Arthur L. Hamel’s trust instrument gave the trustee broad authorization to control and administer trust property, including “the power to do all acts that might legally be done by an individual in absolute ownership and control of the property” and provided the trustee with “the power to lend money to . . . any beneficiary under [the] Trust . . . as may be agreed upon between my Trustee and such parties, provided, however, that any such loan shall be adequately secured and shall bear a reasonable rate of interest.”  The trust also granted to the trustee “any power my Trustee needs to administer my Trust Estate, which is not hereinafter listed.”  This same paragraph provided the trustee with “the power respecting property in [the] Trust Estate that an absolute owner of such property would have.”

But the trust also contained a specific provision relating to the sale of a farm held in the trust:

Upon my death, my Trustees shall have the farmland appraised.  Based upon that appraisal, DENNIS HAMEL has the option to purchase any or all of the farmland for three years immediately following my death at the appraised price.  During such time period, the trust shall continue to hold the farmland not yet purchased by DENNIS HAMEL.  All net income from the farmland shall be distributed annually to the beneficiaries in accordance with the above listed beneficiary’s fractional share of the trust.  If DENNIS HAMEL has not purchased the farmland within the allotted time period, then it shall be divided in accordance with the above beneficiary’s fractional shares.

Dennis executed a contract for deed between himself and his wife, as buyers, and the trustees, as sellers, to purchase the farmland for $244,000 to be paid over 6 years with 5 percent interest and a down payment of $10,000.  The Kansas Supreme Court determined that the trustees lacked authority to sell the farm to Dennis under the terms of this contract for deed.

Notwithstanding the broad powers granted to the trustees under the trust instrument, the specific provision regarding the farmland conveyed Arthur’s clear intent that the farmland would be disposed of within 3 years of his death – either through Dennis’ purchase of the farm or by a division among the beneficiaries.  Arthur’s intent was frustrated when the trustees entered into an impermissible 6-year contract.  Thus, the purchase of the property would not be final until more than 6 years – rather than 3 years – after Arthur’s death.

First, some quick facts.

Robert E. Boyar’s will distributed all of his property to a trust for the benefit of his five children and his grandchildren.  Under the trust, one son (Robert A. Boyar) and a bank were to be co-trustees.  The trust, however, also provided that a trustee could be removed by a majority of the beneficiaries.  Shortly before his death, Robert E. Boyar amended his trust to name a different trustee and to provide that he would not be subject to removal by any of the other trust beneficiaries.  The trust also provided that certain personal property should be divided among the children pursuant to their own agreement, which the children started to do shortly after Robert E. Boyar’s death.

Several months after Robert E. Boyar’s death, the new trustee informed Robert A. Boyer of the trust amendment and demanded a personal property itemization.  Robert A. Boyar contended that, while the amendment didn’t change the substantive dispositions to be made by the trust, it was improperly orchestrated by the new trustee to gain control of the trust and to collect trustee fees.

Robert A. Boyar filed an action challenging the validity of the amendment on the grounds of undue influence and lack of capacity.  The trial court dismissed the petition on the grounds that, because Robert A. Boyar accepted some of Robert E. Boyar’s personal property under the terms of the trust, he didn’t have the right to challenge the amended trust provision.  In other words, the trial court applied the doctrine of election.

With that background, now, let’s get a quick refresher on the doctrine of election.  In the context of wills, it means that “once a beneficiary under a will has accepted a benefit granted by the will, he will be estopped from asserting any claim contrary to the validity of the will.”  Put differently, “[w]hen a person is presented with the choice between two inconsistent or alternative claims to property devised by the testator and elects to accept benefits pursuant to the provisions of the will, that person will then normally be estopped from challenging the will or any part of it.”  The lower courts extended this doctrine to the trust.

The Illinois Supreme Court, however, decided that the doctrine of election shouldn’t have been considered by the lower courts.  The reason was that Robert A. Boyar’s challenge was not to the distribution provision.  He did not make a choice between accepting the property or challenging the trust.  Thus, he could take under the distribution provision and still challenge the amendment changing the trustees.

Last week, over at Bryan Cave‘s Private Client Group blog, TrustBryanCave, Kathy Sherby and Stephanie Moll wrapped up a three part series on this topic.  Readers of this blog will definitely be interested:

Part 1 takes a look at Pennell v. Alverson, which we previously looked at here.

Part 2 explores the ongoing saga of In re Estate of Giraldin, which we briefly reviewed here.

Part 3 wraps up the discussion with In the Matter of Trust #T-1 of Mary Faye Trimble, which we took a look at here.

Thomas and Michael filed an ex parte petition to remove Frederick as trustee and install Michael as the trustee of the Smillie Trust for the benefit of Thaddeus.  Nearly simultaneously, Thomas fraudulently created a second trust for Thaddeus.  Through alleged fraud, forgery, and subterfuge, Thomas convinced the insurance company to pay the death benefit to the fraudulent trust rather than to the correct trust.  Thaddeus sued the insurance company for breach of the insurance contract by making out the insurance proceeds check to the wrong trust thereby allowing Thomas to steal the money.

In Jakobiec v. Merrill Lynch Life Insurance Co., a New Hampshire federal court dismissed the claims against the insurance company and a federal appellate court agreed.  The reasoning was that, even if the insurance company made a mistake by making out the check to a fraudulent trust, the insurance company was not the cause of the beneficiary’s loss.  Because the Tessiers were hellbent on stealing the money and because they had gained control of the legitimate trust, too, they would have stolen the money even if the insurance company had made the check out to the correct trust.

You have to wonder how far this protection extends.

These were pretty bad facts – the wrongdoers here admitted that they were hellbent on getting the money.  Would an insurance company be granted the same protection if it made the erroneous distribution to a run-of-the-mill identity thief?  Based on the court’s reasoning, perhaps, because the criminal activity was an intervening cause.  In other words, it’s still the criminal – not the insurance company – who is the actual cause of the damage.

Here, also, the claims agent appears to have done some digging before cutting the check.  What if he hadn’t?  Would it have made a difference if the agent was reckless or merely negligent?  Maybe, because in that case the agent would have arguably caused the damage as opposed to a third party.

What happens if an agent’s negligence or recklessness is combined with a criminal trying to steal the funds?  While that seems like a fact-intensive inquiry, under this court’s reasoning, the existence of criminal activity may trump any act by the agent because the criminal activity will be the cause of the loss.

The court determined that a purported beneficiary of a trust didn’t need to be joined as a party where:

(1) Someone else, like the trustee, would defend the same position as the absent beneficiary; and

(2) The absent beneficiary had essentially disclaimed any interest in the trust.

The second point raises an interesting question – if the sole beneficiary of a trust disclaims any interest in the trust, does a trustee still have a duty to uphold the trust insofar as defense of the trust presumably upholds the grantor’s intent?

The trust instrument there required that “[e]ach Successor Trustee shall render an account of his/her receipts and disbursements and a statement of assets to each adult vested beneficiary.”  The plaintiffs were adult vested beneficiaries of the trust who had made requests for the successor trustee to provide an accounting, which the trustee did not provide.  The federal court ordered the trustee to provide the plaintiffs with an accounting of his receipts and disbursements on behalf of the trust and a statement of the trust assets within 30 days of the order.

We’re interested in this opinion for two issues that weren’t central to the court’s decision.

First, the trustee didn’t argue that the plaintiffs’ interests were not “vested” under Illinois law.  Thus, the court didn’t have to address vesting, but it still did.   In doing so, the court reminded us of an important tenet of Illinois trust law.  The plaintiffs here weren’t entitled to any trust assets until after the grantor and his partner’s deaths.  Death is an event that is certain to occur.  Thus, a a bequest merely postponed until after the death of a life tenant is still a vested remainder.  The inclusion of the phrase “upon death” doesn’t imply the creation of a conditional interest even though the future condition of “death” must first be met before the bequest is actually made.

Second, the time period for the accounting is interesting.  The grantor died on October 19, 2009.  The court ordered the trustee to provide an accounting to the beneficiaries from October 19, 2009 to the present.  It’s unclear from this opinion whether the court was recognizing that Illinois falls into that group of states that does not require the trustee of a revocable trust to account for the period of time preceding a grantor’s death or whether the court was simply limiting the accounting to that period of time for which the successor trustee was the trustee of the trust.  Either reasoning would be significant, but the opinion leaves us to wonder.

In 1996, Congress enacted 26 U.S.C. § 7434(a), which gives victims of fraudulent filing activities a damage remedy against the perpetrators.  The provision applies whenever “any person willfully files a fraudulent information return with respect to payments purported to be made to any other person.”  It allows the subject of the false information return to recover from the person filing the return the greater of $5,000 or actual damages flowing “as a proximate result” of the fraudulent return including costs incurred in dealing with deficiencies resulting from the return, court costs and, in the court’s discretion, “reasonable attorneys fees.”

In Vandenheede v. Vecchio, the U.S. District Court, Eastern District of Michigan, recently granted the Defendants’ motion for summary judgment based on the fact that violations of 26 U.S.C. § 7434(a) fall on the “filer,” and not on every person involved in preparing the return.  The Plaintiff, Mary C. Vandenheede (“Vandeheede”), filed suit against the co-trustees of her husband’s revocable trust for, among other things, filing a false and fraudulent tax form. The facts are as follows:

Vandenheede and Donald Chinn (“Chinn”) began dating in 1992.  Chinn paid for Vandenheede’s living expenses and bought her a house with funds from his revocable trust, the Chinn Trust.  Chinn and Vandendeede got married in 2006.  Chinn’s children resigned as trustees of the Chinn Trust, in favor of Chinn’s attorney, Frank B. Vecchio (“Vecchio”), and Chinn’s accountant, Frank A. Borschke (“Borschke”).  After Vecchio and Borschke became co-trustees, the Chinn Trust issued Forms 1099-MISC to Vandenheede for 2006 and 2007, and sent copies of the forms to the IRS.  The 1099s asserted that the Chinn Trust had paid income to Vandenheede, as a trade or business, of $87,893 in 2006 and $27,542 in 2007.  Vandenheede objected to the issuance of the 1099s, asserting that any amounts paid to her were to reimburse her for Chinn’s living expenses, or to continue his practice of paying for her personal living expenses.  The IRS and the Michigan Treasury assessed income tax and penalties against Vandeheede.  Vandenheede brought a refund action in the U.S. District Court, which led to the full abatement of the Federal income tax, penalty, and accrued interest.  Vandenheede then filed suit against the co-trustees to recover under 26 U.S.C. § 7434(a).

Defendant co-trustees argued that in order to have a cause of action under 26 U.S.C. § 7434, the information return must be willful and fraudulent when it is filed.  In addition, the defendant must be the person “so filing” such a return.  Defendants argued that the “filer” is the person required by statute to file the return, and not every person involved in preparing the return.  Defendants cited Treasury Regulation § 301.6721-1(g)(6) regarding the failure to correctly file information returns, for the proposition that the filer is the person “required to file an information return . . .”  The Court granted the co-trustees’ motion for summary judgment on the basis that the 1099s ran directly to Chinn, who reported all income and deductions of his trust on his personal income tax returns.  Therefore, although Borschke and Vecchio prepared and caused the return to be filed, it was Chinn who “filed the return” for purposes of 26 U.S.C. § 7434.  Vandenheede’s claim against Borsche and Vecchio was dismissed.

This case is interesting because its holding seems to deviate from the purpose of 26 U.S.C. § 7434(a).  Congress enacted 26 U.S.C. §7434(a) as remedy for the victims of fraudulent filings.  However, the Defense’s argument in Vandenheede v. Vecchio, that the filer is the one “required to file an information return,” will result, in most cases, as the filer being the taxpayer itself.  Such holdings could prevent the taxpayer from recovering against the tax professional who may have prepared and caused the fraudulent return to be filed.

This post also appears here on trustbryancave.com.

Although the Ohio Supreme Court identified additional “underlying improprieties” that prohibited the applicant’s admission to the bar, the court separately identified “probate litigation” and “breach of fiduciary duties as trustee of life insurance trust” as several of the grounds for disapproving the applicant’s application for admission to the state bar.  Let’s take a brief look at these two issues which might give already-licensed attorneys some pause about serving as fiduciaries.  Because if it’s grounds for denial of admission to the state bar, can the same conduct be grounds for reprimand, censure, suspension or disbarment?

Probate Court Litigation

With respect to the probate litigation considered by the court, the applicant sued his father (who himself was trustee of a trust) seeking an accounting, a distribution from the trust, and removal of his father as trustee of the trust.  The applicant’s father filed a counterclaim alleging that the applicant and his wife had accepted a loan from the trust but then failed to execute a note and mortgage to secure the loan.  The probate court that heard the case refused to remove the applicant’s father as trustee.  The probate court also entered a judgment against the applicant and his wife for the value of the loan plus interest.

Breach of Fiduciary Duties as Trustee

The applicant was trustee of a life insurance trust.  The applicant’s father stopped paying the premiums for the life insurance policy held by the trust.  As trustee, the applicant could elect to cash in the policy, which would preserve the cash value of the policy, or he could use the cash value of the policy to maintain the policy.  The applicant initially used the cash value of the policy to pay the premiums but when the cash value diminished to approximately $75,000, he elected to surrender the policy.

While the trust instrument allowed unequal distribution of trust assets in certain circumstances, it did not allow the trustee to unilaterally make distributions to himself.  Distributions to the trustee had to be authorized by the next eligible successor trustee.  The applicant claimed that he distributed trust funds to himself for “reinvestment,” but then ultimately admitted that he had spent all but $256 of the $75,000 for his own benefit.  The parties to that dispute ultimately reached a settlement agreement.

Based on the probate court litigation, the breach of fiduciary duties as trustee of the life insurance trust, and several other issues identified in the Ohio Supreme Court’s opinion, the applicant was denied admission to the Ohio State Bar.

In Rendall v. Black, the Court of Appeals of Kentucky dug into both the trust instrument and Kentucky trust law to reverse a local circuit court’s ruling that declared a 1994 deed void ab initio based upon the language of a trust agreement.  In doing so, the appellate court got to differentiate between the trustee’s power to distribute income versus the trustee’s power to sell off the corpus of the trust.  And we saw a brief – and curious – appearance of the trust pursuit rule.

When J.D. Hays died, his wife, Martha, got one-half of his 50 percent interest in a tract of land in Knott County, Kentucky.  Martha placed her then-75 percent interest in the Knott property in trust.  When Martha died, pursuant to the trust agreement, separate, individual trusts were created for the benefit of each of her surviving children.

With respect to the trust income, Martha intended to “grant a liberal degree of fiduciary discretion to the Trustees to make income and corpus available to the beneficiaries for reasonable purposes, it not being intended to grant any beneficiary a power to withdraw or appoint assets.”  With respect to the Knott property that comprised almost all of the trust corpus, Martha granted the trustees all but total authority to alienate the Knott property.

The survivor trusts were to continue until the death of the respective children of Martha.  Upon the death of each of Martha’s children, “his or her separate trust shall end and the remaining balance thereof . . . shall be distributed in fee simple, per stirpes and free of trust to the then living issue of” that deceased child.  The survivor trust for one of Martha’s children, Kathlyn Riddle, was a little different.  Rather than distribution per stirpes to Kathlyn’s then-living issue, upon Kathlyn’s death the remainder of her survivor trust would get distributed to Martha’s then-living issue.  In other words, the remainder of Kathlyn’s trust would be distributed to Kathlyn’s siblings instead of her only child, Daniel.

Martha did, however, grant Kathlyn a limited testamentary power of appointment regarding the trust remainder which could include Daniel.  Kathlyn executed a will, but did not exercise her limited power of appointment.

After Kathlyn died, Johnny Cornett, the successor trustee of Martha’s trust, executed a deed conveying the Knott property to Martha’s surviving children and Kathlyn’s estate for consideration of $1.00.  Daniel believed that he inherited a portion of the Knott property through Kathlyn’s estate, which acquired it from the trust pursuant to that deed.

Kathlyn’s surviving siblings and the heirs of her deceased siblings claimed the deed conveying the Knott property was void and that the trustee should have distributed Kathlyn’s survivor trust assets in equal shares to Kathlyn’s siblings rather than to her estate.  Of their arguments, the important one for our purposes is their argument that the trust didn’t permit the trustees to distribute the corpus to the estate of a deceased beneficiary.  Or, put differently, that the trustee lacked the authority to sell the property.

The trial court agreed that the deed was void, but the appellate court disagreed.  Here’s why:

As an initial matter, it’s hornbook law that even where a trustee lacked authority to sell real property, his or her conveyance of trust property operates to vest legal title in the grantee.

Also, Martha’s trust instrument really set the groundwork for what the trustee could and couldn’t do.  The trustee couldn’t distribute trust income to the estate of a deceased beneficiary and the estate of a deceased beneficiary could not be a beneficiary of the trust.  But, that’s not what happened here.  Under the trust instrument, the trustee did have the power to sell or otherwise dispose of the trust corpus.  While the trustee was prohibited from selling the property during Martha’s lifetime, he had free rein to sell it after her death.  That was the transaction here – it wasn’t a distribution of corpus, it was a sale for the amount of $1.00.  The court was prohibited from looking beyond the four corners of the deed for why the transaction occurred – it was required to take it on its face, which evinces a simple sale of property.  Nothing in the deed indicated that it was intended as a distribution of assets.  Therefore, the deed was valid.

We said that the trust pursuit rule made an appearance, and it did.  The trust pursuit rule applies under Kentucky law only where there is an allegation that the trustee converted real property.  There was no such claim here and, therefore, equity would not compel restitution to the trust beneficiaries.  The somewhat interesting twist is that while other jurisdictions have applied the trust pursuit rule to real property, Kentucky apparently limits its application to personal property since an action for conversion in Kentucky lies only with respect to personal property and real estate is not subject to conversion.

In Kristoff v. Centier Bank, Amy Jean Kristoff tried to use Indiana‘s statute to terminate or modify a trust created by her mother.  The Court of Appeals of Indiana found that Amy did not satisfy her burden under the statute because Amy could not demonstrate the existence of circumstances not anticipated by the settlor of the trust.

What were the unanticipated circumstances Amy was claiming warranted termination of the trust?

Amy’s and her sister’s lack of children.

Sally Jean Kristoff created the Sally Jean Kristoff Trust.  Sally’s Trust provided that, upon Sally’s death, two separate trusts would be created for her daughters, Amy and Laurie, with each trust funded with an amount equal to the then-existing generation skipping tax exemption.

Though lengthy, the specific trust language was critical to the court’s decision, so we’ll quote it in full here:

6. As of the date of my death, the GST [Generation Skipping Tax] Exempt Share created above shall be divided and allocated per stirpes among my then living descendants, and property so allocated to a descendant of mine shall be retained in trust as a separate exemption trust named for that descendant of mine and any other exemption trusts created under the following provisions of this paragraph shall be held and disposed of as follows:

(a) The trustee may pay to or apply for the benefit of a beneficiary for whom an exemption trust is named such amounts of the income and principal of the trust as the trustee, in the trustee’s sole discretion, from time to time believes desirable and so directs for the comfortable maintenance, health, education and welfare of the beneficiary and his or her dependents.

(b) If a beneficiary for whom an exemption trust is named dies before the complete distribution of that exemption trust, then on the death of such beneficiary any part or all of the principal of the exemption trust and the accrued or undistributed income thereof shall be distributed to or for the benefit of such one or more persons or organizations in such proportions and subject to such trusts, powers and conditions as such beneficiary may provide and appoint by will specifically referring to this power to appoint, except that no beneficiary shall have the power to appoint an exemption trust to or for the benefit of such beneficiary, his or her estate or the creditors of either.

(c) On the death of a beneficiary for whom an exemption trust is named, any principal of the exemption trust not effectively disposed of by any other provisions of this paragraph shall be divided and allocated per stirpes among the then living descendants of the beneficiary, if any, otherwise per stirpes among the then living descendants of the nearest lineal ancestor of the beneficiary who also was a descendant of mine and of whom one or more descendants then are living, or, if non, per stirpes among my then living descendants. Property so allocated to a beneficiary for whom an exemption trust is named shall be added to that exemption trust, and property so allocated to any other beneficiary shall be retained in trust as a separate exemption trust named for him or her and disposed of as provided in this paragraph 6.

After Sally died, Amy sought to terminate the trust.  Amy’s argument was that the purpose of the trust was to benefit Sally’s grandchildren.  She argued that the fact that neither she nor her sister had any children was a circumstance not anticipated by Sally and the continuation of the trust was impractical or wasteful.

Let’s break down these two prongs and see why they failed.

Why the Primary Purpose of the Trust Was Sally’s Grandchildren Argument Fails

First, providing for Sally’s grandchildren was not the sole or even primary purpose of the trust.  Paragraph 6(a) of the trust provided that a purpose of the trust was to provide for the “comfortable maintenance, health, education and welfare of the beneficiary and his or her dependents.”  Nothing prevented the trustee from exhausting the entire trust corpus to accomplish this purpose thereby leaving nothing to Sally’s grandchildren.

Second, the trust remainder did not necessarily go to Sally’s grandchildren.  Paragraph 6(b) of the trust provided Amy with a limited testamentary power of appointment.  Amy was not required to exercise that power of appointment in favor of her children.

Third, the trust contemplates that Sally may not have any grandchildren.  Paragraph 6(c) of the trust provides what happens if Amy doesn’t exercise the power of appointment.  If Amy fails to exercise the power of appointment, then the remainder goes to Amy’s children, “if any.“  If Amy doesn’t have any children, then the trust provides for how the assets should be distributed in the absence of Amy’s exercise of the power of appointment.

Why the Failure to Have Grandchildren Was an Unforeseen Circumstance Argument Fails

When Sally executed the trust, Amy and her sister didn’t have any children.  At the time Sally died – 12 years after she executed the trust – Amy and her sister still didn’t have any children.  Sally very well could have anticipated that she wouldn’t have any grandchildren.  But, as we examined above, the trust language specifically contemplates how assets will be distributed in the absence of any children of Amy or her sister.  Therefore, Amy’s failure to have children was clearly anticipated rather than unanticipated.

The primary purpose of the trust was not for Amy’s children and Amy’s failure to have children was not an unforeseen circumstance.  Therefore, Amy’s efforts to terminate the trust were unsuccessful.