Trust Accounting Language in Wills and Trusts: A New Area For Clarity?

A deeper dive on good drafting

Many states have adopted the Uniform Trust Code (UTC) as the foundation of their statutes governing the interpretation and administration of trusts. However, it is rare that the UTC is adopted without significant changes. In fact, the arms race between states competing for trust business has been one of the most significant developments in trusts and estates over the last two decades.

I plan to create more content on some of the state-by-state UTC differences, as inspired by my walk around the exhibit hall at Heckerling this year. And, while the differences between states are often highlighted from two perspectives - domestic asset protection trusts, and taxation of trust income - these comparisons are often relevant while a settlor of a trust is living. Once a settlor dies, the two points of comparison are often the applicable rule against perpetuities, and trust accounting requirements.

It is this latter point, trust accounting, that forms the basis for today’s discussion. While not trying to be a “homer” for my home state, Tennessee, I do admire the work that has been done on Tennessee’s Uniform Trust Code by both attorneys and trustees in Tennessee. This is work that warrants a comparison to the norm under the UTC, in areas that often fly under the radar. One such area are the rules dealing with trust accounting.

However, to effectively introduce this comparison, I have to remind drafters of the old adage from Captain Jean-Luc Picard from Star Trek - it is possible to commit no mistakes, and still lose (if the goal is avoiding litigation). From a drafting perspective, unexpected interpretations of clauses within wills and trusts are so common that the associated litigation rarely comes as a surprise. So, while it is possible to commit no drafting mistakes, it is impossible to predict every single way a beneficiary might interpret a clause of a will or trust.

This was illustrated in a recent case from Tennessee’s Court of Appeals, Brock v. Brock (2022). This case invoked Tennessee’s adaptation of UTC Section 813, dealing with a trustee’s duty to inform and report to qualified beneficiaries of a trust.

Brock v. Brock - Facts and Procedural Background

In this case, a testamentary marital trust had been established for a surviving spouse under the decedent’s will, with the remainder passing 50% to the appellant (the testator’s son) and the remaining 50% being split four ways among other children.

A dispute arose between the appellant and trustee (the co-trustees were the surviving spouse and another individual) regarding accounting for the marital trust, particularly the distributions being sourced from principal. Of note, the surviving spouse was allowed to receive all income, as well as principal distributions for HEMS. The surviving spouse also had a limited power of appointment over up to $2,500,000 of the principal of the marital trust.

Regarding accounting for the marital trust, the decedent’s will included the following clause:

The fiduciary shall not be required to make any inventory or appraisal of the assets of my estate or any trust or to file reports, inventories or settlements with any court. However, the fiduciary shall upon written request at reasonable intervals render to each then current income beneficiary of my estate or the trust estate, or to the natural or legal guardian of the beneficiary, full statements of all receipts and disbursements and a schedule of all assets and liabilities of the trust or my estate.

The trustees relied on this clause as grounds to deny accounting to the appellant, as the appellant was a remainder beneficiary and not an income beneficiary, and sought a declaratory judgment to this effect at the trial court level. The appellant counterclaimed for breach of fiduciary duty stemming from the denial of an accounting, and sought an accounting dating back to the inception of the marital trust. The trial court agreed with the trustees, and assessed the trustee’s attorney fees against the appellant.

The Appeal

On appeal, the appellant claimed that the clause in question did not limit the trustee’s duty to provide an accounting to remainder beneficiaries (who meet the definition of qualified beneficiaries under Tennessee’s version of UTC 813, codified at Tenn. Code Section 35-15-813). Instead, the appellant claimed that a plain reading of the language had the effect of:

• limiting the trustee’s duty to provide an accounting to the court only (and not to beneficiaries); and

• expanding the requirements for providing an accounting to the income beneficiary beyond the basic requirements under Tennessee law, while not limiting the remainder beneficiary’s right to request an accounting.

The Court of Appeals disagreed, finding that the language was not ambiguous and clearly expressed the decedent’s intent to create a “silent” trust with respect to remainder beneficiaries under Tenn. Code Section 35-15-813(e). In other words, the Court concluded that the decedent had intended to override the trustee’s duty to provide an accounting to remainder beneficiaries.

Diving deeper, the Court noted that the statute in question - Tenn. Code Section 35-15-813(e) - did not require a trustee’s reporting obligation to be expressly overridden in the will or trust instrument by reference to beneficiaries or classes thereof. Indeed, in keeping with our theme of brevity, Tenn. Code Section 35-15-813(e)(1) (which has been amended since the accounting dispute in this case) only imposes this simple requirement for relief of the trustee’s accounting duty:

That the terms of the trust provide otherwise.

Key Takeaways

This case should provide comfort to trustees not only in Tennessee, but in any state which has relaxed the trustee’s duty to inform and report under UTC Section 813. But, for anybody who drafts trusts, I think it adds another data point to consider in drafting. If the goal is to be clear, should the language be explicit regarding intent?

To get there, one note I had from Heckerling was one state court’s recognition that the intent expressed in a trust was not the intent of the settlor, but instead was the intent of the drafting attorney. In this vein, there is a difference between a client expressly requesting that the duty to inform and report be relaxed, and an attorney using language that relaxes this duty as boilerplate.

Now, I am not saying that is what happened here - the language in Brock appeared to be designed to specifically address family dynamics. In fact, there was even a limited power of appointment which could be used to reduce the appellant’s remainder share of the marital trust. Nonetheless, the lack of an “in your face” expression resulted in litigation. This was perhaps exacerbated by the fact that the surviving spouse was a co-trustee with another individual - a fact that, under Tennessee law, did not expand fiduciary duties (due to the inherent conflicts of interest between the interested trustee and appellant) but may expand such duties in other states.

So, my key lesson is that perhaps there should be more “in your face” types of expressions of intent in wills and trusts.

Now, I believe the language in Brock was clear enough. There were two disjunctive phrases - one relaxing the trustee’s duty to “make any inventory or appraisal,” and one relaxing the trustee’s duty to “file reports, inventories or settlements with any court.” The qualifier “or to” separating these two phrases is what made them each separate and independent, and while not stated in the Court’s opinion, the appellant’s reading of the clause ignored this qualifier. The Court implied this was enough, by refusing to require the addition of “to remainder beneficiaries” or “to qualified beneficiaries” to the first phrase.

However, a belt and suspenders approach may sometimes be helpful. There is a second way under Tennessee’s Uniform Trust Code to relax the accounting requirement - through written instructions to the trustee provided by the settlor, trust protector or trust advisor. In a situation where the trustee’s duty to inform and report is being relaxed, having such a written statement may be a helpful backup. In fact, it may be a good practice for a trustee in any state to request this sort of documentation if they become aware of trusteeship during the settlor’s lifetime. Following the settlor’s death, such a statement from a trust protector or trust advisor could operate as a nonjudicial substitute for a court petition for declaratory judgment or instructions regarding interpretation of a trust.

For the time being, however, drafting attorneys and professionals reviewing estate plans should pay special attention to accounting requirements, and note that deviations from the norm under UTC Section 813 may warrant special attention.