Griff’s Notes, January 6, 2022: Parent versus Child in the Trust Arena
Tax, trusts and estates updates from around the country
Some interesting recent opinions highlight the intergenerational conflicts that can happen when a living parent is the settlor or trustee of a trust, and a child (as beneficiary) is given the unqualified power to demand distributions at certain ages (such as age 21, 35, etc.). While the tiered distribution structure has become a dinosaur that is rarely included in newer trusts or amendments, its effects are still felt in existing trusts.
Another interesting lesson today is that an attorney’s documents are never safe. We often feel reluctant to release drafts to clients in a form that can be edited, as this may embolden them to adapt and reuse the form (which, ironically, attorneys do anyway). But, one of today’s opinions will illustrate a situation where a trust was photocopied, names were whited out, and replacement names/dates/signatures were filled in. The results were disastrous.
Huny & BH Assocs. v. Avi Silberberg, N.J. Superior Court App. Division, December 27, 2021
Central Issue: Reformation of a trust by living settlor
Value Added Score: 6
Rule: Under New York law, an irrevocable trust may be reformed into a revocable trust, even if ambiguous, if the living settlor can provide clear and convincing proof of a mistake or misunderstanding of the trust’s revocability
This case had a long and storied history, and I have chosen to glean just a tidbit of information from an 83-page opinion.
As noted above, Mr. Silberberg took a prior trust form, whited out names, and created a trust in 1992 for his daughter. The intent of the trust was to allow him to name other trustees, but still control the family assets (comprised mainly of real estate holdings) by delegation from the trustees. As you know, this can create issues from a gift, estate, and GST tax perspective.
This case is not about taxes, because ultimately it was determined that Mr. Silberberg had intended to create a revocable trust. But, the trust form he used had an express clause making it irrevocable. The conduct of Mr. Silberberg, and the trustees, was not consistent with an irrevocable trust. While Mr. Silberberg did not assert trustee powers or duties, he routinely exchanged personal assets for trust assets and the trustees testified that they took instruction from him.
The sole beneficiary of the trust was his daughter. She was entitled to withdraw all trust assets at age 21, and if she failed to do so, she would receive all trust net income until age 35, at which point the trust would terminate and be distributed outright to her. The trustees were required to notify her of the withdrawal right at age 21, but did not, and the daughter (and her husband, who had no cause of action but who the Court stated was behind this) sought to enforce the withdrawal right.
Mr. Silberberg had not intended for the withdrawal provisions to be there, and in 2012 decanted the trust into a new trust which provided lifetime discretionary distributions to the daughter and left the remainder in trusts for future children.
The lower court’s remedy of reformation (converting the “irrevocable” trust into a revocable trust) was appealed by the daughter, but in this case the New Jersey Superior Court, Appellate Division upheld the reformation remedy. Applying New York law, the Court determined that reformation and decanting (which was permitted without notice to beneficiaries from a revocable trust) had been permissible under New York law, due to the clear and convincing evidence of a mistake by Mr. Silberberg in creating an irrevocable trust containing withdrawal rights.
Facts rule the day, and in this case the most compelling fact was that Mr. Silberberg did not actually treat the trust like an irrevocable trust. He controlled the trustees, exchanged assets with the trust, and did not inform his daughter of the trust. The grounds were ripe for a mistake, because he did not have an attorney prepare the trust and did not review it for the problematic provisions. Further, the Court looked to the entire family wealth plan, which consisted of other trusts for Mr. Silberberg’s children (presumably correctly drafted and executed).
There is a lot to take from this case, besides the obvious about repurposing old forms, but I also want to highlight the issues that can arise when a trust (purposefully or inadvertently) grants a beneficiary the right to withdraw assets at certain ages. Can this be restricted by the trustee after the fact if the beneficiary has problems at the time? As we will find out in the next opinion, the trustee’s discretion only goes so far.
In re Harrison, Pa. Superior Court, January 4, 2022
Central Issue: Discretion of trustee to withhold outright distributions when beneficiary is disabled or incapacitated
Value Added Score: 5.5
Rule: Even if a trustee has discretion to determine whether a beneficiary is incapacitated or otherwise incapable of managing their own affairs, this discretion is not absolute, and the court can override this discretion and compel distribution if the exercise of discretion is not in good faith
Continuing the theme of parent-child disputes, this opinion centered on an irrevocable trust created by grandparents. Father was the trustee, and son was the beneficiary. Son had the power to withdraw one-third of the trust principal at age 30, and sought to do so.
The catch, however, was a familiar clause in many trusts – the catch-all provision which allows outright trust distributions to be withheld if a beneficiary is under the age of 21, or disabled. And, in this case, the father (as trustee) had discretion to determine the son’s disability status, the only constraints of which required showing illness or other condition which rendered the beneficiary unable to manage their affairs. Note that there is no reference to a determination of incapacity, which you would traditionally see here.
Of course, father had a history of disappointment in the son, who had completed college but lived with a girlfriend in Long Island and worked part-time as a dog walker. Father asserted that the son’s long-standing ADHD diagnosis (from age 13), and alleged history of not only using but growing and selling marijuana (which the son disputed), were sufficient grounds to withhold the distribution.
As noted by Will Smith, “Parents just don’t understand…” (which, by the way, his recent book Will is excellent - I recommend reading it subject to the obvious warning of stories for a mature audience).
The son initiated several actions in the Pennsylvania Orphans’ Court against the father as trustee, chief among them motions to compel accounting, force the distribution, and remove his father as trustee. If the father is to believed, the son was no peach either, as the son alleged theft by the father from the trust and threatened the father’s medical license.
The Orphans’ Court ruled, among other things, that the father did not exercise his discretion in good faith in withholding the one-third distribution. The father appealed, but the Superior Court agreed. Applying Florida law, the Court noted that the father did nothing but recite the same narrative of ADHD and marijuana use which was rejected by the Orphans’ Court.
Chief among the father’s arguments was that the Court was seeking to supplant the father’s discretion with the Court’s own discretion. But, the lower and appellate courts agreed that the trustee’s discretion was not absolute, and equating ADHD and drug use with disability was not a good faith exercise of discretion.
In other words, parental discretion does not have the same standards and duties as fiduciary discretion.
My Two Cents, and Family Systems
Although not spoken of here, what strikes me is the tone of obvious bias, subjectivity, and projection in the father’s testimony and arguments. The Court was kind enough not to cast this as a punitive act, but that is in essence what it appeared to be (hence the ruling of bad faith). The son asserted that he had only used marijuana briefly in the past, and had never grown it or sold it, yet the father could not let go of this narrative and impression. And, it goes without saying that ADHD is not a condition that rises to the level of disability.
I have observed this type of bias in a number of trust disputes in the past, where a family member or friend (who may not even be a parent) is named as trustee. The parent’s impression of the child is often frozen in time, and allows no room for growth or change. In the meantime, the family member or friend acting in a fiduciary capacity has their judgment colored by the parent’s stories of disappointment about the child, and thus absorbs the same frozen impression. This typically leads to a bad-faith withholding of distributions, costly litigation, and happy attorneys. The dispute is really a proxy battle between parent and child.
Similarly, what was unspoken in the first case was the father’s disappointment not in the daughter, but in whom the daughter married, and while family wealth must be protected, there is an undertone that the case was really a proxy battle between father and son-in-law where the daughter was trapped in the middle. And, while the son-in-law was never an intended beneficiary, the father knew that the minute the daughter exercised her right of withdrawal, those funds would cease to truly be hers and hers alone.
So, besides the obvious takeaways, trusts with tiered withdrawal rights may not be a good idea. Further, having parents (or family members or friends who can be influenced by the impressions of the parents) may not be a good idea. This is not a blanket endorsement of institutional or independent trustees, as I have seen many banks toe the line of bad faith and heavy-handed discretion where it was not warranted. But, family systems abound, and the imposition of fiduciary duties may not fix what needs repair.