Trust Disclosure Requirements and Quiet Trusts

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by Carol Warnick

The Uniform Trust Code and the Restatement (Third) of Trusts both follow the presumption that trust beneficiaries should be generally kept aware of the existence of the trust, their status as beneficiaries, and their right to ask for (and receive) further information about the trust and their rights as beneficiaries of the trust. Both also require accountings, at least upon request.

More than two-thirds (2/3) of states in the United States have adopted some form of the Uniform Trust Code as of this writing, but many states have not adopted the disclosure provisions from the Uniform Act. This reflects the feeling voiced by many trust creators that letting a beneficiary be aware of the wealth in a trust set up for the beneficiary’s benefit can be a disincentive for a beneficiary to make their own way in life. This is especially a concern if the beneficiaries are young, or even older beneficiaries that have proclivities towards spending. Many trust creators are also concerned because the sub-trusts they set up for their children don’t have identical provisions, therefore they don’t want their children to know about the provisions in their siblings’ sub-trusts. Read more

Trustees Beware: Provide Timely Information to Beneficiaries

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by Carol Warnick

Individual trustees often fail to fulfill the duties imposed on trustees, not only by the trust instrument, by also by the trust statutes applicable in the jurisdiction.  It is often the case that the individual trustee is a member of the family and seems to believe that the rest of the family won’t care if he or she doesn’t follow the applicable statutory and trust requirements.

A recent Nebraska case, In Re Estate of Forgey, 906 N.W. 2d 618, (Neb. 2018), featured a decedent who died in 1993.  By 2013, when one of the family members initiated litigation, the trustee, a son of the decedent, had neither distributed out the property of the trust into the separate shares called for by the trust document, nor had provided annual accountings to the beneficiaries as required by both the Nebraska statutes and the trust document itself.  In addition, he failed to sign and file the timely prepared federal estate tax return, resulting in an IRS assessment of penalties and interest of over $2 million. 

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Reminder – Mandatory Notice Provisions in CUTC

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by Brooke Simons

As we have just passed the one-year anniversary of the CUTC being signed into law, now seems like an appropriate time to go over a few reminders with regards to its mandatory provisions – in particular the Notice provisions. 

The CUTC is generally considered to be a default statute – that is, a statute that can be overridden by the settlor’s intent as reflected in deliberate drafting of the trust instrument.  However, there are thirteen (13) mandatory provisions in the CUTC that cannot be drafted around, regardless of the settlor’s intent.  Section 15-5-105 lists the thirteen (13) mandatory provisions under the CUTC.  Amongst these thirteen provisions are two “notice” requirements that must be satisfied. 

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Wyoming Creates a New Chancery Court Which Will Hear Trust Cases

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by Carol Warnick

Wyoming has created a chancery court which will be authorized to hear cases in fifteen (15) specific areas, including cases alleging breach of fiduciary duty and transactions governed by the Wyoming Uniform Trust Code, in addition to hearing business disputes.  This represents a significant change in the way many trust disputes, as well as business disputes, will be handled in Wyoming. 

Effective March 15, 2019, the special court of limited jurisdiction, called the Chancery Court of the State of Wyoming, was authorized to assist in the expeditious resolution of disputes involving commercial, business, trust and similar matters.  It is directed “to employ nonjury trials, alternative dispute resolution methods and limited motions practice and shall have broad authority to shape and expedite discovery as provided in the rules adopted by the supreme court to govern chancery courts.”  WYO. STAT § 5-13-115 (a). 

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Avoiding Fiduciary Conflicts of Interest

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by Carol Warnick

It is very difficult for a trustee to have conflicts of interest without breaching the duty of loyalty.  We typically think of trustee conflicts as they relate to self-dealing by the trustee, which is almost always a problem and for which the beneficiaries can obtain redress.  But I have seen more conflicts lately in my practice where a trustee is trustee of different trusts that have conflicting interests, or the trustee is serving as trustee of a trust and also as personal representative of an estate whose interests are in direct conflict with each other.

When faced with a conflict situation, a trustee needs to take action before he or she breaches the duty of loyalty, which is a bedrock duty owed by all fiduciaries.  Restatement of Trusts § 78 (1) states that a “trustee has a duty to administer the trust solely in the interest of the beneficiaries . . . .”  That is not possible when the two trusts (or the trust and the estate) have conflicting interests and what the fiduciary does as trustee of one trust would be detrimental to the other.  One example would be engaging in a specific transaction that is beneficial to the beneficiaries of one trust but harmful to the beneficiaries of the other trust or of the estate.  Read more

Decanting to Eliminate a Beneficiary – New York Says Yes

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by Kelly Dickson Cooper

Settlors often ask whether they can change the beneficiaries of an irrevocable trust because life circumstances or relationships have changed. Often, the answer is no.  However, in a recent case in New York, the trustee was able to accomplish the settlor’s desire to disinherit one of his children through a decanting. Read more

Fifty Ways to Leave Your Lover (or Fifty Ways to Plan, Administer and Litigate Estates)

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by Carol Warnick

As the old song by Paul Simon contemplates, there are fifty ways to leave your lover, and there are also fifty ways to plan, administer and litigate estates and trusts.  I have recently become aware of various situations in which attorneys assume that because things are done a certain way in the state in which they practice, they are done the same way in other states.

I am licensed in three states, Colorado, Utah and Wyoming, and deal regularly with the significant differences between them.  For example, Colorado tends to use “by representation” in dealing with passing assets down the generations, but Utah and Wyoming both use “per stirpes.”  Read more

Recent IRS Statistics

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by Kelly Dickson Cooper

For our litigation clients, a fiduciary’s failure to consider the tax impact of their actions can be the genus for litigation and anticipated tax savings can be the engine that drives a settlement.  For our fiduciary clients, it is important for them to ensure that transfer taxes are minimized for the benefit of their beneficiaries.  For our planning clients, tax planning is a key component in determining the best structure for their wealth transfer planning.  Given the importance of transfer taxes in our practice, we wanted to highlight a few items from the IRS 2015 Data Book relating to estate and gift tax returns:

Number of Tax Returns filed during 2015

  • 36,343 estate tax returns (545 from Colorado)
  • 237,706 gift tax returns (4,492 from Colorado)

Amounts Collected

  • Estate tax returns  – $17,066,589 collected
  • Gift tax returns – $2,052,428 collected

Percentage of 2014 Tax Returns Audited in 2015

  • 7.8% of all estate tax returns
    • Gross estate less than $5 million – 2.1% audit rate
    • Gross estate greater than $5 million but less than $10 million – 16.2% audit rate
    • Gross estate greater than $10 million – 31.6% audit rate
  • 0.9% of all gift tax returns

Results of Audits

  • 22% of estate tax returns examined had no change
  • 34% of gift tax returns examined had no change
  • 70 estate tax returns and 135 gift tax returns had unagreed recommended additional tax
  • 543 estate tax returns and 43 gift tax returns resulted in tax refunds

What Does It Mean To Be A Trustee?

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by Carol Warnick

We are constantly surprised to realize that the normal, average trustee who is not a professional fiduciary doesn’t really understand what is required of him or her and often makes serious mistakes.  You would expect that someone taking over the role of being a trustee would inquire or do some type of research as to what is expected, but unfortunately many new trustees don’t seem to take the responsibility seriously enough, often with disastrous consequences.

The trustee stands in a special relationship with the grantor of the trust as well as to the beneficiaries.  This relationship is unique and the trustee should keep that in the forefront of his or her mind.  By appointing someone as trustee, the grantor is depending upon the trustee to both honor the provisions of the trust to the best of his or her ability, but also to respond to the needs  of the beneficiaries and to maintain their confidence and trust.  The trustee must be careful not to do anything which would benefit the trustee to the detriment of the beneficiaries or to ignore the duties and obligations of a trustee.  Thus the word “trust” inside the term “trustee” should not be taken lightly. 

The obligations of a trustee are defined not only by the trust agreement, but also by state law, some of which is statutory and some of which is common law.  State laws may differ from state to state, but some basic premises hold true wherever  a trust is being administered.  In general, these duties of a trustee are important and can result in litigation, removal, and potentially surcharge if the trustee ignores them.  

Some of the general duties of a trustee are set forth below, as taken from “What It Means to Be A Trustee:  A Guide for Clients,” published in the ACTEC Journal, Volume 31, No. 1, Summer 2005. 

  • Duty to Administer Trust by Its Terms.  The trust, including amendments,  provides a roadmap for the trustee and unless its terms are ambiguous, the trustee must follow its terms.  As mentioned above, state law will govern many areas where the trust is silent, so the trustee must be versed in the state law where the jurisdiction is administered. 
  • Duty of Skill and Care.  Skill, prudence and diligence — this is a high standard of performance — higher that one would be expected to follow if administering one’s own assets. 
  • Duty to Give Notice.  The trustee must be familiar with the language of the trust as well as state law to determine when he or she must give notice to beneficiaries, or perhaps a co-trustee.  Some examples requiring notice to certain individuals are resignation, delegation or designation of a successor trustee, rights of beneficiaries to withdraw principal at certain times, the naming of a professional investment advisor, of delegation of the investment function.
  • Duty to Furnish Information and to Communicate.  The trustee must keep the beneficiaries informed about the administration of the trust.  This may include information about investment performance, actions of the trustee or anything else reasonably requested by the beneficiary. 
  • Duty to Account.  The laws of most states require that the beneficiaries be given regular accountings reflecting the liabilities, receipts and disbursements of the trust.  The form and frequency varies from state to state or the language of the trust document. 
  • Duty Not to Delegate.  Generally, the trustee has the duty not to delegate acts requiring judgment and discretion (typically the trustee was chosen because he or she exhibited good judgment and sound exercise of discretion) unless specifically given that authority in the trust document or by statute.  The trustee may hire agents such as attorneys, accountants, investment advisors, etc. but the trustee should not blindly follow their advice.  The exception to that would be a Directed Trust, which is beyond the scope of this article
  • Duty of Loyalty.  The trustee has a duty to administer the trust solely in the interest of the beneficiaries.
  • Duty to Avoid Conflict of Interest.  The trustee should not use trust property for personal gain and should not use the trust assets in a manner that benefits the trustee personally.  The exception to this is when self-dealing provisions are written into the trust for the benefit of trustees who are also beneficiaries of the trust.  Even if such provisions are present, a trustee needs to be especially careful of self-dealing transactions and should consider appointing an independent trustee (if the trust or state law allows it) strictly for the purpose of authorizing such transactions. 
  • Duty to Segregate Trust Property.  The trustee must not co-mingle personal funds or any other non-trust funds with the assets of the trust.
  • Duty of Impartiality.  The trustee must treat all the beneficiaries impartially unless the trust itself instructs otherwise.  This becomes complicated when the trustee must balance the interests of the income beneficiaries with the interests of the remainder beneficiaries of a trust. 
  • Duty to Invest.  The trustee has a duty to invest the assets appropriately.  Unless otherwise specified, that includes a duty to diversify assets.
  • Duty to Enforce and Defend Claims.  The trustee must take reasonable steps to defend claims against the trust and to enforce claims the trust may have against others.  Part of the decision-making process in determining what is reasonable needs to be an assessment of the costs  of enforcing or defending versus the costs to the trust of not taking action on the claim.
  • Duty of Confidentiality.  The affairs of the trust should be kept confidential except with those who are by law “interested persons” such as the beneficiaries and co-trustees. The trustee should not disclose to third parties the identify or interests of the beneficiaries or the nature of trust assets, unless requested to do so by a beneficiary who may need certain information disclosed to a third party.  This duty of confidentiality also extends to personal things about beneficiaries that may come to the knowledge of the trustee in the process of administering the trust.

Any trustee paying close attention to the duties listed above will stand a much better chance of making the trustee experience a positive one and will be much more likely to avoid problems or lawsuits from beneficiaries. 

Should an undue influencer be responsible for paying the legal fees incurred to rectify the undue influence?

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by Kelly Cooper

In a recent unpublished decision, the Colorado Court of Appeals held that a niece who unduly influenced her uncle was not responsible for the payment of the uncle's legal fees, which were required to rectify the undue influence and return the property to the uncle.

Specifically, the niece was accused of unduly influencing her uncle to give her pieces of real estate during his life. A jury found that the niece did unduly influence her uncle and that she breached her fiduciary duty to her uncle. As a result, the court ordered that the real estate be transferred back to the uncle. In addition, the jury awarded $315,000 in legal fees against the niece to make the uncle whole.

On appeal, the niece argued that she should not be responsible for the payment of attorney's fees because Colorado follows the American rule that parties in a dispute must pay their own legal fees. The uncle, through his conservator, argued that an award of legal fees was appropriate in this case under the breach of fiduciary duty/trust exception to the American rule. This exception was first recognized by the Colorado Court of Appeals in 1982. See Heller v. First Nat'l Bank of Denver, 657 P.2d 992 (Colo. App. 1982). The Colorado Supreme Court recognized the exception in 1989. See Buder v. Satore, 774 P.2d 1383 (Colo. 1989).

Despite the recognition of this exception, the Colorado Court of Appeals found that the Colorado Supreme Court has cautioned it against liberally construing any of the exceptions to the American rule.

In finding that the exception did not apply to this case of undue influence, the Colorado Court of Appeals held that the niece's breach of fiduciary duty did not closely resemble a breach of trust. In addition, the Court of Appeals found that the niece breached her duty as an individual, rather than any fiduciary duty to manage property, and that abusing personal influence is not similar to mismanaging property as a fiduciary.

The citation for the case is: In the Interest of Phillip Delluomo, Protected Person, 2012CA2513.