Griff’s Notes, January 18, 2022: Trustee Breaches and Cover-Ups – A Deadly Combination
Tax, trusts and estates updates from around the country
Today, I am covering only one case. It is lengthy, and has a lot of facts, but I have undertaken a reasonable effort to condense it and glean what you should know.
Many times, it appears that the terms of a trust permit actions which disregard the rights of remainder beneficiaries. This is especially true when a trustee is not fettered by an ascertainable standard, or where the duty to provide accountings is waived or limited. There is a trend towards “silent trusts,” which can be questionable in many states. But, as we are about to find out indirectly, a beneficiary (and their attorney) cannot just unilaterally convert an existing trust into a “silent trust” to conceal the trust (and the actions or omissions in its administration) from the remainder beneficiaries.
At the end, I will cover some key takeaways, as this lengthy case was limited procedurally to a finding that there were sufficient facts to not warrant dismissal by the trial court.
Ely v. Pivar, Ill. App., October 20, 2021
Central Issue: Statutes of limitations (repose) for an attorney’s malpractice and a trustee’s breach of fiduciary duty
Value Added Score: 6.5
Rule: A statute of repose may be tolled when a trustee, or attorney, fraudulently conceals breaches, actions, or omissions which affect a beneficiary’s rights in a trust
Facts (quite lengthy but they do add helpful context):
Where a trust is fully discretionary, what is the extent of a fiduciary’s duties? Can a beneficiary and trustee drain the trust without telling anybody?
This outcome was at issue in this case, where the settlor created five trusts for his fourth wife, and his children and descendants. As you can imagine, the descendants ultimately ended up at odds with their step grandmother. (I am assuming these family relationships, based on the fact that the opinion stated “wife from fourth marriage,” but I could be incorrect in these assumptions).
Now, the step grandmother was the primary beneficiary of each of the five trusts, and the trustee had full discretion to make distributions (unfettered by an ascertainable standard). The trustee was also relieved of the duty to consider remainder beneficiaries, and it appeared that the only limitation was that the trustee was to consider the ability of the beneficiary (in this case the step grandmother) to manage the trust property if distributed.
The descendants never knew of these trusts, other than a notice and a release/indemnification provided in 1988 with respect to a change in trustee. The step grandmother encouraged the beneficiaries to simply sign and not ask questions. Subsequent documents for changes in trustee were sent in 1996 and 2001, but the release and indemnification was signed by the step grandmother, only.
These documents were prepared and sent by the step grandmother’s personal estate planning attorney. But, this is where the problem arose. Who do you think this attorney represented?
You see, the beneficiaries had never received copies of the trusts, nor accountings, and somehow the step grandmother’s personal attorney ended up preparing the release and indemnification for her to sign (implying representation of the trustee of the trusts as well). But, the signatures of the remainder beneficiaries were not sought. Why? Because the (different) attorney for the resigning trustee raised an alarm bell about the lack of accountings and the history of trust distributions (noted below). The step grandmother’s attorney was also concerned about the distribution history, but did nothing to fix these apparent breaches of trust.
What distribution history am I speaking of? Well, from 1989 to 2009, the trusts were drained solely by the step grandmother. Her attorney recognized that her net worth was equal to or greater than the five trusts combined in 2001, but this didn’t stop the distributions. It also appeared that a friend of the step grandmother substantially benefitted from these distributions, even though no distributions were made directly to this friend, and that this friend may have been influencing the step grandmother.
So, it was around 2001 that all of this was discovered, yet the attorney for the step grandmother (who somehow also ended up “representing” the trustee of the trusts) took it upon herself to send the plan of trustee succession alluded to above. No copies of the trusts were sent, as the attorney believed the beneficiaries had gotten this information before thereby relieving the attorney of any duty to do so.
But, the attorney still took action on behalf of the step grandmother (as beneficiary) to attempt to remedy the situation. First, the step grandmother’s new will exercised a testamentary power of appointment (presumably in favor of the remainder beneficiaries) but with a no contest clause which would disinherit a beneficiary if the beneficiary took any action to contest, challenge, or attack the administration of the trust while the step grandmother was a beneficiary. Second, promissory notes were issued from the step grandmother back to each trust for the sum of her total distributions, which had an alleged benefit of tax planning and protecting the assets from the step grandmother’s “friend” who seemed to be influencing her.
(Notably, the attorney alluded that the distributed assets could have received a step-up in basis at the death of the step grandmother, and that the promissory notes could have offset estate tax on these distributed assets).
The trusts had been drained by 2009, and the step grandmother died in 2014. At this point, the trustee tried to get a release from the remainder beneficiaries (descendants of the initial beneficiaries who had received the trustee notices in prior years), and this set off alarm bells for these second-generation descendants who previously had not known about the trusts. Information was requested, and wagons were circled. The trustee who had served since 2001 lied, stating that he had only been “successor” trustee since 2014, and was thus unable to provide an accounting or trust documents, while also alleging that he did not keep files that old (which implies that he had been trustee before 2014, catching him in the lie). Ultimately, the step grandmother’s attorney provided these documents.
Now, before moving on, there is one more vital fact (at least to me as an estate planning attorney) to note – the trusts relaxed the accounting requirement. The trustee was only required to provide an accounting to the beneficiaries upon request. But, as we will find out, this didn’t matter if the beneficiaries didn’t know about the trust (and the right to request an accounting) to begin with.
Analysis
This case was like shaking a hornet’s nest – it stirred up a litany of claims for breach of fiduciary duties, malpractice, fraud, conspiracy, etc. However, the defendants successfully moved to dismiss these claims at the trial court level, and this appeal was not on the merits of the claims generally but on the issue of sufficient facts which would preclude the dismissal of the case.
On appeal, the central issue was the running of the statute of limitations (termed a statue of repose under Illinois law). As set forth in the facts above, 13 years elapsed between the attorney review/discovery of the breaches (in 2001) and the beneficiary discovery of the breaches (in 2014). In the interim, the trusts had been drained in 2009, at which point the breaches may have ceased. This limitations period was only five years for the trustee, and six years for the attorney. However, the beneficiary appellants asserted that this limitations period is tolled when there is fraudulent concealment.
The trial court had determined that there was no fraudulent concealment, as the initial beneficiaries (not the plaintiffs) had been put on inquiry notice about the existence of the trusts as far back as the 80’s, and at no point had a trust or accounting even been requested by them. In fact, as noted above, the only obligation the trustee had to provide accountings was at the request of a beneficiary.
But, the Court of Appeals disagreed with this reasoning. For one, the Court noted that the beneficiaries have no duty to conduct their own investigation. Instead, they were completely reliant on the trustee because they had never even gotten copies of the trusts. The inaction of providing a trust or accounting could be treated as an affirmative act of fraudulent concealment. The Court also noted that the repose period would have started to run in 2009, and that the trustee could have tried to stall in providing the trusts and records at the appellants request just long enough for the limitations period to run in 2014. Thus, the facts were sufficient to preclude dismissal.
Similar reasoning applied to claims against the attorney, especially considering that the attorney’s intentional choice to not send the trust to the beneficiaries in 2001 (the attorney felt this was not her responsibility), and the execution of the step grandmother’s estate plan which had the appearance of protecting the trustee, were facts sufficient to preclude dismissal.
Finally, while the Court did not dig into the facts, it held that there were also facts which should be analyzed to determine whether the attorney and trustee had committed a conspiracy with respect to the actions of the attorney covering up the breach (will exercising power of appointment, no contest clause, promissory notes, etc.). Notably, the no contest clause appeared to have been inserted to prevent the beneficiaries from taking action to investigate or remedy the breaches.
Ultimately, the case was remanded to consider the fraudulent concealment, conspiracy, and other claims and the effect on the statute of repose.
Takeaways
A trend in the U.S. has been towards expanding an attorney’s duties to include third party beneficiaries, especially in estate planning. While some states have recently rejected this duty (See Baker v. Wood, Ris & Hames, Colo. 2016), others have explored it more deeply. Unfortunately, in this opinion, we will not get a look under the hood unless the opinion on remand addresses such a claim.
Nonetheless, there are important lessons here for estate planners and trust professionals.
For one, you should be wary about taking on the dual representation of both a beneficiary and a trustee in that capacity. It may be the case that you represent a beneficiary who is also an interested trustee, which has its own pitfalls. But, even then, it is dangerous territory when the trustee and beneficiary are separate parties. It gets even more dangerous when there may be an ongoing breach due to the coordinated conduct of the beneficiary and trustee.
Second, it doesn’t matter what the trust says. A trustee has certain unwaivable duties, and it is often better to overinform than to underinform. In the case of old trusts (these were created in 1966), don’t assume that the beneficiaries in question have the trust agreement and accountings.
Third, note that the beneficiaries here who took no action to investigate are deceased. It is their descendants, the remainder beneficiaries, who are the plaintiffs here. We often warn clients that unborn beneficiaries could discover a breach down the road and bring a cause of action, but it is assumed that everybody lives in a magical fairy land where they all get along until (surprise) they do not. In this case, the step grandmother and descendants were not related, so this increases the risk of scrutiny. While not stated, an ancestor’s approval of a trustee’s conduct may not bind their descendants, especially if there is a conflict of interest – this is a central tenet of the virtual representation statutes in the Uniform Trust Code.
Fourth, if a breach is discovered, no matter who you represent, do not cover it up. Technically, the step grandmother and her attorney were likely authorized to take the actions that they did. But, it was the concealment of these actions that created an issue. While a beneficiary was not entitled to an accounting without requesting it, it is important to note that this waiver of the trustee’s reporting duty was not absolute. Beneficiaries have to have enough information spoon fed (including possible breaches) so as to protect their rights. When they rely on the trustee for this information, this trust cannot be broken and the duty is increased. Don’t assume that the trust and facts waive any fiduciary duties, or the attorney’s duties to protect the rights of others.
We will have to wait and see what happens to this case. It may get settled, or have an unpublished order at the trial court level. But, this could snake its way back up to the appellate level in Illinois.
In the meantime, stay tuned – we will soon expand on this issue by exploring fiduciary duties surrounding an interested trustee’s exercise of a power of appointment that is granted in a non-fiduciary capacity. Can the two worlds mix?