April 25, 2013
Authored by: Kathy Sherby and Stephanie Moll
Part 3 of a 3 part series.
In a trilogy of new cases decided in the last couple of months, the courts in three states have addressed the issue of whether the trustee of a revocable trust has a duty to account to, and can be held liable to, the remainder beneficiaries of the trust, for a period during which the trust was revocable, after the death of the settlor. In reviewing the discussion of the courts in these three decisions, it is clear that, while a trust is revocable, the trustee has a duty only to the settlor, and that even after the death of the settlor when the interests of the remainder beneficiaries has vested, the trustee continues to have no duty to the remainder beneficiaries for any actions taken while the trust was revocable. In Part 1 of this series, we reviewed the case of Pennell v. Alverson and in Part 2 of this series, we reviewed the case of In re Estate of Giraldin; now, we turn to In the Matter of Trust # T-1 of Mary Faye Trimble.
In the latest case in this trilogy, the Iowa Supreme Court, in In the Matter of Trust # T-1 of Mary Faye Trimble, 2013 WL 275637 (Iowa, January 25, 2013), reviewed all the cases on this point, including the Giraldin case previously discussed, to conclude that the trustee had no duty to account to the remainder beneficiaries for the period during which the trust was revocable.
In this case, Mary Faye served as the sole trustee of her revocable trust until about 8 months prior to her death at age 104 when she designated her niece Judith to serve as a trustee. After Mary Faye’s death, Judith’s sister, Marylynn, requested an accounting from the inception of the trust, which Judith refused to provide. Marylynn then requested an accounting from the time Judith became a trustee, and Judith again refused, but provided her an accounting from the death of Mary Faye, on the basis that the trustee of a revocable trust has no duty to account to anyone other than the settlor during the period prior to the death of the settlor.
Marylynn then filed this action and as part of the discovery, requested complete financial records from the time Judith became a trustee of the Trimble Trust. Judith objected to this discovery request and Marylynn filed a motion to compel. The trial court granted the motion to compel and assessed attorneys fees against Judith. Judith appealed.
The Court then examined all of the cases to harmonize (1) the provision of the Iowa Trust Code requiring the trustee to account and to provide the beneficiaries with information regarding the trust with (2) the provision of the Iowa Trust Code that the trustee of a revocable trust owes duties only to the settlor. The Court concluded that the Trust Code was referring to different beneficiaries during these different periods. The settlor of a revocable trust is the beneficiary during the settlor’s lifetime, and is owed the trustee’s accounting and duties. After the death of the settlor, the trustee for the first time owes duties to the remainder beneficiaries.
The Court then recognized that there could be a “gap period” from the time of the last accounting prior to the death of the settlor and the death of the settlor, during which the accounting had not yet been given to the settlor and was not owed to the remainder beneficiaries. In analyzing whether the remainder beneficiaries should have access to an accounting for such a gap period, the Court reviewed the reasons a settlor would have for creating a revocable trust. Settlors’ generally have two reasons for creating such a trust: (1) to avoid the expense and complications of probate administration and (2) for privacy. The Court reasoned that if the trustee were required to account to the remainder beneficiaries for actions taken during the gap period, this would substantially increase the burden on the trustee and the potential for family conflict. Nevertheless, the trustee could be required to account to the settlor’s personal representative, which would protect the interest of the settlor during the gap period by providing oversight for the benefit of the settlor.
While such a compromise could effectively deal with accounting for the gap period, the Court recognized that there was no mechanism for accounting for pre-death transactions when a person disposes of his assets through a will. In the Court’s view, the same privacy for pre-death transactions should be accorded in the case of a revocable trust. In concluding that the trustee had no duty to account to the remainder beneficiaries for any transactions that occurred prior to the death of the settlor, the Court distinguished the facts of this case, dealing only with the duty to provide an accounting to the remainder beneficiaries, with the facts of the Giraldin case, in which the court was ruling on whether the remainder beneficiaries had standing to sue the trustee for alleged breaches of fiduciary duty to the settlor that had occurred prior to the settlor’s death to the extent that such breaches harmed the remainder beneficiaries and were not taken pursuant to the settlor’s direction.
Based on these three cases, as well as the previously decided Missouri case of In re Stephen M. Gunther Revocable Living Trust, 350 S.W. 3d 44 (Mo.Ct.App. 2011), it appears that during the life of the settlor, the trustee has a fiduciary duty only to the settlor, even after the death of the settlor, so that the remainder beneficiaries cannot bring claims against the trustee for any breach of fiduciary duty to themselves. Further, the remainder beneficiaries are not entitled to an accounting from the trustee for the period during the settlor’s life. On the other hand, the remainder beneficiaries may have standing to bring claims against the trustee for a breach of fiduciary duty to the settlor during the settlor’s life, other than any such breach consented to (either actually or by implication in failing to object to a known breach) or directed by the settlor, if such breach adversely affects the interests of the remainder beneficiaries.