Imagine the following scenario: The trustee of a revocable trust dissipates a substantial amount of trust assets to buy men’s basketball season tickets at the Dean E. Smith Center. The settlor does not follow college basketball. The settlor, moreover, wants to leave a large sum for the trust’s remainder beneficiaries, who are his three children. The trustee keeps the ticket purchase secret. Only after the settlor’s death do the settlor’s children find out that the trust’s assets have been vastly depleted.
Can the settlor’s children—the remainder beneficiaries of the revocable trust—sue the trustee for the breach of fiduciary duty that occurred during the settlor’s life?
North Carolina’s appellate courts have not addressed this question. The few state courts that have addressed it have provided varied answers. This article examines these decisions.
Decisions that Hold that Beneficiaries Cannot Sue for Breaches of Fiduciary Duty that Occurred During the Settlor’s Lifetime
Three courts have concluded that, during the settlor’s life, the trustee of a revocable trust is accountable only to the settlor, and not to remainder beneficiaries—and that, for this reason, a beneficiary lacks standing to sue the trustee for a breach that occurred during the settlor’s life. These decisions come from appellate courts in Missouri, Arizona and Iowa.
The Missouri Decision
In the Missouri case, remainder beneficiaries of a revocable trust sought an accounting, enforcement of trust, and removal of the trustee. In re Stephen M. Gunther Revocable Living Trust, 350 S.W.3d 44 (Mo. App. E.D. 2011). The remainder beneficiaries filed their lawsuit one year after the settlor died. They wanted an accounting for a period of time that included when the settlor was alive. For the final three years of his life, the settlor served as trustee. In the years prior, another person served as trustee. The beneficiaries sought an accounting for the period of time when the other person served as trustee.
The trustee moved for summary judgment. The trustee argued that, before the settlor’s death, the trustee lacked a fiduciary relationship with the beneficiaries. The court granted summary judgment in the trustee’s favor.
On appeal, the Missouri Court of Appeals emphasized that, during the period when a trust is revocable by the settlor, the remainder beneficiaries’ rights are subject to the settlor’s control. For this reason, the court explained, the trustee owes duties during this period only to the settlor. Id. at 47. Missouri’s Uniform Trust Code, moreover, supports this conclusion. A comment to the code says that “while a settlor has capacity to revoke a trust, he or she is treated as the sole beneficiary.” 4C Mo. Practice Series Trust Code & Law Manual § 456.6.-603 cmt. at 219 (2010-11 ed.).
The Missouri decision also relied on a decision by the Alabama Supreme Court. In the Alabama case, the settlor and beneficiaries of two revocable trusts sued the trustee and other defendants for breach of fiduciary duty. The Alabama Supreme Court concluded that—regardless of whether their rights were injured—the remainder beneficiaries lacked standing to sue. Ex parte Synovus Trust Co., 41 So.3d 70, 74 (Ala. 2009). Because the settlor controlled the beneficiaries’ rights during the period that the trust was revocable, the trustees owed fiduciary duties “exclusively” to the settlors during that time. Id. (emphasis in original).
The Arizona Decision
One year after the Missouri decision, the Arizona Court of Appeals considered the same issue and reached the same conclusion. See Pennell v. Alverson, No. 1 CA-CV 10-0673, 2012 WL 4088679 (Ariz. App. Div. 1 Sept. 18, 2012). The Arizona case concerned a revocable trust for which the settlor served as trustee. The settlor was also the sole income and principal beneficiary of the trust during her lifetime. Her daughters and granddaughters were remainder beneficiaries. The settlor later amended the trust to name a granddaughter as co-trustee.
When the settlor died, the remainder beneficiaries sued the co-trustee (the granddaughter) for breach of fiduciary duty. The trial court, however, dismissed the case, holding that the remainder beneficiaries lacked enforceable rights prior to the settlor’s death.
The Arizona Court of Appeals affirmed. Like the Missouri court, the Arizona court held that, under Michigan law (which governed the trust), the trustee did not owe a duty to the remainder beneficiaries during the settlor’s lifetime. Because the settlor could modify the terms of the trust to eliminate the beneficiaries’ interests, the trustee (here, also the settlor) could not owe a fiduciary duty to those beneficiaries. Id. at *5.
The Iowa Decision
Most recently, the Iowa Supreme Court, like the courts in Missouri and Arizona, ruled that the trustee of a revocable trust did not owe a duty to provide an accounting to a remainder beneficiary for the period during the settlor’s lifetime when the settlor could revoke the trust. In the Matter of Trust # T-1 of Mary Faye Timble, Judith R. Cunningham, Trustee, 826 N.W.2d 474, 489 (Iowa 2012).
The Iowa Supreme Court, like the courts in Missouri and Arizona, focused its analysis on the relevant trust code. In particular, the Iowa Supreme Court noted that, under the Iowa Uniform Trust Code, the trustee’s duties—while the settlor is alive, and the trust is revocable—run only to the settlor. Id. at 484. Consequently, during this period, the trustee owed no duties during this period to the beneficiaries. Id.
Less clear, the court noted, was whether, upon the settlor’s death, the beneficiary became entitled to an accounting for the period preceding death. Id. The beneficiary argued that “the trustee should account to the beneficiaries for this period because, once the settlor dies and the trust is irrevocable, section 633A.3101 becomes inoperative and the beneficiaries succeed to the settlor’s interest in the trust.” Id. In opposition, the trustee argued that “the beneficiary is not entitled to an accounting for the period during which the settlor was alive and the trust was revocable, even if the accounting is requested after the settlor’s death.” Id. at 485.
Finding that the Iowa Code “unambiguously” stated that “‘while a trust is revocable . . . [t]he duties of the trustee are owed to the [s]ettlor’ without stating whether a beneficiary can obtain an accounting for that period once the settlor’s death renders the trust irrevocable,” the court asked, “does the temporal word ‘while’ define the time period that can be covered by a request for an accounting, or does it only limit when the request can be made?” Id. (quoting Iowa Code § 633A.3103) (emphasis in original).
Relying on Gunther and Synovus, the Iowa Supreme Court held that a trustee who owes no accounting to the beneficiaries while the trust is revocable should not face retroactive accounting duties for the same period upon the settlor’s death.
Decisions Holding that Remainder Beneficiaries Do Have Standing to Sue for Certain Breaches of Fiduciary Duty During the Settlor’s Lifetime
Courts in California and Florida have concluded that remainder beneficiaries can seek an accounting from the trustee of a revocable trust that covers a period of time when the settlor was alive. Significantly, these courts focused their inquiry on whether beneficiaries could seek remedies based on breach of duties owed to the settlor.
In the Florida decision, called Brundage v. Bank of America, 996 So.2d 877, 882 (Fla. 4th D.C.A. 2008), the court explained that, although co-trustees of a revocable trust did not owe the remainder beneficiaries a duty during the settlor’s lifetime, the co-trustees did owe duties to the settlor. This is consistent with the reasoning of the Missouri, Arizona and Iowa courts.
The Brundage court, however, then held that the contingent beneficiaries could sue to enforce the duties owed to the settlor—and could do so after the settlor’s death. Id.
Brundage involved a suit by beneficiaries of a revocable trust that provided for distribution of particular stock upon the settlor’s death. The beneficiaries sought a declaration that they were entitled to additional shares of stock resulting from a stock split. After the co-trustees filed a motion to dismiss, the court concluded that the co-trustees did not owe a fiduciary duty to the beneficiaries, who were contingent beneficiaries under the revocable trust during the settlor’s lifetime. The beneficiaries appealed.
On appeal, Florida’s intermediate appellate court agreed that, during the settlor’s lifetime, the trustee owes a fiduciary duty only to the settlor, and not to remainder beneficiaries. Id. at 882. The court then concluded, however, that “once the interest of the contingent beneficiary vests upon the death of the settlor, the beneficiary may sue for breach of a duty that the trustee owed to the settlor/beneficiary which was breached during the lifetime of the settlor and subsequently affects the interest of the vested beneficiary.” Id.
In sum, under Brundage, a remainder beneficiary could sue a trustee for a breach of a duty owed to the settlor, but the remainder beneficiary could not sue the same trustee for breach of a duty purportedly owed to the remainder beneficiary himself.
The California Supreme Court, in a later decision called Estate of Giraldin, 290 P.3d 199 (Cal. 2012), agreed with this principle. Giraldin involved a petition by beneficiaries of a family trust to remove the trustee, to compel an accounting, and to surcharge him for breach of fiduciary duty after an investment by the trust had depreciated. After a trial, the court ruled that the trustee had violated his fiduciary duty in various ways.
On appeal, the court of appeals concluded that, because the beneficiaries sought to vindicate their own interests and not those of the settlor, and because the trustee owed duties solely to the settlor and not to the trust beneficiaries, the beneficiaries lacked standing to sue.
The California Supreme Court, which granted the beneficiaries’ petition for review, reversed the decision. The court explained that, although no section of California’s probate code expressly addressed the question of standing before the court, the code implied that, after the settlor died, the beneficiaries of a revocable trust can challenge the trustee’s breach of the fiduciary duty owed to the settlor “to the extent that breach harmed the beneficiaries’ interest.” Id. at 204.
Specifically, the California Supreme Court explained that section 15800(b) of the California Probate Code, which stated that “[t]he duties of the trustee are owed to the person holding the power to revoke,” merely “postpone[s] the beneficiaries’ enjoyment of their rights until after the settlor’s death.” Id. at 204-05. The court also emphasized that the probate code afforded beneficiaries broad remedies for breach of trust, including that a beneficiary could commence a proceeding to redress a breach of trust. Id. at 205. Although the probate code stated that the trustee did not have to account to the beneficiaries of a revocable trust for the period when the trust may be revoked, the court found that this section, read in light of section 15800, did not mean that the trustee is insulated from ever having to provide an accounting, even after the trust becomes irrevocable. Id.
The California Supreme Court then offered a hypothetical to make its point:
Let us assume that the trustee himself, unbeknownst to and against the wishes of the settlor (who wishes to leave behind a large trust for his beneficiaries), goes on [a] six-month cruise around the world with trust funds, dissipating most of the trust assets in the process. The acts do not come to light until the settlor has died and the beneficiaries discover the trust is devoid of assets. In that situation, the trustee would have violated his duty to the settlor, much to the beneficiaries’ harm, and . . . would be liable to the beneficiaries. Id. at 207 (emphasis in original).
In holding that the beneficiaries may bring an action directly themselves, the California Supreme Court emphasized the lack of judicial decision, statute, or legal authority finding that beneficiaries have no standing in this situation. The court also rejected the notion that, rather than suing the trustee themselves, beneficiaries should have been required to appoint a personal representative, who could be charged with filing the suit. Just because a personal representative would have had standing, the court explained, did not mean that the beneficiaries themselves lacked standing. Id. at 210.
The dissent in Giraldin raised two key points. First, the dissent argued that, by conferring standing to sue only upon the decedent’s personal representative, the court would have avoided a conflict of interest: A beneficiary, after all, has a personal interest in maximizing his or her share of the inheritance. That interest, the dissent explained, “may be at odds with what the decedent had in mind.” Id. at 212.
Second, the dissent asked what would happen if a personal representative and several beneficiaries of a revocable trust both sued the trustee on behalf of the deceased settlor and the trustee offered to settle. If some of the plaintiffs wanted to accept the offer, but not others, the court asked, “What to do? Which of the plaintiffs, all of whom purport to represent the deceased settlor’s interests, get to decide whether to accept the offer?” Id. at 213.
Implications for Allowing Beneficiary Suits in North Carolina
North Carolina has adopted an analogue to section 603 of the Uniform Trust Code, which states, “While a trust is revocable, rights of the beneficiaries are subject to the control of, and the duties of the trustee are owed exclusively to, the settlor.” N.C.G.S.§ 36C-6-603 (emphasis added).
This section of the code, however, does not clearly address whether remainder beneficiaries could sue a trustee for breach of fiduciary duty owed to a settlor to the extent they were injured by the breach. If this issue were raised, what considerations might a North Carolina court consider?
First, allowing beneficiaries standing to sue could create conflict that would undermine some of the goals of forming a trust, such as keeping costs low. As the Giraldin dissent posited, beneficiaries generally have an interest in maximizing their share of the inheritance, which can conflict with what the decedent had in mind. Beneficiaries, moreover, may disagree as to the scope and form of an accounting to be provided to them. Trust of Trimble, 826 N.W.2d at 486. Disputes, in turn, could increase the expense of using revocable trusts by making a trustee accountable to multiple parties with potentially conflicting interests. See id.
Second, limiting accountability to personal representatives helps ensure the trust privacy between settlors, trustees, and beneficiaries, which helps minimize disputes grounded in jealousy and anger. See id. Increased privacy, however, may make vulnerable settlors more vulnerable and inhibits the ability of beneficiary to monitor and enforce trusts. See id.
Returning to the hypothetical at the start of the article, the decisions from Florida and California would allow remainder beneficiaries to sue the trustee for breach of fiduciary duty that occurred during the settlor’s lifetime—but only if the remainder beneficiaries can show that the settlor did not want the trust’s funds used for basketball tickets. In the absence of this showing, the remainder beneficiaries lack any standing to sue because, as all courts have concluded, the trustee’s duties during the settlor’s lifetime run only to the settlor.
*This article originally appeared in the April 2014 issue of The Will and The Way