The Perils of Failing to Follow the Trust Instrument

A recent case from the Court of Appeals of South Carolina illuminates the personal risk inherent in a trustee’s decision to deviate from the express language of the trust instrument, even if that decision was made in good faith.  (Deborah Dereede Living Trust dated December 18, 2013 v. Karp, 831 S.E.2d 435 (Ct. App. S.C. 2019)).

Trust with Unusual Mandatory Language Executed

Several months before her death, Deborah Dereede executed a revocable trust, naming herself as trustee and her daughter, Courtney, as successor trustee and representative of her personal estate.  The only asset held by the trust was a house.  The trust provided that, “as soon as practicable following [Deborah’s] death,” the trustee “shall sell” the house and distribute a portion of the net proceeds to Deborah’s husband (Courtney’s stepfather), Hugh, and his business, Tyre Dealer Network Consultants, Inc.

Trustee Delays Distribution

Deborah died eight months later, and Courtney sold the house, netting a profit for the estate.  As soon as the sale closed, Hugh demanded that Courtney immediately distribute his share of the proceeds.  Courtney demurred, believing that she couldn’t do so until she ascertained the net assets of the trust and estate, and the time for creditor claims had lapsed.

Breach of Fiduciary Duty Claim

Hugh and Tyre filed suit, alleging that Courtney’s delay in distributing the trust proceeds was a breach of her fiduciary duties.  Following a bench trial, the circuit court entered judgment in favor of Hugh and Tyre.  The circuit court held that Courtney’s delay breached her fiduciary duties and awarded attorney’s fees and costs to Hugh and Tyre from Courtney’s personal account.

Trustee’s Personal Liability Affirmed Despite Her Good Faith

The appellate court affirmed.  Interpreting what it deemed a “unique” trust provision, the court held that Courtney’s duty to distribute the proceeds “as soon as practicable” wasn’t discretionary, but rather, absolute; thus, Courtney breached her duties when she failed to make an expedited distribution. The court acknowledged that Courtney acted in good faith, and that as a general matter, trustees often must delay in distributing proceeds while ascertaining whether the estate is sufficiently liquid to satisfy creditors’ claims.  In this case, however, the court found that no record evidence supported the assertion that an expedited distribution to Hugh and Tyre would have risked leaving the trust insufficiently liquid to satisfy its creditors.  The court also affirmed the circuit court’s ruling that Courtney was personally liable, holding that, under South Carolina’s trust code, a trustee is personally liable to the beneficiaries for a breach of trust and must pay damages from personal funds.

Mitigate Risk Through Advice and Documentation

This case illustrates the risk to a trustee in diverging—even in good faith—from the trust instrument.  Courtney might have mitigated her risk of personal liability had she sought the advice of experienced trust counsel to help her reconcile the language of the trust instrument with her understanding of her fiduciary obligations.  This case also highlights the importance of carefully documenting the basis for each fiduciary decision.  Evidence demonstrating that Courtney reasonably believed an expedited distribution would threaten the trust’s ability to satisfy its creditors’ claims might have led to a different outcome.

Craig C. Martin is the Chair and Brienne M. Letourneau is a partner, both at Jenner & Block.