A fiduciary’s failure to disclose material facts to beneficiaries may violate their fiduciary duties. A recent Texas court’s decision outlines the fiduciary’s risks that come with the obligation to disclose.
In In re Estate of Stewart, several siblings disputed the estate of their father. Wayne was the executor of his father’s estate and filed for a judicial discharge of the probate. Jennifer, his sister, filed an objection to the judicial discharge, claiming, among other things, a breach of fiduciary duty. She prevailed at trial.
The relevant facts are relatively straightforward: Wayne was appointed executor under his father’s will. He had two brothers and one sister. Wayne made several distributions of his father’s property, which provided several specific bequests, but provided that the siblings should receive equal shares of the remainder of the property.
In making the distributions, Wayne provided no information about the properties or their valuations to Jennifer, did not provide her accountings, and failed to tell her when he was making distributions to her (e.g., transferring securities into her Merrill Lynch account without telling her he was going to do so).
Wayne also failed to disclose an electrical lease on a piece of land held by the estate which he deeded to the brothers. He sold the lease to the electrical company outside of the estate. Finally, Wayne distributed $26,000 less to Jennifer than to himself and his brothers, and claimed to have mistakenly paid himself a $48,000 executor fee without court approval. He corrected these “errors” before he filed the request for a judicial discharge.
The jury found that Wayne violated his fiduciary duty. And while they found Jennifer’s damages were $0, they awarded her $150,000 in attorney fees and costs, with prospective appellate attorney fees.
On appeal, the Court ruled that Wayne indeed had a fiduciary duty to Jennifer as the executor to the will. Fiduciary duties include “the duty of loyalty and utmost good faith; duty of candor; duty to refrain from self-dealing; duty to act with integrity; duty of fair, honest dealing; and the duty of full disclosure.” Id. Among these obligations, Jennifer argued that Wayne was involved in self-dealing and violated his obligation of full disclosure.
On appeal, Wayne argued that he had a right to make pro-rata distributions under section 405.015 of the Texas Estates Code and that he thus he didn’t engage in self-dealing.
The Court disagreed, holding that:
section 405.0015 states nothing about divesting an independent executor of the fiduciary duties he owes the beneficiaries of the will. We agree with Jennifer that Wayne’s interpretation would lead to an absurd result. … We conclude section 405.0015 merely provide an independent executor with the tools necessary to make non-pro-rata distributions and avoid the common partition litigation among heirs anticipated and addressed by the Heirs Partition Act. Thus, the typical fiduciary duties of good faith, fair dealing, and full disclosure still apply to Wayne’s actions notwithstanding section 405.0015.
The statute, the court found, stated nothing about an executor’s obligations as a fiduciary. Under Texas law, an executor maintains an obligation to provide the beneficiary information as it is requested about the properties and their valuations. By failing to do so, an executor may breach its fiduciary duty.
The moral of the story: If a beneficiary requests information, provide it. If a beneficiary requests an accounting, provide it. Indeed, these items are generally required even in the absence of a formal request. Full disclosure is a fiduciary duty.