When virtual representation is not an option in trust-reformation litigation

In an external contract-based or tort-based dispute between the trustee and a third party to the trust relationship, the beneficiaries are generally not necessary parties. But all beneficiaries (of an irrev. trust) whose equitable property rights might be compromised by the litigation must be given an opportunity to participate in an internal trust dispute, even any beneficiaries yet to come into existence, such as the settlor’s future descendants (issue) who are designated to take the remainder in corpus (“future benes”). An action for instructions or declaratory judgment qualifies as such a dispute, provided equitable property rights are at stake. So also an action to reform the trust. The court’s ultimate determination would not be binding on future benes whose equitable property have been compromised by the determination unless a guardian ad litem had advocated for their equitable property rights or they had been “virtually represented.” One codification of the doctrine of virtual representation is Uniform Trust Code’s Section 304: “Unless otherwise represented, a minor, incapacitated or unborn individual, or a person whose identity or location is unknown and not reasonably ascertainable, may be represented by and bound by another having a substantially identical interest with respect to the particular question or dispute, but only to the extent there is no conflict of interest between the representative and the person represented.” But the UTC may not pre-empt the U.S. Constitution. Thus, virtual representation may not be a vehicle for end-running the Due Process Clause. See Roth v. Jelley, 45 Cal. App. 5th 655, 259 (2020). The judiciary being a state actor, even an equitable trust reformation order that would erode the contingent equitable property rights of future benes is subject to due process constraints. For examples of conflicts of interest that foreclose virtual representation, see §8.14 of Loring and Rounds: A Trustee’s Handbook (2025), excerpted in appendix below. Terteling v. Terteling, 2024 WL 4644904, Idaho Sup. Ct. (11/1/2024), involved an irrev. trust the terms of which restricted a class of future benes to co-trustees’ male descendants. Petitioners sought judicial reformation to expand class to include female descendants. Expansion would partially divest via dilution male descendants’ pre-existing contingent equitable property rights. A presumptive male class-member objected. No GAL was appointed to represent the other future benes, the court presumably being comfortable that objectant’s participation was adequate “representation” of their property rights. The court’s finding clear and convincing extrinsic evidence of mistake replaced restrictive language with gender-neutral language. But was it prudent for the court to forego appointing a GAL to advocate for the property rights of the other male future benes? What if objectant had contractually agreed mid-course to switch sides? Or simply abandoned the litigation? Or died mid-course? A GAL would then have to have been appointed mid-course and duly served with the reformation complaint to ensure that any judicial determination adverse to the male future benes would be constitutional and thus final and binding as to them. Back to square one. As an aside, while the GAL would owe no fiduciary duties to the yet-to-exist male future benes, he/she at least would have owed agency-based fiduciary duties to the court. See my 11/28/2024 JDSUPRA posting, accessible below or by clicking on to https://www.jdsupra.com/legalnews/when-the-guardian-ad-litem-representing-5208844/. As one cannot enter into an agency relationship with the non-existent, neither objectant nor his counsel had truly “represented” the yet-to-exist male future benes. The objectant himself had owed fiduciary duties to no one. The equity court thus had had an “administrative” duty to step into the breach, to act sua sponte in vindication of whatever contingent equitable property rights that had accrued at time of irrevocable entrustment to the unrepresented male future benes, the institution of the trust being equity’s ward as well as its invention.