Tips Regarding Fiduciary Disputes and Estate Planning

“Tips Regarding Fiduciary Disputes in Estate Planning,” that’s the subject of today’s ACTEC Trust and Estate Talk.

Transcript/Show Notes

This is Stacy Singer, ACTEC Fellow from Chicago. There are several trust and estate matters that are hot topics for planners, such as trust reformation, issues arising from settlor incompetence, and expectations when managing disbursements from a trust. ACTEC Fellow Kelly Preteroti of Baltimore, Maryland has been investigating these issues and is with us today to share her findings and takeaways. Welcome, Kelly.

Examining Case Studies: Lessons Learned

Kelly Preteroti: Thank you, Stacy. I’m happy to be here. I’m going to begin by looking at several cases from 2023 and one from 2024. It has been an interesting time period for case law and so it was hard to choose the most appropriate examples. But I’m going to start with two cases that I’ll contrast with one another, both of which teach litigants to choose their words carefully when pleading causes of action and have some applicable lessons for planners.

Case Study 1: Baldwin v. Baldwin

The first case is the Baldwin v. Baldwin case out of Missouri. This case is interesting because it involved a mistaken amendment. Here, the revocable trust of a settlor was amended four times in the last six months before he died. This was a blended family scenario with two daughters from the current marriage and one son from the prior marriage. The correct version left the largest assets of bank stock to the settlor’s two daughters and not the son at the death of the surviving spouse.

The surviving spouse realized that this was a mistake of fact, and she tried to work with the son to resolve it so that the proper amendment would be offered and administered. Not surprisingly, he refused to agree, and he ultimately sued her for breach of trust. She responded with a counterclaim for reformation, seeking to have the trust reformed to the amendment that was intended to be signed by the settlor.

Interestingly, in this case, the surviving spouse presented what amounted to uncontroverted evidence surrounding the mistake. The son didn’t object to the admission of the evidence, nor did he dispute her allegations that there had in fact been a mistake. What he contended is that the new amendment that had not been executed, but was intended, amounted to a total rewrite of the trust, which amounted to a challenge to the validity of the instrument and was time-barred under the truncated two-year statute of limitations. While clever lawyering and defense of this case, the court didn’t buy it. The court ultimately said that the surviving spouse and trustee had proven by clear and convincing evidence that there was a mistake here, that at all times in her pleadings, writings, and discovery, she affirmed the validity of the trust, which was hugely important, and ultimately the court allowed the reformation claim to move forward and found that it was only precluded by a 10-year statute of limitations, which had not run at this time.

So I think the takeaway from this case, especially for litigators, is to think very carefully about how you plead your claims. We have a lot of ways to attack certain things and here you could have tried to attack the amendment that was executed through a declaratory judgment to invalidate the amendment, and if that’s how counsel had said it, they very well might have been time barred under the two-year statute of limitations.

Case Study 2: Jax v. Brossett

Turning to another case that highlights this issue of how carefully litigants must plead their case is an in terrorem clause case. These clauses, I think, strike fear in planners and litigators alike in many ways, and there aren’t lots of cases where you see them discussed and enforced because many states don’t even allow them, but Arkansas does.

In the case of Jax v. Brossett, which occurred this year in 2024, the decedent here created a will and a trust for the benefit of a close family friend, his daughter, and her children. The close family friend is not described in terms of her relationship with the decedent, but the daughter clearly was not happy about it. She also was not happy about the power afforded the close family female friend in the settlor’s will and trust. She was appointed as both the personal representative and the trustee of the trust. She had significant oversight under the trust and the settlor made clear that he wanted his daughter to have no fiduciary role in the trust, including administering the sub-trust that had been created for her children.

He did appoint a corporate trustee for the sub-trust for her children, but that corporate trustee declined to serve. So upon the declination being received, the trustee – a close female friend – ultimately appointed herself, and this caused a serious disagreement between the daughter and the trustee. The trust contained a very broad in terrorem clause, not only precluding a beneficiary from challenging any provision in the instrument but also from becoming an adverse party with respect to the administration. And I think this language is really interesting because it could encompass a broad range of claims that can be asserted in the context of the administration, including claims that could be validly brought. That is not discussed in this case.

The disagreement between the daughter and the trustee turns into a lawsuit. The daughter seeks to remove the trustee as trustee of the sub-trust for the benefit of the grandchildren. She also sought an independent right to appoint all successor trustees for the sub-trust and then, broadly, she named the trustee as a defendant in the lawsuit. This caused the trustee to respond with a counterclaim alleging that the in terrorem clause had been invoked and that both the daughter’s and her children’s interests were forfeited.

The daughter amended her complaint several times. She tried to rework it in a way that she thought maybe less offensive to the in terrorem clause. She even included a breach of duty claim to withdraw and withdrew her challenge to the timeliness of the probate in the estate action. But here, the court said that the trust was crystal clear, as was the Will, and that the daughter’s conduct did trigger the in terrorem clause, and she therefore forfeited her interests. The court, however, rightfully and probably fairly, did not attribute the daughter’s actions to her children, even though she was their guardian as a matter of law, and ultimately allowed their trust interests to remain.

Case Study 3: Matter of Otto Bremer Trust

The final case I want to bring to your attention is a case out of Minnesota involving a very large charitable trust and, frankly, a trustee behaving badly. In the Matter of Otto Bremer Trust, the settlor in the 40s had created a significant charitable trust naming three co-trustees. There were no named charitable beneficiaries, rather, the co-trustees were given tremendous authority to decide what charities should receive benefits from the trust. At the time of the litigation, the trust was valued at roughly $2 billion.

Under the trust agreement, the settlor had created one clear parameter, which was to retain the holding company, which was the primary asset of the trust, and only sell it if there were unforeseen circumstances. The case walks through a litany of things that occurred which were viewed in culmination to determine whether a trustee should be removed. First, one of the three trustees admitted to using $1,800 out of $2 billion for his personal benefit, along with some trust-owned resources that should not have been used. He admitted to it. He repaid the $1,800. He did not repay the other consequences associated with discovering this self-dealing, inclusive of tax, accounting fees, and legal fees. But everyone moved on from it.

Later, an investment banker approached the trustees and the board of the holding company to present a sale opportunity. The sale opportunity apparently put dollar signs in the self-dealing trustee’s eyes, and he, along with his co-trustees, agreed that unforeseen circumstances had occurred in this case, which warranted a sale. This put the three co-trustees at odds with the Board of Directors for the holding company because they were not interested in pursuing a sale and shut down the negotiation.

This was not satisfactory to the self-dealing trustee, and he then engaged a consultant to devise a plan where he would thereby take over the voting interest and control of the holding company to pursue a sale. In doing so, he aggressively pursued buyers of stock who would be interested in allowing for a sale to go forward. The AG in Minnesota got involved in this case and sought to remove all three trustees. As you can imagine, cross and third-party claims ensued. As a part of the discovery process, the communications between the consultant and the trustee via text were discovered and they were not complimentary to the trustee’s conduct; they demonstrated that he was making rude and disparaging comments about beneficiaries.

He described the trust as an endless war chest and that he was only interested in pursuing aggressive investors to help him pursue his takeover plan of the board. The facts also revealed that the self-dealing trustee was very disparaging to the primary beneficiary of the charitable trust. The evidence showed that the charitable beneficiary who had received the largest bequest from the charitable trust received a delay in funding the entity because the self-dealing trustee had hoped to use leverage to force the CEO to side with him in the litigation. Discovery also revealed that he made rude, disparaging, and disrespectful comments to her.

As a result, the charitable organization ultimately returned the $1.2 million that it had received, finding that the charitable donation didn’t align with the company’s values in light of how the CEO had been treated. The final nail in the coffin for this self-dealing trustee was the fact that he refused in discovery and at hearings to disclose the name of the successor he had appointed. In fact, he only disclosed it in the context of the trial when he was directed by the judge to do so. So, the court looked at the culmination of the facts in this case and ultimately decided that while maybe one of these things in isolation would not amount to a serious breach of trust, when viewed cumulatively they did. This is an interesting and helpful approach because not all states allow a cumulative view of misconduct to allow for the removal of a trustee.

Recently, this year in 2024, the Minnesota Supreme Court affirmed the lower court’s ruling and its decision to remove the self-dealing trustee. That’s all the time I have. I want to thank you, Stacy, for asking me to be a part of this interesting podcast.

Stacy Singer: Kelly, thank you so much. Those were really fascinating, particularly the last one. I love those facts. Thank you so much, and thank you, everyone, for listening.

You may also be interested in:

• 2022 Hot Topics in Trust and Estate Law (Mar 2022)
• Navigating Unique Issues in the Settlement of Trust and Estate Disputes (Feb 2024)

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