Chapter 6—Modification and Termination of Trusts
A trust may be modified or terminated in several different ways. First, the terms of the trust may dictate the duration of the trust. For instance, O may give Blackacre in trust to A for the benefit of B for life. The trust will end when B dies. Further, language in the trust instrument may indicate the manner in which the trust may be modified. Consider the following example. O gives a certain sum of money in trust to A for the benefit of B. A is instructed to pay B $1000 per month. In the event that B becomes incapacitated, B has the power to modify or terminate the trust. The testator could also give an independent third party the authority to modify or terminate the trust. With regards to an inter vivos trust, the settlor can revoke the trust if she has retained the right in the trust instrument. If the settlor and all of the beneficiaries consent, an irrevocable inter vivos trust may be modified or terminated. A testamentary trust can be terminated by consent of all of the beneficiaries as long as a material purpose of the trust does not exist. For instance, if the testator establishes a trust to pay for her children’s education, the trust cannot be terminated as long as one of the testator’s children have not received the requisite education.
Under the doctrine of merger, a trust is terminated if the legal and equitable title to the trust property ends up in the hand of one person. For example, Mary created a trust naming Peter and Paul as trustees of Brownacre. Peter and Paul conveyed their legal title to John, the only beneficiary of the trust. As a result, the trust terminates and John receives fee simple title to Brownacre. In order for Peter and Paul to become the owners of the Brownacre free of the trust, John could convey his equitable interest in Brownacre to Peter and Paul. John’s equitable interest would merge with Peter and Paul’s legal interest to give them the fee simple title to Brownacre. A trust may also be terminated if it runs out of property. For instance, if the testator places a certain amount of money in trust, the trust will cease to exist once the trustee has spent all of the money. According to the terms of the testamentary trust included in Whitney Houston’s will, her daughter, Bobbi Christina, is to receive all of the money in the trust when she reaches the age of 30. Once the trustee disburses the money to Bobbi Christina, the trust is extinguished.
In the Matter of the Estate of Bonardi, 871 A.2d 103
This is an appeal from a judgment of the Superior Court, Chancery Division, certified as final, Rule 4:42-2, permitting termination of a testamentary trust. For the following reasons, we reverse.
William Bonardi died testate on March 9, 2002, survived by his wife, Donna, and his two daughters, Danielle and Jessica. At the time of his death, Danielle was eighteen-years old and Jessica was sixteen-years old. Although decedent’s Will included some specific bequests to other individuals, his wife and two daughters were the primary beneficiaries under separate testamentary trusts, each made up of one-half of the residuary estate. Stephen F. Pellino, decedent’s friend, was named Executor of decedent’s estate and Trustee of the two testamentary trusts.
The first trust named plaintiff, Donna Bonardi, as the income beneficiary and devised the remainder to Danielle and Jessica. The second trust named the daughters as the only beneficiaries. In both instances, the daughters were not entitled **105 to outright distribution of their interest before they reached the age of twenty-five.
Under the first trust, plaintiff’s interest was subject to several terms and conditions. Paragraph TENTH of decedent’s Will reads, in pertinent part:
For the duration of the life of my wife, DONNA, the Trustee shall pay her or apply towards her benefit, all of the net income of this trust. In addition, the Trustee may pay to her or apply to her benefit such amounts of the principal of the Trust as the Trustee, in the exercise of the Trustee’s absolute discretion, deems advisable for her welfare. In deciding to make such distributions of principal to or for DONNA’S benefit, the Trustee shall be guided by the following statement of my purposes and intentions: It is my expectation that the trust income and principal will not be made available to provide primary support for the beneficiary, as I expect that DONNA in complete or large measure will support herself. I further direct that my Trustee shall, to the extent possible, not make payments to DONNA out of principal unless necessary, and that he rather seek to preserve the corpus, to the extent possible, for ultimate distribution to my children or survivor of them. My Trustee shall have complete authority to make these determinations which I direct shall not be subject to legal challenge. In making determinations as to distributions of principal for DONNA’S benefit, I ask that my Trustee be mindful of the standard of living that we maintained during my lifetime.
Explaining the limitations imposed pursuant to this paragraph, Pellino certified that decedent had expected his wife, who had gone to school and obtained a nursing degree during the marriage, to work in the nursing field on a full-time basis after his death. According to Pellino, decedent was also concerned about “his wife’s inappropriate use of alcohol” and feared “that if the estate’s assets were left to Donna outright, she would continue to lead this lifestyle which he felt was inappropriate, unhealthy and against his wishes.” Further, decedent “did not want the proceeds of his hard work to be used for the benefit of any future boyfriend or husband that Donna might choose.” None of these concerns, however, was expressly addressed by a spendthrift provision in the trust or anywhere else in the Will.
Even so, decedent evidenced his intent elsewhere in the Will. Notably, paragraph ELEVENTH, which concerned the daughters’ trust, provided that “the trust income and principal will not be made available for primary support for the beneficiary as I expect that my wife will contribute to their support….” Further, paragraph TWELFTH granted the Trustee the exclusive right to “deal with [the] corpus and the income of such trusts.” Only if the accumulated income from the trust was insufficient could the Trustee invade the principal.
A dispute eventually arose between plaintiff and the Executor/Trustee over the amount necessary for plaintiff’s support. Plaintiff claimed that because she was only able to work part-time due to chronic medical problems, her living expenses exceeded her income, including the amounts made available to her by the Trustee under the first testamentary trust. Essentially, she complained that Pellino was improperly withholding principal necessary for her support and requested immediate distribution of all principal in the trust.
While acknowledging that plaintiff’s payments from the trust had decreased over time, Pellino insisted the reductions were necessary to preserve the corpus and carry out the trust’s purpose. He explained that he initially allowed plaintiff to control all the finances in order to ease the transition after her husband’s death, and that he paid her $8,000 per month when he first took over as Trustee, but that she was advised the payments would be reduced because she was expected to work and contribute towards her own support. As significantly, Pellino certified that the net monthly income from Donna’s trust was only $2,845, yet he was paying plaintiff $4,545 per month, thereby depleting the principal by as much as $1,700 per month. Pellino also disputed plaintiff’s assertion that she could only work part-time, stating that she had “resisted any discussion of where she works, how much she earns, how many hours she works, and why she is unable to earn more.”
On account of this impasse, on December 16, 2003, plaintiff filed an action in the Chancery Division to compel formal accountings of her husband’s estate and the testamentary trust created on her behalf, and to direct the immediate distribution to her of all net income as well as principal held pursuant to that trust necessary to maintain the marital standard of living. Simultaneously, decedent’s two daughters filed a separate complaint, also seeking a formal estate accounting and distribution of income and/or principal from the second trust created under their father’s Will for their exclusive benefit. On the return date of the orders to show cause, the trial judge issued a consolidated order requiring the Executor to provide an informal accounting by March 15, 2004, and to examine the financial requests of the beneficiaries “in the context of their needs and the intent of the testator.” Pursuant to that order, Pellino rendered a timely accounting, and plaintiffs’ counsel was given an opportunity to examine all of the estate’s financial records. Sometime thereafter, the two complaints were consolidated and the action proceeded on the respective claims for distribution under a single docket number
On May 12, 2004, Danielle and Jessica Bonardi executed a waiver of their remainder interest in the trust established on behalf of their mother so that the corpus could be immediately distributed to her. Pellino, however, refused to accept the waiver. As a result, the daughters filed a motion to terminate the testamentary trust, supported by certifications stating they understood they would inherit one-half of the trust principal upon their mother’s death, but believed it was in their best interest if the trust were terminated and the corpus made immediately available to their mother. At the time, both daughters were living with their mother and under the age of twenty-five: Danielle, being only twenty years old, and Jessica, eighteen.
Following oral argument, the judge granted the motion and terminated the testamentary trust, directing distribution of the daughters’ remainder interest in trust principal to plaintiff, Donna Bonardi. Mistakenly believing that “all beneficiaries [were] at least twenty-one years old,” the judge reasoned in part:
New Jersey permits the termination of a trust upon consent of all beneficiaries (even if the trust is discretionary) where the income beneficiary is different from the remainder beneficiary. 6 Clapp. New Jersey Practice: Wills and Administration § 543 (3d ed. 1982). This is so because the testator did not establish the trust because of an especial lack of confidence in the income beneficiary’s ability to manage the fund. Id. Instead, the testator may possibly have wished to save estate and inheritance taxes on the income beneficiary’s death, or he may have had some other motive. Id. In any event, there being no other manifestation of intention in the Will bearing on the subject, the testator probably would not object if all the beneficiaries consent to the termination of the trust. 3 Scott, Trusts § 337.1.
On appeal, the Executor/Trustee maintains, among other things, that termination of the testamentary trust frustrates and defeats the express intent of the testator and is, therefore, impermissible. He further argues that the judge’s finding that the testator’s probable intent was to the contrary was unsupported by the evidence and constituted error. We agree with those contentions and reverse.
It is well-settled that a court’s primary function is to enforce the testator’s expressed intent with respect to a testamentary trust. Fidelity Union Trust Co. v. Margetts, 7 N.J. 556, 566, 82 A.2d 191 (1951); In re Ransom Testamentary Trust, 180 N.J.Super. 108, 117, 433 A.2d 834 (Law Div. 1981); Cinnaminson Tp. v. First Camden Nat’l Bank & Trust Co., 99 N.J.Super. 115, 127, 238 A.2d 701 (Ch. Div. 1968). Our duty is to “uphold testamentary dispositions of property, made through the medium of trusts, instead of searching for reasons for avoiding them, or dealing with them with any degree of disfavor.” Fidelity Union, supra. 7 N.J. at 565, 82 A.2d 191 (internal citation omitted). In this regard, the whole will must be examined to ascertain the purpose of the testator. Ibid.
To be sure, all the beneficiaries of a testamentary trust can consent to the trust’s termination if none of them is under an incapacity and continuance of the trust is no longer necessary to carry out a material purpose of the trust. Fidelity Union, supra. 7 N.J. at 566, 82 A.2d 191; In re Ransom Testamentary Trust, supra., 180 N.J.Super. at 120, 433 A.2d 834; Restatement (Second) of Trusts § 337 (1959). Thus, if all of the purposes of the trust have been carried out, or if the only purpose remaining unfulfilled is to confer upon certain beneficiaries interests successively in possession and in remainder, then all persons in interest, if they are sui juris, may jointly compel termination of the trust. Bd. Of Dir. of Ajax Electrothermic Corp.v. First Nat’l Bank of Princeton, 33 N.J. 456, 465, 165 A.2d 513 (1960). Ajax II ); 6 Alfred C. Clapp et al., New Jersey Practice Series § 542 (3d Ed.1982).
On the other hand:
If a trust is created for successive beneficiaries and it is not the only purpose of the trust to give the beneficial interest in the trust property to one beneficiary for a designated period and to preserve the principal for the other beneficiary, but there are other purposes of the trust which have not been fully accomplished, the trust will not be terminated merely because both of the beneficiaries desire to terminate it, or one of them acquires the interest of the other.
[Restatement (Second) of Trusts, supra. § 337 comment g.].
Indeed, one of the conditions which must exist before a trust will be accelerated or terminated, even upon application of all the parties in interest, “is that every reasonable ultimate purpose of the trust’s creation and existence has been accomplished and that no fair and lawful restriction imposed by the testator will be nullified or disturbed by such a result.” Fidelity Union, supra. 7 N.J. at 570, 82 A.2D 191.
Even where the beneficiary is the sole party in interest and of full age, and the trust is not a spendthrift trust, the beneficiary may not automatically have it terminated, irrespective of the creator’s intention. Where, for instance, the trustee has active duties, the trust is not terminable as a matter of right at the demand of the beneficiary, even though the beneficiary is given the disposition at death. Id. at 564, 82 A.2d 191.
Further, spendthrift trusts, trusts for support of a beneficiary, and discretionary trusts cannot be terminated by consent of the beneficiaries. Restatement (Second) of Trusts, supra, § 337 at comments l, m, and n. This is because the material purpose of a spendthrift trust is to prevent anticipation or control of future income or corpus by the protected income beneficiary and, therefore, acceleration of the trust would directly contravene the testator’s intent. Heritage Bank North N.A. v. Hunterdon Medical Center, 164 N.J. Super. 33, 36, 395 A.2d 552 (App. Div. 1978). Moreover, “even if not of an express spendthrift nature, a trust nevertheless created for the primary purpose of ensuring the beneficiary’s support and maintenance is not terminable by consent since such termination would obviously also contravene testamentary intent.” Ibid. And, the fact that a trustee has the power to invade the corpus for the beneficiary’s benefit does not negate a testator’s intent to establish such a trust. Id. at 37, 395 A.2d 552. In short, “[t]he question for determination is whether the settlor had any other purpose in mind than to enable the beneficiaries to successively enjoy the trust property.” Baer v. Fidelity Union Trust Co., 133 N.J. Eq. 264, 266, 31 A.2d 823 (E & A 1943).
Here, a material purpose of the trust not only still remains, but would be soundly defeated by the daughters’ renunciation of trust corpus in favor of their mother, the income beneficiary whose right to principal was expressly limited under the terms of the trust. First and foremost, the request is not simply to terminate the trust and accelerate distribution to the intended successive beneficiaries, but quite the opposite, to divest the remaindermen of their interest and divert the trust corpus instead to the income beneficiary. This, however, is directly contrary to the express testamentary plan, evident from the face of the language of the Will itself. As stated in paragraph EIGHTH and provided for in paragraph TENTH, the clear purpose of the trust is to preserve the corpus for the ultimate benefit of decedent’s daughters “per stirpes and not per capita.” Thus, if one or both of the daughters were to predecease plaintiff, their children-decedent’s grandchildren-would acquire their mother’s interest in the trust. However, if the relief requested were to be granted, not only would Danielle and Jessica be divested of their remainder interest, but the rights of the putative grandchildren would be defeated as well, cf. In re Estate of Branigan, 129 N.J. 324, 609 A.2d 431 (1992). hereby frustrating the testator’s clear intent. Plainly, in this instance, acceleration and termination of the trust would have resulted in a distribution to a person other than those intended by the testator. Cf. Ajax Electothermic Corp. v. First Nat. Bank of Princeton, 7 N.J. 82, 87-88, 80 A.2d 559 (1951)(Ajax I ).
Another purpose of the trust, evidenced in paragraph TENTH, was to provide supplemental support and maintenance for plaintiff without making trust income and principal “available to provide primary support.” Rather, the announced expectation was that plaintiff would “in complete and large measure” support herself and “contribute to [the daughters’] support as may be appropriate to their age and circumstance from time to time.” In fact, payments out of principal were not to be made to plaintiff unless absolutely necessary for her welfare. And, in making this determination, the trustee was vested with “absolute discretion.” Indeed, the express terms of the Will divested plaintiff of actual control over the estate’s assets. Thus, the creation of a trust with “complete authority” in a trustee evidences testator’s plain intent to deny plaintiff immediate distribution of, or control over, distribution of trust corpus. See Heritage Bank, supra. 164 N.J. Super. At 37, 395 A.2d 552.
It also demonstrates the testator’s intent to insulate trust principal from any control exerted by the daughters during their mother’s lifetime. The language of paragraph EIGHTH, which states that neither Danielle nor Jessica is entitled to her respective remainder share before she reaches the age of twenty-five, supports this construction. By selecting a specific age as the earliest time at which his daughters may receive outright distribution of principal, the testator implicitly negated their ability to affect the trust before then. Yet, when Danielle and Jessica made the mutual decision to renounce their respective remainder interests, they were only twenty and eighteen years of age respectively, living with their mother, and presumably still under her influence. Cf. Archard v. Mesmer, 110 N.J.Super. 560, 562, 266 A.2d 314 (App. Div. 1970)(holding that mutual promises, unsupported by valuable consideration, to equally divide expected interests in an estate will ordinarily not be enforced because they thwart the plain wishes of the testator and are fraught with opportunities for fraud). Clearly, such decision-making by those otherwise ineligible under the explicit terms of the Will contravenes the testator’s plain intent. And, the expressed wishes of the testator to preserve trust corpus for the benefit of his children or their survivors simply cannot be reconciled with the family settlement struck in this case that achieves diametrically opposite results. The named remaindermen not having yet attained the age to exert control over the trust corpus, a material purpose of the trust still exists and would be completely frustrated by its premature termination and distribution of principal to plaintiff, an unintended beneficiary.
Plaintiff’s reliance on Ajax II, supra, to justify the relief sought in this case is misplaced. Ajax II dealt with a situation exactly opposite of that presented herein, involving not a renunciation by the remaindermen, but rather a waiver by a life tenant who was entitled to a fixed monthly disbursement. 33 N.J. at 460, 163 A.2d 513. In return for her release of her $150 per month life interest in the trust, the corporate remainderman established an annuity that provided the life tenant with a benefit greater than that which she was receiving under the testamentary trust. Ibid. The Court found this circumstance consistent with the testator’s intention and, therefore, sufficient to justify acceleration and termination of the trust so that the intended beneficiaries could immediately receive distribution of the corpus Id. at 469, 165 A.2d 513. Here, of course, the relief requested would not result in an accelerated distribution of trust corpus to the intended beneficiaries, but rather a diversion of principal to someone expressly ineligible under the trust.
We disagree with the trial court’s construction of the Will to the contrary. We find no basis in the record, or in the rather plain language of the testamentary instrument, for the judge’s conclusions that the testator “did not establish the trust because of an especial lack of confidence in the income beneficiary’s ability to manage the fund[,]” and that “the testator may possibly have wished to save estate and inheritance taxes on the income beneficiary’s death, or he may have had some other motive.” The former, in fact, is belied by the record evidence and the latter amounts to no more than rank speculation. Although we are sensitive to the deference to which the trial court’s findings are entitled, that deference is predicated upon adequate evidentiary support for those findings. Rosa Farms Resort. Inc. v. Investors Ins. Co. 65 N.J. 474, 483-84, 323 A.2d 495 (1974). Our review of the record constrains us to conclude that the evidence did not warrant the determination that “the testator probably would not object if all the beneficiaries consent to termination of the trust.”
We are convinced of just the opposite. The relief requested here defeats the testamentary plan, evidenced from the face of the instrument itself, and contravenes the expressed wishes of the testator.
6.2 Claflin and Material Purpose
Jn Clafin v. Clafin, 20 N.E. 454 (Mass. 1889), the testator created a trust to benefit her son. According to the terms of the trust, the trustee was to terminate the trust and pay the principal to the son when he reached the age of thirty. When he turned twenty-one, since he was the only beneficiary of the trust, the son went to court to have the trust terminated, so he could receive the money. The court ruled against the son establishing the rule that a trust cannot be modified or terminated early if a material purpose of the trust has not been accomplished. This rule referred to as the Clafin doctrine is still applicable. Consequently, it is important for the court to determine the purpose of the trust. That task is usually easy because the purpose is often stated in the trust instrument.
In re Estate of Brown, 528 A.2d 752
The trustee of a testamentary trust appeals an order of the Washington Superior Court granting the petition of the lifetime and residual beneficiaries of the trust to terminate it and to distribute the proceeds to the life tenants. We reverse.
The primary issue raised on appeal is whether any material purpose of the trust remains to be accomplished, thus barring its termination. The appellant/trustee also raises the closely related issue of whether all beneficiaries are before the court, i.e., whether the class of beneficiaries has closed.
Andrew J. Brown died in 1977, settling his entire estate in a trust, all of which is held by the trustee under terms and conditions that are the subject of this appeal. The relevant portion of the trust instrument provides:
(3) The … trust … shall be used to provide an education, particularly a college education, for the children of my nephew, Woolson S. Brown. My Trustee is hereby directed to use the income from said trust and such part of the principal as may be necessary to accomplish this purpose. Said trust to continue for said purpose until the last child has received his or her education and the Trustee, in its discretion, has determined that the purpose hereof has been accomplished.
At such time as this purpose has been accomplished and the Trustee has so determined, the income from said trust and such part of the principal as may be necessary shall be used by said Trustee for the care, maintenance and welfare of my nephew, Woolson S. Brown and his wife, Rosemary Brown, so that they may live in the style and manner to which they are accustomed, for and during the remainder of their natural lives. Upon their demise, any remainder of said trust, together with any accumulation thereon, shall be paid to their then living children in equal shares, share and share alike. (Emphasis added.)
The trustee complied with the terms of the trust by using the proceeds to pay for the education of the children of Woolson and Rosemary Brown. After he determined that the education of these children was completed, the trustee began distribution of trust income to the lifetime beneficiaries, Woolson and Rosemary.
On June 17, 1983, the lifetime beneficiaries petitioned the probate court for termination of the trust, arguing that the sole remaining purpose of the trust was to maintain their lifestyle and that distribution of the remaining assets was necessary to accomplish this purpose. The remaindermen, the children of the lifetime beneficiaries, filed consents to the proposed termination. The probate court denied the petition to terminate, and the petitioners appealed to the Washington Superior Court. The superior court reversed, concluding that continuation of the trust was no longer necessary because the only material purpose, the education of the children, had been accomplished. This appeal by the trustee followed.
Ordinarily, a trial court’s conclusions will be upheld where they are supported by its findings. Darmouth Savings Bank v. F.O.S. Associates, 145 Vt. 62, 66, 486 a.2d 623, 625 (1984. Here, the superior court’s conclusion that the trust could be terminated because the material purpose of the trust had been accomplished has an insufficient basis in its findings, and this conclusion cannot stand.
An active trust may not be terminated, even with the consent of all the beneficiaries, if a material purpose of the settlor remains to be accomplished. See, e.g., Ambros v. First National Bank, 87 Nev. 114, 117, 482 P.2d 828, 829 (1971); Sundquist v. Sundquist, 639 P.2d 181, 187 (Utah 1981); Restatement (Second) of Trusts § 337 (1959); 4 A. Scott, Scott on Trusts § 337 at 2655 3d ed. 1967). This Court has invoked a corollary of this rule in a case where partial termination of a trust was at issue. In re Bayley Trust, 127 Vt. 380, 385, 250 A.2d 516, 519 (1969).
As a threshold matter, we reject the trustee’s argument that the trust cannot be terminated because it is both a support trust and a spendthrift trust. It is true that, were either of these forms of trust involved, termination could not be compelled by the beneficiaries because a material purpose of the settlor would remain unsatisfied. See Restatement (Second) of Trusts § 337.
The trust at issue does not qualify as a support trust. A support trust is created where the trustee is directed to use trust income or principal for the benefit of an individual, but only to the extent necessary to support the individual. 2 A. Scott, Scott on Trusts § 154, at 1176; G. Bogert, Trusts and Trustees § 229, at 519 (2d ed. Rev. 1979). Here, the terms of the trust provide that, when the educational purpose of the trust has been accomplished and the trustee, in his discretion, has so determined, “the income … and such part of the principal as may be necessary shall be used by said Trustee for the care, maintenance and welfare of … [Rosemary and Woolson Brown] so that they may live in the style and manner to which they are accustomed….” The trustee has, in fact, made the determination that the educational purpose has been accomplished and has begun to transfer the income of the trust to the lifetime beneficiaries. Because the trustee must, at the very least, pay all of the trust income to beneficiaries Rosemary and Woolson Brown, the trust cannot be characterized as a support trust.
Nor is this a spendthrift trust. “A trust in which by the terms of the trust or by statute a valid restraint on the voluntary and involuntary transfer of the interest of the beneficiary is imposed is a spendthrift trust.” Restatement (Second) of Trusts § 152(2). (Emphasis added.) While no specific language is needed to create a spendthrift trust, id. at comment c, here the terms of the trust instrument do not manifest Andrew J. Brown’s intention to create such a trust. See Huestis v. Manley, 110 Vt. 413 419, 8 A.2d 644, 646 (1939).
The trustee cites Barnes v. Dow, Barnes v. Dow, 59 Vt. 530, 10 A. 258 (1887), for the proposition that a gift of support for life must be deemed a spendthrift trust. In fact, in Barnes, the terms of the will gave the testator’s sister “support during her natural lifetime out of my estate.” Id., at 541, 10 A. at 261. This Court construed the will as establishing a trust for support and held that an interest arising under such a trust is inalienable. Id. The mere fact that an interest in a trust is not transferable does not make the trust a spendthrift trust. See Restatement (Second) of Trusts § 154 comment b. In any event, Barnes is inapplicable here because a support trust is not at issue.
Although the issue as to whether a material purpose of the trust remains cannot be answered through resort to the foregoing formal categories traditionally imposed upon trust instruments, we hold that termination cannot be compelled here because a material purpose of the settlor remains unaccomplished. In the interpretation of trusts, the intent of the settlor, as revealed by the language of the instrument, is determinative. In re Jones, 138 Vt. 223, 228, 415 A.2d 202, 205 (1980) citing v Destitute of Bennington County. v. Putnam Memorial Hospital, 125 Vt. 289, 293, 215 A.2d 134, 137 (1965).
We find that the trust instrument at hand has two purposes. First, the trust provides for the education of the children of Woolson and Rosemary Brown. The Washington Superior Court found that Rosemary Brown was incapable of having more children and that the chance of Woolson Brown fathering more children was remote; on this basis, the court concluded that the educational purpose of the trust had been achieved.
The settlor also intended a second purpose, however: the assurance of a life-long income for the beneficiaries through the management and discretion of the trustee. We recognize that, had the trust merely provided for successive beneficiaries, no inference could be drawn that the settlor intended to deprive the beneficiaries of the right to manage the trust property during the period of the trust. Estate of Weeks, 485 Pa. 329, 332, 402 A.2d 657, 658 (1979), (quoting Restatement (Second) of Trusts § 337 comment f). Here, however, the language of the instrument does more than create successive gifts. The settlor provided that the trustee must provide for the “care, maintenance and welfare” of the lifetime beneficiaries “so that they may live in the style and manner to which they are accustomed, for and during the remainder of their natural lives.” (Emphasis added.) The trustee must use all of the income and such part of the principal as is necessary for this purpose. We believe that the settlor’s intention to assure a life-long income to Woolson and Rosemary Brown would be defeated if termination of the trust were allowed. See 4 Scott, Scott on Trusts § 337.1, at 2261-64; see also Will of Hamburger, 185 Wis. 270, 282, 201 N.W. 267, 271 (1924) (court refused to terminate trust since testator desired it to continue during life of his wife).
Because of our holding regarding the second and continuing material purpose of the trust, we do not reach the question of whether the trial court erred in holding that the educational purpose of the trust has been accomplished.
Reversed; judgment for petitioners vacated and judgment for appellant entered.
6.3 Deviation and Changed Circumstances
The doctrine of deviation allows a court to modify or terminate a trust by court order if the trust is no longer necessary because the purposes of the trust have been fulfilled, have become illegal, or are impossible to fulfill. Additionally, the court may permit the trustee to deviate from the testator’s instructions as contained in the trust if the court is convinced that the testator would have agreed to the change had he or she foreseen the current situation. There are two main types of deviation-administrative and equitable. Administrative deviation lets the trustee deviate from the administrative directions in the trust instrument because of changed in circumstances if compliance with those directions would defeat or substantially impair the accomplishment of the purposes of the trust. This doctrine applies to actions like when and how to invest trust property. Under the doctrine of equitable deviation, trustees are permitted to deviate from the distributive terms of the trust because of change in circumstances. Thus, the trustee may modify the time and manner he distributes the trust property.
In re Trust of Riddle, 157 P.3d 888
¶1 The Trustee of a consolidated trust, Ralph A. Riddell, appeals the trial court’s denial of his motion to modify the trust and create a special needs trust on behalf of a trust beneficiary, his daughter, Nancy I. Dexter, who suffers from schizophrenia affective disorder and bipolar disorder. Ralph’s deceased father and mother each established a trust. The trusts were consolidated by the court. Upon Ralph’s death, the trust will terminate and Nancy will receive payment of her portion of the trust proceeds. Ralph argues that the trial court has the power to modify the trust; that his daughter’s disabilities are a changed and unanticipated condition; and that the purpose of the settlor will be preserved through the modification. We agree and remand to the trial court to reconsider an equitable deviation in light of changed circumstances and the settlors’ intent that the beneficiaries receive both medical care and general support from the trust’s funds.
¶2 George X. Riddell and Irene A. Riddell were husband and wife with one child, Ralph. George’s Last Will and Testament left the residue of his estate in trust for the benefit of his wife, his son, his daughter-in-law, and his grandchildren. George also created an additional trust (the Life Insurance Trust) for their benefit. Irene’s Last Will and Testament left the residue of her estate in trust for the benefit of her son; her son’s wife, Beverly Riddell; and her grandchildren.
¶3 The trusts contained a provision in which, upon the death of Ralph and Beverly, George and Irene’s grandchildren would receive the trust’s benefits until the age of thirty-five when the trusts would terminate and the trustee would distribute the principal to the grandchildren. Ralph is currently the Trustee. George and Irene are both deceased.
¶4 Ralph and Beverly have two children, Donald H. Riddell and Nancy. Both Donald and Nancy are more than thirty-five years old. Donald is a practicing attorney and able to handle his own financial affairs. Nancy suffers from schizophrenia affective disorder and bipolar disorder; by 1991 she received extensive outpatient care; and by 1997 she moved to Western State Hospital. She is not expected to live independently for the remainder of her life.
¶5 Both Ralph and Beverly are still living. Upon their death, the trusts will terminate because Nancy and Donald are both over the age of thirty-five; Nancy will receive her portion of her grandparents’ trust principal, which is approximately one half of $1,335,000.
¶6 The Trustee, Ralph, Ralph, filed a petition in superior court, asking the trial court to consolidate the trusts and to modify the trust to create a “special needs” trust on Nancy’s behalf, instead of distributing the trust principal to her. Clerk’s Papers (CP) at 4. He explained that, under the current trust, when her parents die, Nancy’s portion of the principal will be distributed to her and the trust will terminate. He argued that a special needs trust is necessary because, upon distribution, Nancy’s trust funds would either be seized by the State of Washington to pay her extraordinary medical bills or Nancy would manage the funds poorly due to her mental illness and lack of judgment. He argued that the modification would preserve and properly manage Nancy’s funds for her benefit.
¶7 The trial court granted the motion to consolidate the trusts but denied the motion to modify. It stated that it did not have the power to modify the trust unless unanticipated events existed that were unknown to the trust creator that would result in defeating the trust’s purpose. The trial court found that the trust’s purpose was “to provide for the education, support, maintenance, and medical care of the beneficiaries” and that a modification would only “permit[ ] the family to immunize itself financially from reimbursing the State for costs of [Nancy’s medical] care.” CP at 54, Report of Proceedings (RP) at 4. Relying on the Restatement (Second) of Trusts, it stated that it would not allow a modification “merely because a change would be more advantageous to the beneficiaries.” CP at 53; Restatement (Second) of Trusts § 66(1) cmt. b (2001). It did not issue factual findings or legal conclusions with its order but incorporated its reasoning from its oral ruling into the order.
¶8 Ralph moved for reconsideration, arguing that the Trust and Dispute Resolution Act, chapter 11.96A RCW (TEDRA) and the Restatement (Third) gave the trial court plenary power to handle all trusts and trust matters and the authority to modify the consolidated trust into a special needs trust. Ralph argued that, because the grandparents directed the trust proceeds to be distributed to their grandchildren when they reach the age of thirty-five, the settlors intended that their grandchildren attain a level of responsibility, stability, and maturity to handle the funds before receiving the distribution. He also argued that due to Nancy’s mental illness, allowing a distribution to her would defeat the settlors’ intent and the trust’s purpose.
¶9 The trial court denied the motion for reconsideration. It again issued no factual findings or legal conclusions, but it stated that its decision was based on the findings and conclusions articulated in its oral ruling on the motion for reconsideration. On reconsideration, the trial court agreed that the Restatement (Third) of Trusts-allowed the court to modify an administrative or distributive protection of a trust if, because of circumstances the settlor did not anticipate, the modification or deviation would further the trust’s purpose. It then stated:
I believe that there is a showing here that there is a circumstance that was, perhaps, not anticipated by the original settler [sic]; however, the purpose of the trust is to provide for the general support and medical needs of the beneficiaries. I think that modifying the trust in a fashion that makes some of those assets less available for that purpose than they would be under the express language of the trust presently is not consistent with the purpose of the trust.
CP at 107. The trial court reasoned that because the trust was written to provide for “medical care” and because creating a special needs trust would make some money unavailable for medical care expenses, the modification was inconsistent with the trust’s purpose. CP at 101. Ralph now appeals.
I. STANDARD OF REVIEW
¶10 Ralph contends that the standard of review in this case is de novo. He is partially correct. Whether equitable relief is appropriate, or whether the trial court should have modified the trust, is a question of law, which we review de novo. Niemann v. Vaugh Cmty. Church, 154 Wash.2d 365, 374, 113 P.3d 463 (2005)(citing Puget Sound Nat’l Bank of Tacoma v. Easterday, 56 Wash. 2d 937, 943, 350 P.2d 444 (1960); Townsend v. Charles Schalkenbach Home for Boys, Inc., 33 Wash.2d 255, 205 P.2d 345 (1949).
¶11 But determining the parties’ intent in regard to a trust is a factual question. We review findings of fact under a substantial evidence standard, determining whether the evidence was sufficient to persuade a rational fair-minded person the premise is true. Wenatchee Sportsmen Ass’n v. Chelan County, 141 Wash.2d 169, 176, 4 P.3d 123 (2000). If this standard is satisfied, we will not substitute our judgment for that of the trial court even though we may resolve a factual dispute differently. Croton Chem. Corp. v. Birkewald, Inc., 50 Wash.2d 684, 314 P.2d 622 (1957). Therefore, this case presents a mixed question of law and fact. We give deference to the trial court’s factual findings in regard to the trust, but we review the trial court’s decision to deny equitable relief and not modify the trust de novo. Niemann, 154 Wash.2d at 375, 113 P.3d 463.
II. TRUST MODIFICATION
¶12 Ralph asserts that the trial court had the authority to modify the trust under both the equitable deviation doctrine and under the plenary power granted by TEDRA. TEDRA states that it is the Legislature’s intent to give courts full and ample power to administer and settle all trust matters. RCW 11.96A.02. On reconsideration, the trial court agreed that it possessed the power to modify a trust. It stated that it could modify an administrative or distributive protection of a trust if, because of circumstances the settlor had not anticipated if the modification would further the trust’s purpose. The trial court understood that it possessed the ability to modify the trust.
¶13 Next, Ralph contends that the trial court erred in declining to modify the trust. He explains that a modification would further the trust’s purpose because, if George and Irene had anticipated that Nancy would suffer debilitating mental illness requiring extraordinary levels of medical costs and make her incapable of managing her money independently, they would not have structured the trust to leave a substantial outright distribution of the trust principal to her. He contends that the settlors instead would have established a special needs trust to protect the funds because Nancy’s medical bills would be extraordinary and covered by state funding.
¶14 Ralph explains that the settlors conditioned the distribution of trust assets on her being at least thirty-five years old, indicating that they intended that their grandchildren have a level of maturity and stability before receiving the trust distribution. Ralph asserts that given Nancy’s medical conditions and inability to handle her finances independently, she will never attain a level of maturity to handle the distribution of funds; therefore a special needs trust is appropriate.
¶15 Niemann is very instructive in this case. In Niemann, our Supreme Court held that trial courts may use “equitable deviation” to make changes in the manner in which a trust is carried out. Niemann, 154 Wash.2d at 378, 113 P.3d 463. The court outlined the two prong approach of “equitable deviation” used to determine if modification is appropriate. Niemann, 154 Wash.2d at 378, 113 P.3d 463. The court “may modify an administrative or distributive provision of a trust, or direct or permit the trustee to deviate from an administrative or distributive provision, if [ (1) ] because of circumstances not anticipated by the settlor [ (2) ] the modification or deviation will further the purposes of the trust.” (Niemann, 154 Wash.2d at 381, 113 P.3d 463. Restatement (Third) of Trusts § 66(1) (2001).) In Niemann, the court adopted the Restatement (Third) of Trusts and noted that the Restatement (Third) requires a lower threshold finding than the older Restatement and gives courts broader discretion in permitting deviation of a trust. Niemann, 154 Wash.2d at 381, 113 P.3d 463.
¶16 The first prong of the equitable deviation test is satisfied if circumstances have changed since the trust’s creation or if the settlor was unaware of circumstances when the trust was established. Restatement (Third) of Trusts § 66 cmt. a (2001). Upon a finding of unanticipated circumstances, the trial court must determine if a modification would tend to advance the trust purposes; this inquiry is likely to involve a subjective process of attempting to infer the relevant purpose of a trust from the general tenor of its provisions. Restatement (Third) of Trusts § 66 (cmt. b (2001).
¶17 The reason to modify is to give effect to the settlor’s intent had the circumstances in question been anticipated. Restatement (Third) of Trusts § 66 cmt. a (2001). Courts will not ordinarily deviate from the provisions outlined by the trust creator but they undoubtedly have the power to do so, if it is reasonably necessary to effectuate the trust’s primary purpose. Niemann, 154 Wash.2d at 382, 113 P.3d 463. A trust settlor may possess a myriad of intentions in settling a trust, but the trial court must concern itself with their primary objective. Niemann, 154 Wash.2d at 382, 113 P.3d 463.
¶18 As stated above, we defer to the trial court’s factual findings. Niemann, 154 Wash.2d at 375, 113 P.3d 463. In this case, the trial court did not issue formal factual findings, but it stated in the oral ruling that there was a showing of a changed circumstance in this case. This meets the first prong. The settlor’s intent is also a factual question. Niemann, 154 Wash.2d at 374-75, 113 P.3d 463. The trial court found in its oral ruling that the “stated” purpose of the trust is to provide for the beneficiaries’ education, support, maintenance, and medical care. CP at 54. Thus, it found that this trust’s primary purpose was to provide for Nancy during her lifetime. Because the trust was to terminate at age thirty-five, it was also the settlors’ intent that Nancy have the money to dispose of as she saw fit, which would include any estate planning that she might choose to do.
¶19 There is no question that changed circumstances have intervened to frustrate the settlors’ intent. Nancy’s grandparents intended that she have the funds to use as she saw fit. Not only is Nancy unable to manage the funds or to pass them to her son, but there is a great likelihood that the funds will be lost to the State for her medical care. It is clear that the settlors would have wanted a different result.
¶20 In 1993, as part of the Omnibus Budget Reconciliation Act, Congress set forth a requirement for creating special needs trusts (or supplemental trusts), intended to care for the needs of persons with disabilities and preserve government benefits eligibility while allowing families to provide for the supplemental needs of a disabled person that government assistance does not provide. Marla B. Karus, Special Issue: Special Needs Children in the Family Court, 43 FAM. CT. REV. 607, 610 (Oct.2005) (emphasis removed). The Act exempted certain assets from those assets and resources counted for the purposes of determining an individual’s eligibility for government assistance. Pub.L. 103-06, § 13611(b), codified at 42 U.S.C. § 1396p(d)(4)(A). A supplemental needs trust is a trust that is established for the disabled person’s benefit and that is intended to supplement public benefits without increasing countable assets and resources so as to disqualify the individual from public benefits. See Jill S. Gilbert, USING Trusts in Planning for Disabled Beneficiaries, Wisconsin Lawyer (Feb.1997); Sullivan v. County of Suffolk, 174 F.3d 282, 284 (2nd cir. 1999).
¶21 In this case, the trial court was concerned with fashioning a trust for Nancy that would allow the family to shield itself for “reimbursing the State” for the costs of her medical care due to her disability. RP at 4. But in 1993, Congress permitted the creation of special needs trusts in order to allow disabled persons to continue to receive governmental assistance for their medical care. Marla B. Karus, Special Issue: Special Needs Children in the Family Court, 43 Fam. Ct. Rev. 607, 610 (Oct. 2005); Pub. L. 103-66, § 13611(b), codified at 42 U.S.C. § 1396p(d)(4)(A). Special needs trusts were created in order to allow disabled persons to continue receiving governmental assistance for their medical care, while allowing extra funds for assistance the government did not provide. Given this legal backdrop, the trial court should not have considered any loss to the State in determining whether an equitable deviation is allowed. The law invites, rather than discourages, the creation of special needs trusts in just this sort of situation. The proper focus is on the settlors’ intent, the changed circumstances, and what is equitable for these beneficiaries.
¶22 George and Irene both died without creating a special needs trust but did not know of Nancy’s mental health issues or how they might best be addressed. They clearly intended to establish a trust to provide for their grandchildren’s general support, not solely for extraordinary and unanticipated medical bills.
¶23 A special needs trust may be established by a third party or by the disabled person that would be benefited by the trust. See Barbara A. Isenhour, Medicaid Eligibility for Long-Term Care Coverage and Special Needs Trusts, Isenhour Bleck, P.L.L.C. (Feb. 2006). Trusts established or funded by the disabled person are subject to 42 U.S.C. § 1396p(d)(4)(A), which entitles the State to receive all remaining trust amounts upon trust termination for medical assistance paid on behalf of the disabled beneficiary. See Clifton B. Kruse, Jr., Third Party and Self-Created Trusts Planning for the Elderly and Disabled Client, ABA Publishing (3rd Ed.). However, the State is not entitled to receive payback upon termination of a third party special needs trust for medical assistance provided for the disabled beneficiary. See Barbara D. Jackins, Special Needs Trusts A Guide for Trustees Administration Manual (2005 Ed.). Here, the trust was established and funded by George and Irene Riddell for the beneficiary Nancy Dexter. It is a third party special needs trust. The trust is not subject to State assistance payback and is not required to have a payback provision.
¶24 We remand to the trial court to reconsider this matter and to order such equitable deviation as is consistent with the settlors’ intent in light of changed circumstances.
Class Discussion Tool
Juanita created a trust for the benefit of her two children, Wayne and Connie. The terms of the trust were as follows: “I leave my entire estate in trust for my two children, Wayne and Connie. The purpose of the trust is to provide Wayne and Connie with a college education and to provide support for them for life. After Wayne and Connie die, the proceeds of the trust are to be paid to my grandchildren, who are then living.” In 2005, after Juanita died, Corporate Trust assumed its role as trustee. At that time, Wayne was a freshman in college. Connie had graduated from college with a degree in nursing. Connie had two children, April and Robin. In 2007, Wayne was hit by a drunk driver while riding his bicycle. As a consequence, Wayne suffered permanent brain damage. Connie was so angry that she shot and killed the drunk driver. Consequently, Connie was given life in prison. In 2011, Robin was diagnosed with kidney disease. Robin needs $100,000 to get her name place on the transplant list. Connie would like to have the trust modified to create a special needs trust for Wayne and to get the $100,000 that Connie’s needs for treatment. What result?
6.4 Removal of the Trustee
Another way to modify the trust is to have the trustee replaced. Courts are reluctant to substitute their judgment for the testator’s judgment with regards to the trustee. This is especially true where the trustee is an individual that has been specifically chosen by the testator. Thus, courts will not remove a trustee unless it is for unfitness or other good cause.
In re the Matter of Trust Established by Baird, 204 P.3d 703
Justice JIM RICE delivered the Opinion of the Court.
¶1 Donald Baird, the beneficiary of a trust established by his parents, petitioned the Ninth Judicial District Court, Teton County, to remove N. Kay Goulet as trustee on the grounds that she breached her fiduciary duties. Baird appeals the District Court’s denial of his petition. We affirm.
¶2 The issue presented is whether the District Court abused its discretion by denying the beneficiary’s petition to remove the Trustee of the Trust.
FACTUAL AND PROCEDURAL BACKGROUND
¶3 On October 30, 1981, Allan and Catherine Baird (Trustors) signed a Trust Agreement establishing a trust for their son, Donald Baird (Baird). The Trust Agreement named Kay Goulet (then Kay Hagen), as trustee. The corpus of the trust consisted of real property, including a home, in Choteau, Montana, and mineral interests in Blaine County, Montana. The purpose of the Trust is to benefit and provide a home for Baird, and the remainder beneficiaries of the Trust are Goulet and Zina Druesdow, the designated successor trustee. The Trust Agreement also indicated that certain real property in Great Falls was to be a part of the trust, but the property was never transferred into the Trust. It was sold in 1989.
¶4 Donald Baird is one of the Trustors’ biological children, and Goulet was raised by them as a foster child. Donald Baird was hit by a train and suffered severe injuries in 1970. His mother, Catherine Baird, lived with him in the house on the trust property in Choteau until her death in January 2005.
¶5 In October 2005, Goulet petitioned the District Court seeking modification of the Trust Agreement to allow her to sell the Trust property and invest the proceeds. She asserted that the Trust property in Choteau was dilapidated and dangerous, and that the Trust did not have the resources to maintain the house. Baird opposed the petition and counter-petitioned the court to remove Goulet as Trustee and replace her with Druesdow, the successor trustee. The District Court, Judge Buyske presiding, conducted a hearing on Goulet’s modification petition and issued an order denying the petition in February 2006. The court ruled that the Trust property was not in such a condition that it needed to be sold to preserve the corpus of the Trust or accomplish the purposes of the Trust.
¶6 In October 2007, the District Court, Judge McKinnon presiding, conducted a hearing on Baird’s counter-petition to remove the Trustee, and thereafter issued an order denying the petition. Additional facts will be discussed herein.
STANDARD OF REVIEW
¶7 “We review a district court’s findings of fact to determine whether they are clearly erroneous. We review a district court’s conclusions of law to determine whether that court’s interpretation of the law is correct.” In re Estate of Berthot, 2002 MT 277, ¶21, 312 Mont. 366, 59 P.3d 1080 citations omitted). As discussed below, we review a district court’s denial of a petition to remove a trustee under an abuse of discretion standard.
¶8 Did the District Court abuse its discretion by denying the beneficiary’s petition to remove the Trustee of the Trust?
¶9 Baird argues that the District Court should have removed Goulet as trustee for breaching fiduciary duties because she (1) failed to provide Baird with an annual accounting, (2) did not pay the property tax and insurance premiums on the property and blocked Baird from paying the taxes, and (3) did not preserve the trust property and make it productive. The parties argue over what grounds require removal of a trustee and whether a district court has any discretion in removing a trustee. Baird asserts that any breach of the Trust requires removal and that the District Court did not have the authority or discretion to determine otherwise. Goulet argues that not every breach of the Trust requires removal and the District Court had discretion to determine whether removal of the Trustee is appropriate.
¶10 Section 72-33-618, MCA, states in part:
(1) A trustee may be removed in accordance with the trust instrument or by the court on its own motion or on petition of a cotrustee or beneficiary.
(2) The grounds for removal of a trustee by the court include the following:
(a) if the trustee has committed a breach of the trust;
(b) if the trustee is insolvent or otherwise unfit to administer the trust;
(c) if hostility or lack of cooperation among cotrustees impairs the administration of the trust;
(d) if the trustee fails or declines to act; or
(e) for other good cause.
¶11 The official comments to § 72-33-618, MCA, explain that this statute is based upon the Restatement (Second) of Trusts § 107 (1959), the California Probate Code, and the Texas Trust Code. The comments in the Restatement (Second) of Trusts explain that a court “may remove a trustee if his continuing to act as trustee would be detrimental to the interests of the beneficiary. The matter is one for the exercise of reasonable discretion by the court.” Restatement (Second) of Trusts § 107 cmt. a; see also Restatement (Second) of Trusts § 37 cmt. d (2003) (“The matter is largely left to the discretion of the trial court, but is subject to review for abuse of discretion.”) We agree with these comments and will apply an abuse of discretion standard of review to examine a district court’s denial of a request to remove a trustee, in addition to reviewing findings of fact and conclusions of law under the usual standards of review stated earlier herein.
¶12 Concerning the grounds for removal of a trustee, the official comments to § 72-33-618, MCA, refer to comment b of the Restatement (Second) of Trusts, which provides that “the commission of a serious breach of trust” constitutes grounds for removal of a trustee. Restatement (Second) of Trusts § 107 cmt. b. As suggested by the Restatement (Second) of Trusts § 37 cmt. e, this can include the “repeated or flagrant failure or delay in providing proper information or accountings to beneficiaries.” However, “[n]ot every breach of trust warrants removal of the trustee … but serious or repeated misconduct, even unconnected with the trust itself, may justify removal.” Restatement (Second) of Trusts § 37 cmt. e. Consistent with our recognition that a district court possesses discretion in determining whether or not to remove a trustee, we also conclude that not every breach of the trust requires removal of the trustee as a matter of law, but is subject to the trial court’s discretionary review. Upon these principles, we turn to Baird’s challenges.
¶13 Baird challenges Goulet’s failure to provide annual accountings. Both the Trust Agreement and statutory law require annual accountings. The Trust Agreement states that the “Trustee shall keep books of accounts and shall render an annual accounting of the Trust to the Beneficiary.” Section 72-34-126, MCA, states that “[e]xcept as provided in 72–34–127, the trustee shall annually mail each income beneficiary an itemized statement of all current receipts and disbursements of both principal and income.” None of the exceptions of § 72-34-127, MCA, apply to this case.
¶14 The District Court found that Goulet had never provided an annual accounting to Baird, but accepted Goulet’s argument, likewise made on appeal, that because the trust had no income or disbursements, there was “nothing to account for.” In concluding that good cause did not exist for Goulet’s removal, the District Court reasoned that “[w]hile an annual accounting is required, there has been nothing in the trust except for the property for which to provide and [sic] accounting. The oil and gas leases are not income producing at this time.”
¶15 Other states have reached similar conclusions. The Supreme Court of Iowa held that failure to provide annual accountings does not always require removal of the trustee. Schildberg v. Schildberg, 461 N.W.2d 186 (Iowa 1990). In Schildberg the court recognized that the trustee breached the trust by failing to provide annual reports. Schildberg v. Schildberg, 461 N.W.2d at 191. Nonetheless, the court stated that “[t]here is no evidence to indicate that the omission to report resulted from a motive on the part of Dennis to take advantage of the beneficiaries. Nor do we find evidence to suggest that the effectiveness of the trust has been impaired, despite this technical violation, or that the intent of the settlor has been thwarted.” Schildberg v. Schildberg, 461 N.W.2d.
¶16 Similarly, the Supreme Court of Minnesota has upheld the denial of a petition to remove a trustee where the trustee failed to provide annual accountings. Matter of Gershow’s Will, 261 N.W.2d 335, 340 (Minn. 1977) ( “While these important and necessary statutory provisions requiring annual accounting were violated, the trial court did not abuse its discretion in failing to remove the trustee for inconsequential deviations from legal requirements in the past.”).
¶17 On this record, we conclude that the District Court did not abuse its discretion in determining not to remove Goulet as trustee for failure to file annual accountings. Nonetheless, it should be emphasized that failing to file an annual accounting is a violation of the statute and the Trust Agreement. As a matter of course, annual accountings must be completed by the Trustee. The parties’ briefing disputes whether the Great Falls property referenced above was part of the trust corpus, and whether its 1989 sale should have been part of an accounting. Although the District Court did not find this property to be part of the trust, an annual accounting would have identified this issue long ago, and perhaps resolved the matter between the parties, instead of allowing it to linger for many years. Further, the beneficiary is entitled to know whether there has been any activity with regard to the trust’s mineral interests. Thus, we agree with the conclusion reached by the Gershow court: “[w]hile there are some deviations from the required statutory requirements in the preparation of these accounts, we are satisfied that, if they are corrected in the future, the rights of all parties can be adequately protected.” Matter of Gershow’s Will, 261 N.W.2d at 340 (quotation omitted). In the future, the Trustee is to file annual accountings for the Trust. This will serve to protect the rights of the parties.
¶18 Baird also claimed in the District Court that Goulet should be removed as Trustee because she failed to pay insurance premiums and certain taxes in a timely manner. On appeal, Baird does not dispute the District Court’s conclusion that Goulet was not obligated to use her personal funds to pay the taxes and insurance premiums, but challenges Goulet’s interference with his attempts to pay the taxes himself.
¶19 The record shows that between the first and second hearings in this case the parties disagreed as to whom the county should send the tax statements. At the hearing, Goulet testified that as Trustee she should receive the tax statements but has no problem with letting Baird pay the taxes. After the hearing, the District Court entered an order allowing Baird to pay taxes on the property. Thus, the issue of whether Baird may pay the taxes is settled, and neither party challenges it. Goulet’s interference with Baird’s efforts to pay taxes was temporary, apparently done in good faith, and does not require a conclusion that the District Court’s resolution was an abuse of discretion.
¶20 Baird raises several other issues that do not merit a detailed discussion. Baird challenges several factual findings, but he has not established that they were clearly erroneous. Also, Baird asserts that the District Court should have removed Goulet for failure to preserve the trust property and make it productive by being unaware of mineral interests in the trust. However, Baird has not factually demonstrated an error by Goulet necessitating her removal.
¶21 We conclude that the District Court, after considering all of Baird’s claims, did not abuse its discretion by denying his request to remove Goulet as Trustee.
Notes, Questions and Problems
1. The court will not remove a trustee simply because he has a dispute with the beneficiary of the trustee. Moreover, the trustee usually will not remove a trustee because he is a bad actor unless his behavior negatively impacts the beneficiary.
2. When a beneficiary sues the trustee claiming a breach of trust, the trustee’s attorney fees are paid out of the trust funds. If there is bad blood between a beneficiary and a trustee, the beneficiary might constantly challenge the trustee’s actions. In that case, most of the trust funds could end up in the hands of attorneys. Would it make sense to permit the court to remove a trustee for having irreconcilable differences with the beneficiary?
If which of the following cases might the court remove the trustee?
a). Jackson, a former slave, established a trust for the benefit of his children. After Jackson died, Main Bank assumed its role as trustee. A few years later, Main Bank was acquired by New Bank. Jackson’s children found out that New Bank is suspected of financing the genocide in Dafur,
b). Albert established a trust for the benefit of his grandchildren. After Albert died Zelda assumed her role as trustee. A few years later, Zelda started having financial problems and had to file bankruptcy.
c) Yolanda established a discretionary support trust for the benefit of her sisters, Kelly and Tiffany. After Yolanda died, Peyton assumed his role as trustee. A few years later, Peyton started having an affair with Kelly.
d) Velma established a trust for the benefit of her nieces and nephew. After Velma died, Otis assumed his role as trustee. A few years later, Otis became a tax protester and refused to pay his state and federal taxes.