The Beneficiary As an Army of OneThe Beneficiary As an Army of One

John Brooks, partner, and Samantha E. Weissbluth, senior counsel, Foley & Lardner LLP, Chicago

An Illinois appeals court has issued an opinion that voids a trust provision allowing for majority approval of a trustee’s accounts and lets one of 19 beneficiaries reject the trustee’s accounting of how he distributed all the trust’s assets to them.

The decision makes it so that trustees would be wise to get court approval of their final accountings—whenever beneficiaries do not unanimously approve and despite what the trust document says. The prospect is time-consuming and costly for all.

This surprising ruling arises in the case of decedent Harry Vena’s trust, Vena v. Vena, 899 N.E.2d 522 (Ill. App. 2nd Dist., Dec. 4, 2008).

THE CASE

On Feb. 28, 2002, Harry Vena executed a trust and named his brother, Guy Vena, as trustee. The trust required Guy to distribute trust income and principal as required or requested by Harry during his lifetime. Upon Harry’s death, Guy was to distribute the net trust principal and any undistributed income among 19 individuals.

The trust also provided that a “majority in interest of the [income beneficiaries] may at any time approve the trustee’s accounts . . . with the same effect as if a court having jurisdiction over the trusts approved the accounts.”

Harry died in November of 2003. In the spring of 2005, Guy began to make distributions to the 19 beneficiaries and obtained a “Receipt and Release” from 18 of the 19 beneficiaries. The lone hold out was someone referred to only by the court as “Philip.”

Guy filed a petition for a declaratory judgment that, given the fact that a majority of the beneficiaries had approved the accounting, was binding on all of the beneficiaries. Philip filed a counterclaim alleging that Guy had breached his fiduciary duties. Various motions followed, including a motion for summary judgment filed by Guy asserting that the approval of the accounts by the majority of the beneficiaries acted to defeat Philip’s defenses and claims.

In August of 2007, a lower court granted Guy’s motion for summary judgment, thereby dismissing Philip’s counterclaim and holding that the majority-approval provision of the trust was enforceable. Because there was no Illinois precedent on the issue, the lower court based its decision on Section 83, comment d of the Restatement (Third) of Trusts, which condones trust provisions authorizing a designated individual (including a beneficiary) to approve the accounts and discharge a trustee from liability.

Philip appealed, alleging that the majority-approval provision is unenforceable because it improperly restricts judicial review of trustees’ actions.

COURT'S PUBLIC POLICY FEARS

We are surprised by what happened next: The Illinois appellate court actually overturned the lower court decision and held that the majority-approval provision in Harry’s trust was contrary to public policy because it “too thoroughly deprives an individual beneficiary of the ability to enforce his or her rights and too thoroughly insulates the trustee from accounting to a court.”

The court noted, as a preliminary matter, that it had some uncertainty as to whether the 19 individuals could be considered “income beneficiaries”—indeed, one could plausibly argue that they were only remainder beneficiaries. Apparently, the appellate court asked the litigants for supplemental briefs on that issue and became persuaded that the 19 were “income beneficiaries” under the terms of Harry’s trust and after examining his intent.

The appellate court also stated that the Restatement was not binding but merely provided “guidance” for what should be done in this matter. That said, the court distinguished the clause at issue from the Restatement because Harry’s trust substituted majority approval for the concept of approval by a sole designated individual, and Harry’s trust made majority approval equivalent to court approval for discharging a trustee.

With the Restatement issue aside, the court’s holding ultimately rested on public policy grounds and the court’s opinion that a true trust relationship cannot exist without accountability: ”A settlor who attempts to create a trust without any accountability in the trustee is contradicting himself . . . If the court finds that the settlor really intended a trust, it would seem that [judicial] accountability . . . must inevitably follow as an incident.”

The appellate court found that a majority approval provision does not provide effective trustee oversight for two reasons:

First, responsibility is too diffused making it likely that beneficiaries will make an uninformed choice. (After all, the court noted, “[r]eviewing accounts is work – generally tedious work—and, if one is not familiar with accounting conventions, difficult work”).

Therefore, the court said it’s “useless” for a beneficiary to be part of an informed minority that actually takes the time to engage in this tedious work; to have an effect, one must be part of the herd, uh, the majority. In other words, one could expect an informed majority only if that majority is conscientious and the beneficiaries trusted one another also to be conscientious.

The court hypothesized that this problem would be solved if the beneficiaries had meetings to deliberate where the informed minority then could attempt to show their expertise and influence the others. Harry’s trust required no such deliberations.

Second, the court found, Harry’s trustee had too much control over the process: Nothing in the trust document would prevent the trustee from presenting the accounts to the group of beneficiaries most likely to approve the accounts before more resistant beneficiaries even saw the accounts.

The court concluded by noting that the “majority approval” provision also was an exculpatory clause—and provisions that exculpate a trustee of serious misconduct raise significant public policy concerns. The court’s concern was alleviated somewhat by the fact that the majority approval provision was a retrospective, rather than prospective exculpation. But the court found that when the clause was combined with the other concerns, it could not be allowed to stand.

PROTECT YOURSELF

Time will tell whether Vena itself will stand. But for now, practitioners in jurisdictions without precedent should be very cautious in situations where a trustee client cannot obtain unanimous approval of its accounts from beneficiaries. Unfortunately, given Vena, the most conservative approach in such situations would be a (relatively costly) court proceeding for approval of accounts.

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