FIDUCIARY DUTIES AND BREACH – WHEN TRUSTEES AND REPRESENTATIVES GO BAD – PART 4
By Cary A. Lind
The Overbearing Trustee
In 1994, Martha executed a living trust. Martha had two children, Victor and Dorothy. Soon after the trust was established, Martha divided the trust assets into three separate accounts at a major brokerage firm: the V1 account, the V2 account, and the D account. According to the trust, the V1 and V2 accounts were ultimately to go to Victor, and the D account was ultimately to go to Dorothy. At the time the accounts were set up, the V1 and V2 accounts combined totalled almost the same amount as the D account by itself, making the ultimate disposition of the trust assets roughly equal between the two children. Martha’s trust directed that after her demise, all expenses would be paid equally from the V1 and D accounts, so that her children would ultimately end up with roughly equal amounts from her trust. Because of less than artful drafting, the trust did not say from which of the accounts Martha’s expenses were to be paid during her lifetime.
At the time the trust was established and until her death, Martha lived in Florida with her second husband (he died shortly before she did). Dorothy lived with Martha in Florida. Victor was co-trustee of the trust with Martha during her lifetime. Victor lived in Chicago and established the brokerage accounts in Chicago. All account statements were sent only to Victor. As the accounts were initially set up, both Victor and Martha were required to sign checks for any payments from the accounts. At a later date, the agreement with the broker was changed so that one trustee alone could sign checks.
From the time the trust was set up, Victor had only limited contact with his mother. When he did see her, Martha was afraid to stand up to Victor. At his request, she pre-signed checks from the brokerage accounts and gave them to Victor. Unbeknownst to Martha or Dorothy, over the period of time prior to Martha’s death, Victor paid over $150,000.00 out of the D account in excess of what he paid out of the V1 account. In the absence of an accounting and brokerage statements, neither Martha nor Dorothy was aware of Victor’s conduct at the time.
After Martha died, Victor became the sole trustee of the trust. Victor refused to pay any money out of the D account to Dorothy unless she first released him in writing from any and all liability with regard to the entire trust. Victor did not give Dorothy any accounting with regard to the trust or any of the trust accounts prior to seeking the release. Victor also continued to make a greater share of the payments from the D account than from the V1 account.
Dorothy refused to sign a release without an accounting. Instead, she retained counsel and filed suit for an accounting and to remove Victor as trustee. I came into the case approximately one year later and filed an amended complaint also seeking an accounting of the trust for the period prior to death. Victor’s attorneys moved to dismiss the new part of the complaint because, as they argued, Martha could spend her money any way she wanted to while she was alive. The court granted the motion with regard to the pre-death accounting without prejudice to raise it again at a later date.
It took Victor’s lawyers several months to prepare and file an accounting of the post-death expenditures. To his credit, Victor, who was administering the trust during 2001 (as was the trustee in the example in Part 1), had competent investment advice and avoided virtually any losses to the trust assets during the steep decline in the financial markets. We still questioned numerous expenses and sought copies of the account statements for all three of the brokerage accounts. Victor then fired his first attorneys and hired Attorney 2 to represent him. That attorney spent several months investigating and determining the answers to our questions. He also confirmed that in addition to spending significantly more money from the D account than the V1 account for after-death expenditures, Victor had been receiving dividend checks from two investments we found on Dorothy’s income tax returns. Those investments were never transferred to the trust and were co-owned after Martha’s death by Victor and Dorothy. Victor kept all of the dividends on those investments to the exclusion of Dorothy and did not tell Dorothy that the investments even existed. All told, Attorney 2’s calculations showed that Victor owed Dorothy approximately $40,000.00 in cash above and beyond her share of the trust. By this time, we had clearly established that Victor breached his fiduciary duty of impartiality by favoring himself over Dorothy through his uneven expenditures, had breached his fiduciary duty of loyalty in seeking a release without first providing Dorothy with an accounting, and had breached his fiduciary duty of care based upon on record-keeping errors that resulted in additional tax liabilities.
All along the way, Victor refused to make appropriate distributions from the D account to Dorothy as directed by the trust. Several times we petitioned the court to compel Victor to make distributions. In three separate “chunks” we ultimately compelled payment to Dorothy of all of the D account. After those distributions, the only issues remaining with regard to post-death expenses were the amount that Victor owed Dorothy directly as a result of his unequal expenditures, receipt of the non-trust income, other adjustments to the accounting, and our claims for punitive and other damages.
Having discovered Victor’s payment pattern after death, we amended our complaint to add a count seeking an accounting for the period prior to Martha’s death. We obtained copies of brokerage statements which disclosed the same disproportionate expenditures of greater than $150,000.00, as set forth above made by Victor from the D account while Martha was still alive, including approximately $50,000.00 to buy Victor and his son new motor vehicles. While Martha was always generous to her children, we had no reason to believe that she would ever have told Victor to buy himself and his son those “gifts” out of funds that were targeted to go ultimately to Dorothy. Victor and Attorney 5 are now trying to dismiss all claims for damages prior to death based upon brokerage agreements that were signed by Victor and his mother while ignoring the fact that trustees do have duties to contingent beneficiaries, although those duties may have to wait to be pursued in Court until after the death of the primary beneficiaries. Victor also claims that he is entitled to payment of his fees and costs from the remaining money that he still owes Dorothy. We are resisting his claims on the basis that numerous actions taken by Victor were gross breaches of his various fiduciary duties and that neither he nor his attorneys should be paid out of the trust for defending those improper actions.
This case is more aggravated than the typical situation, but it shows the kind of misbehavior that is referred to above. It is my experience that often when the second parent dies, becomes incompetent, or becomes sufficiently diminished by age or illness, childhood rivalries, unfinished business, and sometimes just greed come to the forefront. Often it is not even the family members themselves who cause the fighting but their spouses, significant others, or other third-party instigators. However, the duties of a trustee are objective, not subjective, and individual circumstances or excuses will not avoid liability. When this case is over, we expect “Victor” to be the “loser.”
Avoiding Liability and Conclusion.
Care, impartiality, and loyalty define a fiduciary’s basic fiduciary duties. It is a responsibility to be a trustee. If a person cannot do so properly, then he should not accept the position in the first place. Most fiduciaries act in good faith and do their jobs well. However, when they do not, the courts will step in and afford remedies to the beneficiaries.
How can an honest fiduciary avoid liability? First and foremost, the fiduciary should do a good job. The fiduciary should keep beneficiaries fully informed and advise them of any issues as they occur. The fiduciary should account to all current beneficiaries regularly and accurately. Openness and honesty can prevent most potential disputes before they become significant.
The fiduciary should remember his role and his fiduciary duties, i.e., the beneficiary comes first, the trustee second. If the fiduciary has a question about what to do, he should ask the beneficiaries first. As a general rule, if everyone agrees, there is no one left to complain. If there is no agreement the fiduciary should then petition the court for instructions. The fiduciary should lay out the issues and ask for instructions while remaining neutral in what he requests. In similar manner, if the trust document needs to be construed, the fiduciary should remain neutral. Taking any other position may constitute a breach of the fiduciary duty of impartiality.
A fiduciary may not take advantage of his superior position. If a fiduciary wants a release, it should be offered and received only after full accounting, full disclosure, and scrupulously fair dealing, which should be the rule for every case.
Note Well: Under recent and developing case law, the attorney for a fiduciary also has a potential direct liability to beneficiaries and can also be denied fees when the fiduciary has misbehaved. It is crucial for a fiduciary’s attorney not to participate in conduct by the fiduciary that can lead to such liability. Reference is made to an excellent article entitled A Trust Counsel’s Duty to Beneficiaries in the December, 2004, issue of the Illinois State Bar Journal. Most fiduciaries want to do their jobs well and do the right thing. It is our job as attorneys to assist them when necessary, to set them straight if they start to stray, and to see that they act properly and in accord with their fiduciary duties.
©2007 by Cary A. Lind, all rights reserved.