999, the bank approached her about using VPFs with the trust to address her requests for increased income distributions. The granddaughter signed off on the VPFs, although the court found that she wasn’t aware that the VPFs could result in the sale of the Exxon stock. All but one of the VPFs were done with a party affiliated with the bank. By 2003, 100 percent of the Exxon stock was pledged under the VPFs. In 2007, almost 20,000 shares of Exxon stock were surrendered to partially settle the VPFs, followed by additional surrenders of 66,666 shares and 81,140 shares. The granddaughter was replaced as co-trustee in 2006, and a new corporate trustee was appointed in 2007. Without analysis or discussion, the court held that the choice-of-law provision in the trust was unenforceable and rendered its decision under Oklahoma law, including the Oklahoma Trust Act. (Oklahoma hasn’t enacted the Uniform Trust Code (UTC).) The district court concluded that the trustee had breached its fiduciary duties as co-trustee and had been “grossly negligent and reckless in the administration of the trust,” on several grounds, including not fully informing the individual co-trustee and the beneficiaries about the VPFs, encumbering the trust assets without authority, selling the Exxon stock and using VPFs for the Exxon stock in violation of the retention clause and administering the trust for its own benefit. The court didn’t hold the granddaughter responsible for any of the perceived breaches of trust and, instead, awarded actual damages against the bank for $18,122,644 (the cost to restore 220,122 shares of Exxon stock to the trust), along with attorneys’ fees incurred by the trust and the beneficiaries and punitive damages to be later determined after a hearing on the “financial condition of the bank.”
Other recent cases of interest:
• U.S. Court of Appeals for the Second Circuit holds Defense of Marriage Act (DOMA) unconstitutional in a marital deduction case (Windsor v. United States, Docket No. 12-2335-cv(L) (Oct. 22, 2012). On Dec. 7, 2012, the U.S. Supreme Court agreed to hear the case. (For more in-depth discussion about Windsor, see Charles A. Redd, “Wandry, Wimmer and Windsor,” Trusts & Estates (January 2013) at p. 10 and Radd L. Riebe, “An Election Year Race—For Taxpayers,” Trusts & Estates (January 2013) at p. 32.) Note that a Minnesota district court also recently held that DOMA and the state version of DOMA were ineffective to bar intestate inheritance rights under the probate code. See In re Estate of Thomas Proehl, 2012 WL 3191246 (Minn. Dist. Ct. 2012).
• Court refuses to approve estate settlement agreement without proof of value of stock surrendered by estate in the deal (In re Estate of Pappas, 36 Misc.3d 1204A (May 9, 2012)).
• Jury verdict against attorneys reduced to zero by court-approved settlement with other parties (Oliveira v. Kiesler et al., 206 Cal. App. 4th 1349 (June 15, 2012)).
• Court refuses to dismiss state securities law claims against trustee (Regions Bank v. Kramer, et al., 2012 Ala. LEXIS 74 (2012)).
• Incapacity for guardianship purposes doesn’t deprive settlor of capacity to execute a trust (Shaaf v. Fifth Third Bancorp et al., 2012 Ind. App. Unpub. LEXIS 1065).
• After-acquired property clause in trust not sufficient to transfer assets into trust (Rose et al. v. Waldrip, 2012 Ga. App. LEXIS 659 (2012)).
• Cy pres allowed in New York when hospital gave up its operating license (In the Matter of the Application of Trustco Bank, 2012 WL 5328378 (N.Y. Sur. 2012)).
• Amendment of trust by agent under power of attorney valid (Perosi v. Ligreci, 2012 WL 2819300 (N.Y.A.D. 2 Dept. 2012)).
• Court refuses to modify trust to create special needs trust (In re Ruby G. Owen Trust, 2012 Ark. App. 381 (Ark. Ct. App. 2012)).
• UTC reverses the common law presumption that a trust can’t be terminated over a spendthrift clause (In re Pike Family Trusts, 2012 ME 8 (2012)).
• Trustee removed for failing to act to administer and protect trust assets (In Re Berg Trust, 2012 Mich. App. LEXIS 1228 (2012)).
• Court refuses to remove fiduciary chosen by settlors without proof of breach of duty (In re Estate of Mumma, 2012 Pa. Super. LEXIS 45 (2012)).
• Multiple roles as fiduciary and beneficiary aren’t enough to justify removal of trustee named by settlor in the absence of a breach of trust (In re Estate of Mumma, 2012 Pa. Super LEXIS 41 (Feb. 22, 2012)).
• Accounting firm not liable for trustee’s failure to maintain records and account (Taylor, et al. v. Barberino et al., 136 Conn. App. 283 (June 19, 2012)).
• Federal law regarding federal insurance policies pre-empts Virginia statute on revocation of benefits incident to divorce (Maretta v. Hillman, 283 Va. 34 (Jan. 13, 2012)).
• Uniform Probate Code in New Jersey allows probate of unsigned copy of will (Estate of Ehrlich, 427 N.J. Super. 64 (2012)).
• Term “lawful issue” in trust created in 1971 doesn’t include child born out of wedlock (In re: the Trust created by Lydia Butler Dwight, 2012 N.Y. Slip Op. 22229 (Aug. 10, 2012)).
• Child given up for adoption excluded as beneficiary by trust terms (In re the Cecilia Kincaid Gift Trust for George, 2012 MT 119 (May 29, 2012)).
• Court applies probate code to construe will and include child given up for adoption as beneficiary (Estate of Emma Boehm, et al. v. Ramos, 2012 N.D. 104 (May 17, 2012)).
• Court refuses to interpret “legal representatives” in trust as meaning settlor’s children (Heath v. Heath, 2012 Conn. Super. LEXIS 1437 (June 5, 2012)).
• Court reverses summary judgment in favor of surviving spouse when she breached agreement to return assets to beneficiaries who disclaimed to avoid taxes (In re Estate of Milmet, 2012 Mich. App. LEXIS 1551 (2012)).
• Loss from paying higher estate taxes as potential damages in wrongful death action (Beim v. Hulfish, 2012 WL 1912261 (N.J. Super. 2012)).