A Strong Offense
A Stronger Defense
Applying Michigan law, in Pennell v. Alverson the Arizona Court of Appeals recently came out with a well-written opinion explaining when a trustee owes fiduciary duties to the remainder beneficiaries of a revocable trust.
Cleo Hubbard executed a revocable trust that provided that Cleo was the sole income and principal beneficiary of the trust during her lifetime, and that the remainder beneficiaries were Cleo’s daughters and grandchildren. The trust also named Cleo as trustee and Angella Alverson, one of Cleo’s grandchildren, as successor trustee in the event of Cleo’s death or resignation. Cleo later amended the trust to appoint Angella as co-trustee.
Cleo died and the remainder beneficiaries sued Angella alleging breach of fiduciary duty and a number of other claims. Angella sought to dismiss the claims on the grounds that they were based on acts that were alleged to have occurred before Cleo’s death. Angella argued that, until Cleo died, she didn’t owe a fiduciary duty as co-trustee to the remainder beneficiaries. The trial court agreed with Angella and so did the appellate court.
After sorting through some conflict of laws issues, the appellate court determined that Michigan law applied. Under Michigan law, the trust instrument frames the duties that a trustee owes the beneficiaries. The remainder beneficiaries contended that the trust instrument imposed on the trustee a fiduciary duty to them at all times, including during Cleo’s lifetime.
It’s a lengthy provision, but we’ll include it here because the court found that this language did not impose a duty to the remainder beneficiaries of a revocable trust prior to the grantor’s death:
Trustee may freely act under all or any of the powers by this agreement given to them in all matters concerning the trust herein created, after forming their judgment based upon all the circumstances of any particular situation as to the best course to pursue in the interest of the trust and the beneficiaries hereunder, without the necessity of obtaining the consent or permission of any person interested therein, or the consent or approval of any court. Trustee may so act notwithstanding that they may also be acting individually, or as Trustee of other trusts, or as agent for other persons or corporations interested in the same matters, or may be interested in connection with the same matters as stockholder, director, or otherwise. However, Trustee shall exercise such powers at all times in a fiduciary capacity primarily in the interest of the beneficiaries hereunder.
Trustee shall have the power to do all acts, institute all proceedings, and exercise all rights, powers and privileges that any absolute owner of the trust property would have, subject always to the discharge of Trustee’s fiduciary obligations.
While it lacks some clarity, there’s nothing terribly unusual about that language. Still, we know this was a revocable trust. So, by reserving the right to alter the trust, Cleo implicitly reserved the right to change or eliminate the remainder beneficiaries up until her death or until the trust became irrevocable. The court reasoned that the trust instrument could not sensibly impose on the trustee a duty to the remainder beneficiaries when, in creating the trust, Cleo reserved the right to modify the trust terms to eliminate the interests of one or more of the remainder beneficiaries. Because Cleo could change the remainder beneficiaries up until the time of her death, no duty was owed to the remainder beneficiaries until Cleo’s death.
Side note: Arizona has a statute that actually should have made this a much easier analysis for the court had Arizona law applied: “While a trust is revocable by the settlor, the rights of the beneficiaries are subject to the control of, and the duties of the trustee are owed exclusively to, the settlor.” A.R.S. § 14-10603. Under Michigan law, however, the terms of the trust could prevail over statutory provisions governing the duties and powers of a trustee: “the duties and powers of a trustee. . .and the rights and interests of a trust beneficiary” will be governed by any applicable “terms of the trust” (subject to some exceptions). Mich. Comp. Laws Ann. § 700.7105.
The underlying lesson, at least under Michigan trust law, is still to remember that the trust instrument controls. So conceivably, the trust instrument could impose on a trustee of a revocable trust a fiduciary duty owed to remainder beneficiaries prior to the grantor’s death (or the trust otherwise becoming irrevocable).