Trust Accounting, Reverse Accounting, and Contingent Beneficiaries: Food for Thought
Examining Collins v. Flannery
Table of Contents
Intro
Previously, we have discussed some of the nuances of a trustee’s duties to provide an accounting to trust beneficiaries. Many states – especially those who follow the Uniform Trust Code, or UTC – start with the presumption that qualified (i.e., current) beneficiaries must receive an accounting, but that contingent remainder beneficiaries may have restricted rights (or no rights) to receive an accounting. And, this presumption can be overridden by a trust agreement, but depending on trust situs the current income beneficiaries usually must at least be able to request an accounting.
The trustee’s duty to inform and report is often thought of as a one-way duty. In other words, the trust or governing law dictate the flow of information from trustee to beneficiary. But, might there be an obligation for information to flow the other way?
Let’s take an example where the trustee is charged with taking into account other resources available to a beneficiary in making distributions. Often, this is a suggestion and not a direction because it can easily lead to, for example, a breach of the duty of impartiality (if a trustee is more heavy-handed with information requests from one beneficiary when compared to others). But, what happens if the trustee is also a beneficiary – especially the sole beneficiary? Might the contingent beneficiaries’ powers to request an accounting extend to the interested trustee’s own financial information in order to substantiate the “need” for distributions?
This brings us to today’s case out of the Ohio Court of Appeals – Collins v. Flannery – published on December 12, 2024.
Facts
Plaintiff-appellees were the children of the decedent, and the defendant-appellant was the surviving spouse of the decedent (but not the mother of the plaintiff-appellees).
As with many blended family situations, the decedent’s estate plan (under his joint revocable trust with the surviving spouse) provided for a “Surviving Spouse’s Trust” for the sole lifetime benefit of the surviving spouse. The surviving spouse was also trustee of this trust, and the decedent’s children were remainder beneficiaries contingent upon survivorship. The Surviving Spouse’s Trust was irrevocable – a fact that would later contribute to the disposition of the case. (As an aside, a plain reading of the facts indicates that the trust may also have been funded with the surviving spouse’s own assets that had been contributed to the trust – which has its own tax and asset protection pitfalls that were not cited by the Court.)
The broader trust instrument contained a term that is common to many distribution standards, directing the trustee (also the surviving spouse as noted above) to take into account a beneficiary’s resources in making distributions pursuant to an ascertainable standard as follows:
However, the Trustee, based upon information reasonably available to the Trustee, shall make such distributions to any such person for the purposes set forth above only to the extent such person's income, and funds available from others obligated to supply funds for such purposes, are insufficient in the Trustee's opinion for such purposes. (emphasis added.)
This case also involved the messy intersection of a pending divorce and an intervening death, as discussed in this article. Since the divorce was never finalized, the surviving spouse was still treated as such under the trust even though, as alleged in the complaint, the decedent and surviving spouse were living separately at the time of decedent’s death.
The children of the decedent filed a complaint seeking:
An accounting of the trust;
An accounting of the surviving spouse’s income and assets independent of the trust;
An injunction against any subsequent distributions to the surviving spouse from the trust; and
Removal of the surviving spouse as trustee for unfitness, incompetency, conflicts of interest, and a failure to effectively administer the trust assets.
The parties filed cross-motions for summary judgment. The surviving spouse’s motion alleged, in part, that the children lacked standing to bring their action or to seek an accounting as contingent beneficiaries. On the children’s motion, the magistrate at the probate court level granted partial summary judgment on the issue of the accounting, finding that they were entitled to the accounting as contingent remainder beneficiaries under the Ohio Trust Code, R.C. Section 5808.13(C), which provides:
A trustee of a trust that has a fiscal year ending on or after January 1, 2007, shall send to the current beneficiaries, and to other beneficiaries who request it, at least annually and at the termination of the trust, a report of the trust property, liabilities, receipts, and disbursements, including the source and amount of the trustee's compensation, a listing of the trust assets, and, if feasible, the trust assets' respective market values. Upon a vacancy in a trusteeship, unless a cotrustee remains in office, a report for the period during which the former trustee served must be sent to the current beneficiaries by the former trustee. A personal representative or guardian may send the current beneficiaries a report on behalf of a deceased or incapacitated trustee. (emphasis added.)
(This is generally based on UTC Section 813, but with some small changes such as application only to fiscal years ending after 1/1/2007, and a change from “distributees or permissible distributees of trust income or principal” to “current beneficiaries.”)
On the surviving spouse’s motion, the magistrate found that the children had standing to bring their action for her removal as trustee. But, the magistrate declined to award them summary judgment on the removal, or on their request for an accounting of the surviving spouse’s income and assets outside of the trust.
The surviving spouse appealed after the probate court overruled her objections to the magistrate’s decision, citing the same objections as her assignments of error – that the probate court erred in granting partial summary judgment on the issues of (1) the children’s standing as contingent beneficiaries, and (2) the children’s right to receive an accounting as contingent beneficiaries.
Analysis
Standing Issue
On the issue of standing, the Court first analyzed the broader issue of common law standing against the backdrop of an 8th Circuit case that the surviving spouse presented as controlling authority – Campbell v. Donald A. Campbell 2001 Trust, 8th Dist. No. 109585, 2021-Ohio-1731. The surviving spouse argued that, in line with Campbell, she had the power of defeasance to eliminate the remainder interests in the trust during life by distributions to herself as trustee. Accordingly, she argued, the contingent beneficiaries should lack standing until her death because damage to such beneficiaries (a prerequisite for standing) would not occur until that time.
Ironically, in Campbell, the beneficiary-trustee (also a surviving spouse in that case) was subject to an ascertainable standard as in this case. However, the 8th Circuit still determined that the beneficiary-trustee in Campbell had “unfettered” powers to deplete the assets. It is possible, as later noted by this Court, that the beneficiary-trustee in Campbell had a power to amend the trust which, if accurate, would indeed have given her unfettered discretion independent of the distribution standard. But, the Surviving Spouse’s Trust in the instant case was irrevocable.
The Court’s observation about the power to amend the trust was bookended by the following considerations:
The surviving spouse in this case did not have unfettered powers of depletion to start with, mainly because of the requirement that the trustee consider her income and assets outside of the trust in determining the need for distributions.
Even aside from the distribution standards, the plaintiff in Campbell sought standing under common law principles. However, in the instant case, the children were actually granted standing independent of common law principles under the Ohio Trust Code.
On this latter point, the Court cited R.C. 5807.06(A) which provides, in part:
The settlor, a cotrustee, or a beneficiary may request the court to remove a trustee, or the court may remove a trustee on its own initiative. (emphasis added.)
Citing R.C. 5801.01(C), which defines “beneficiary” to include those with a vested or contingent future interest in a trust, the Court determined that the children indeed had standing.
Accounting and Unfunded Subtrusts
To preface this next part, a concept that is often difficult to grasp for clients (and even practitioners) is that many revocable and irrevocable trusts are divided into separate, usually irrevocable subtrusts – often upon the death of a settlor or primary beneficiary. This trust is usually governed by the same master trust instrument that controlled administration of the source trust or subtrust. But, each subtrust remains unfunded until after the event triggering its creation – sometimes with a delay for payments of expenses and taxes, valuation of trust assets, and determination of which trust assets will fund which specific subtrust (if fractional funding is not used).
This concept is one that the surviving spouse latched onto here, to argue that the children weren’t actually contingent remainder beneficiaries of the Surviving Spouse’s Trust itself but instead of their separate, unfunded subtrusts to be created and funded from the assets of the Surviving Spouse’s Trust at her death. Thus, argued the surviving spouse, they are not entitled to an accounting of the Surviving Spouse’s Trust because they are not “technically” contingent remainder beneficiaries of that trust but instead their unfunded subtrusts.
However, the Court cited a Florida Court of Appeals case, Rachins v. Minassian, 251 So.3d 919, 924 (2018) as persuasive authority for the proposition that Florida’s Trust Code, which like Ohio’s is also based on the Uniform Trust Code, interpreted the technical definition of beneficiary to not be affected by the contingency of the creation and funding of a separate subtrust. This quote from Rachins was telling:
The fact that any remaining principal of the Family Trust would flow into a new trust created for the children, as opposed to being distributed to the children outright, does not preclude the children from being beneficiaries of the Family Trust under the statutory definition.
Thus, the Court also determined that the children were entitled to an accounting of the Surviving Spouse’s Trust.
Conclusion
Somewhat disappointingly, no ruling was made on appeal around the issue of whether the children were entitled to an accounting of the surviving spouse’s assets and income outside of the Surviving Spouse’s Trust because there was no cross-appeal by the children on the denial of summary judgment on this issue. Presumably, this and the issue of removal of the surviving spouse as trustee will be addressed on remand.
But, these issues presented interesting and creative arguments by the surviving spouse that have broad utility outside of Ohio since they are interpretations of Ohio’s Trust Code which, as noted above, is based on the Uniform Trust Code. While Ohio uses the distinction of “current beneficiary” against just a mere “beneficiary” in the context of an accounting, this stacks up next to the UTC’s distinction between a “qualified beneficiary” against a mere “beneficiary.”
What I found interesting was the role of the trustee’s power to consider the surviving spouse’s assets and income outside of the trust. Often, this power is stated as a permissive power but not a mandatory requirement. However, in the case of this trust, it was stated as a mandatory requirement. Obviously this played out in favor of the children, but we have no idea whether this matched with their father’s intent (as settlor of the trust).
This raises an interesting drafting point. There is usually a tension between remainder beneficiaries and a surviving spouse, especially where the surviving spouse is a stepparent to the remainder beneficiaries. Often, a settlor wishes to avoid a situation where a surviving spouse might feel discouraged from taking any distributions for fear of reprisal by the remainder beneficiaries. But, the settlor may also not intend that children be left with nothing by the surviving spouse’s complete depletion of the trust in question. Relaxing the accounting requirement is a possibility, but doing so can leave the children without the necessary checks and balances to monitor the activities of a surviving spouse who, for example, is acting as trustee. Trust language establishing priorities of distributions between multiple subtrusts, like a credit shelter trust versus a marital trust (and possibly even inter vivos irrevocable trusts like a SLAT) can also be helpful.
On the administration side, appointment of an independent trustee can be valuable here to protect both the surviving spouse and children. A no-contest clause may have some utility, but may also invite further litigation. As with the trust in this case, you could also require the trustee to consider a beneficiary’s outside resources, but as seen in this case that requirement itself also led to litigation while raising the question of whether the beneficiaries might be able to exercise that power to consider resources if, for example, the trustee holding that power has a conflict of interest.
This case did not indicate whether or not the surviving spouse held a testamentary power of appointment, either. If so, depending on the class of appointees, the surviving spouse presumably could have used this power instead of the distribution to disinherit one or both children as remainder beneficiaries. This may not have made much difference with respect to the arguments of standing and the right to receive an accounting, because the Ohio Trust Code clearly gave the remainder beneficiaries these rights. While this illustrates a common principle – that it is not a good idea to give a stepparent a testamentary power of appointment – perhaps such a power that limits the class of appointees to children and descendants in an exclusionary manner could serve as an effective deterrent if the settlor’s intent is to avoid challenges to the surviving spouse’s authority by remainder beneficiaries. On the other hand, such a situation also raises the question of whether the surviving spouse’s fiduciary duties (as trustee) might extend to the (traditionally nonfiduciary) power of appointment itself.