April 24, 2012
Authored by: Kathy Sherby and Stephanie Moll
In Re: Stephen M. Gunther Revocable Living Trust, 2011 Mo. App. LEXIS 1293, October 4, 2011, is one of the first cases interpreting the duties of a trustee of a revocable trust during the settlor’s lifetime under the Uniform Trust Code. Here, the court ruled that under the provisions of R.S. Mo. §456.6-603 (a Uniform Trust Code provision), the trustee had duties only to the settlor while the trust was revocable.
In this case Stephen M. Gunther established a revocable trust for his own benefit in 1997, naming J. Barry Gunther as the initial trustee. Several years later, Stephen amended the trust to name himself as trustee and J. Barry Gunther as his successor trustee. Stephen died in 2009. Upon Stephen’s death, his two minor children became the residuary beneficiaries. A year after Stephen’s death, the beneficiaries sued the trustee seeking an accounting of the trust from its inception in 1997, except for the time when the settlor served as the trustee. The court affirmed the summary judgment in favor of the trustee that was granted by the trial court.
The court rejected the argument of the beneficiaries that the trustee owed a duty to account to them as residuary beneficiaries, under R.S. Mo. §456.8-813. The court ruled that the residuary beneficiaries were not entitled to an accounting or information concerning the administration of the trust during settlor’s life under R.S. Mo. §456.8-813. Rather, under R.S. Mo. §456.6-603, the trustee during that time period owed a duty exclusively to the settlor, and that exclusive duty to the settlor does not change simply because the settlor died. This exclusive duty to the settlor exists during settlor’s life and continues after settlor’s death with respect to the time period during settlor’s life. As stated by the court, the effect of R.S. Mo. §456.6-603 is to “remove any duty the trustee may have to any other beneficiary” during that time period, permanently. The beneficiaries are only entitled to trust information under R.S. Mo. §456.8-813 after the settlor’s death.
In a similar California case, Estate Of Giraldin, 199 Cal. App. 4TH 577 (2011), the court ruled that under Prob. Code, § 16069, subd. (a) (a statute that is similar to § 603 of the UTC), the trustee of a revocable trust was only answerable to the settlor during the settlor’s life. In that case, Bill Giraldin created a revocable trust in early 2002 and designated his son Tim to serve as the trustee. The trust provided that Bill was the only beneficiary during his lifetime, and in the event of Bill’s incapacity, the trustee was to make distributions for Bill’s needs liberally, and that “the rights of remainder beneficiaries shall be of no importance.” The trust also contained a provision that “[d]uring [Bill’s] lifetime, the trustee shall have no duty to provide any information regarding the trust to anyone other than [Bill.]”
Just prior to creating the revocable trust, Bill entered into an agreement to invest two-thirds of his fortune in SafeTzone, a company owned by Tim and another son, among others. Bill’s investment in SafeTzone ultimately became an asset of the revocable trust administered by Tim as trustee. By the time Bill died in 2005, the SafeTzone investment was worth very little, which led Tim’s siblings, as trust remainder beneficiaries, to file suit against him for breach of fiduciary duties he owed to trust beneficiaries for failure to diversify the trust’s assets and failure to talk Bill out of making and keeping the investment and for Tim’s conflict of interest in permitting the trust to own an investment in a company also owned by Tim individually. The beneficiaries sought to recover from Tim the trust’s losses stemming from the trust’s investment in SafeTzone. Tim testified that Bill persuaded him to serve as trustee on the basis that his duties would not “kick in” until Bill’s death and until that time Tim would be working “at the suggestions and direction of his father.”
The trial court issued a judgment against Tim, ruling that Tim had breached his fiduciary duty “to not take part in any transaction in which the trustee has an interest adverse to the beneficiary,” that Tim had breached his duty of undivided loyalty to the trust beneficiaries with the conflict of interest between his duties as trustee and his duties as an officer of SafeTzone, and that Tim had failed to consider the interests of the remainder beneficiaries when he invested and distributed. The court did note that prior to Bill’s death, the beneficiaries “did not have any right to an accounting of the Trust’s activities from Tim”, stating that the rights of the remainder beneficiaries against the trustee vested on Bill’s death.
On appeal, the beneficiaries argued that they could not be penalized for not having brought the action sooner, as they had no standing to bring the action against Tim until Bill’s death. The appeals court then, sua sponte, requested the parties to brief the issue of the standing of the beneficiaries to maintain any claim for breach based on the actions of the trustee during Bill’s lifetime. The court then ruled that Tim’s duties as trustee were owed solely to Bill during his lifetime, and that the beneficiaries did not have standing to sue Tim for his actions taken during that time.
“If the trustee’s duties are not owed to the beneficiaries at the time of the acts in question, the death of the settlor cannot make them retroactively owed to the beneficiaries. To rule otherwise would put the trustee in an impossible position: while the settlor is alive, he is obligated to do what the settlor wants, even if it harms the expectations of the beneficiaries, but once the settlor dies, the trustee would have to answer for allowing the interests of those same beneficiaries to be diminished by conduct during the settlor’s lifetime.”