As the previous chapters have indicated, the trustee has a lot of responsibilities. Some of the trustee’s duties are mandated by law; others are imposed by the provisions of the trust instrument. In order for the beneficiary to hold the trustee accountable, the beneficiary must have information about what the trustee is required to do and what the trustee actually does. Thus, the trustee has a duty to account and to inform. These duties are related because the purpose of the accounting procedure is to provide the court and the beneficiary with information. The accounting may be mandated by the trust instrument or the law or requested by a beneficiary who suspects that the trustee has violated the terms of the trusts instrument.
The accounting protects the interests of the trustee and the beneficiary. After the trustee makes an accounting that is accepted by the beneficiary and the court, the trustee is protected from liability to the extent that the factual basis for a later claim by the beneficiary was disclosed in the accounting and accepted by the beneficiary. Consider the following example. A leaves his house to B in trust for the benefit of C. The house declines in value after B assumes his role as trustee. At an accounting, B informs C that since the house is depreciating, B has decided to reduce the insurance coverage on it. C fails to object to B’s accounting and the court approves it. If the trust suffers a loss because of the lack of full insurance coverage, C might be inclined to sue B for breaching his duty of prudence. However, A may be relieved of liability because the accounting was accepted by the beneficiary and approved by the court. Nonetheless, an accounting will not protect a trustee who misrepresents vital facts. The beneficiary’s consent to the accounting must be informed. Thus, a beneficiary who lacks the capacity to understand the information presented at the accounting will not be prevented from later challenging the court’s approval of the accounting.
When a beneficiary requests an accounting she is usually seeking some type of damages. Therefore, this chapter includes a brief discussion of the remedies available to the beneficiary when the trustee is found to have breached one or more of his duties.
12.1 To Account
Raak v. Raak, 428 N.W.2d 778
Respondents, former trustees of Berdena Raak’s revocable trust, appeal as of right from an order of the probate court requiring them to render an accounting as to trust property. We affirm.
Petitioner Berdena Raak is a widow in her late seventies who lives by herself. Respondents are Berdena’s children. Throughout their marriage, Berdena’s husband was the exclusive manager of the couple’s assets, so that Berdena had no experience in financial management. Berdena was the sole beneficiary under their joint will. Shortly after her husband’s death in 1981, respondents began to assume control over Berdena’s assets which apparently totaled approximately $104,591.82, exclusive of her home and antique doll collection.
In September, 1983, Berdena and respondents entered into a written trust agreement appointing respondents as trustees. Pursuant to the terms of the declaration of trust, Berdena conveyed to herself and respondents as joint tenants with rights of survivorship her real property, personal property, and intangible personal property. Along with the trust agreement, Berdena also granted respondents a durable power of attorney.
In September, 1984 Berdena, revoked the power of attorney. In November, 1984, she petitioned the probate court for the appointment of a conservator and revoked the declaration of trust. The probate court granted the petition and named petitioner FMB-First Michigan Bank conservator. Respondents subsequently delivered to the conservator $32,579.12 in assets.
On September 9, 1985, Berdena and FMB filed a petition for an order to show cause in the probate court alleging that, as trustees, respondents converted items of personal property, failed to make payments on a promissory note to Berdena, used the power of attorney to transfer title to Berdena’s assets without her knowledge and consent, and refused to reconvey her real and personal property. The petition requested that the court order respondents to render an accounting of the property while it was held in trust in order to determine the whereabouts of the $70,000 in missing assets.
On March 13, 1986, the probate court granted petitioners’ motion for partial summary disposition and ordered respondents to reconvey to Berdena her real property. The court further ordered respondent Robert Raak to prepare an accounting of all Berdena’s assets over which he had obtained control or title pursuant to the durable power of attorney. The court, however, reserved the question of whether respondents were under a duty to render an accounting of the trust property. This was because respondents claimed that under paragraph 7 of the declaration of trust they had no obligation to account for the trust assets. Paragraph 7 provided:
“7. ACCOUNTING. So long as [Berdena Raak] lives and is not disabled, Trustees need keep no accounts because of the control which she has retained. However, in the event of the disability or death of Berdena Raak, Trustees shall keep an account of receipts and disbursements and of property on hand at the end of the accounting period and shall deliver copies to the beneficiaries or, if one is a minor, to one with whom he makes his home.”
In the meantime, Berdena decided that she no longer wanted an accounting of her assets, that it did not matter where her $70,000 went, and that she no longer required a conservator. The court subsequently refused to dismiss the conservatorship, ruling: “I can’t think of a situation that requires one more than this one.”
Following a hearing on the issue whether respondents had an obligation to render an accounting, the court ruled that respondents were legally obligated to do so. On respondents’ motion for reconsideration, the court stated:
“This Court’s appointing of a fiduciary, a [sic] official fiduciary, a conservator, I think places that fiduciary in the shoes of Berdena Raak, and I think that even this provision of the trust would allow that conservator to ask for an accounting. I can’t conceive of a situation where someone would make someone a trustee and not be able to change their minds on an account situation. I think that’s, as I’ve said before, the responsibility of a fiduciary. To hold otherwise would mean that Berdena Raak five years down the road could wonder what happened to her money and have no ability to get answers to those questions. That’s not the way I construe that provision of the Trust Document.
“Formal accounts, perhaps. An idea of what happened to the money? No, I cannot believe that that is included in that or that the law would recognize that situation. The restatement of law, I think, points out the very difficulties we are dealing with here. It says a provision in the terms of the trust that there shall be no liability to account, however, may manifest an intention not to create a trust in the first place. And I think that indicates what I’m saying. Fiduciaries commonly have a duty to account to the persons they are responsible to. And I find nothing else in the brief supplied that would change my mind on that issue. There is a duty to account by all fiduciaries, and nothing in the law that I’m aware of or has been presented to me would change that.”
On appeal, respondents contend that this ruling was erroneous and that the terms of paragraph 7 of the trust document, relieving them of the duty to account, should control. We disagree.
It is a strict duty of a trustee to keep and render a full and accurate record and accounting of his trusteeship to the cestui que trust, and the duty is strictly enforced by the courts. 76 Am. Jur.2d Trusts, § 505, pp. 725-726. In Michigan, the duty to account is codified a M.C.L. § 700.814; M.S.A. § 27.5814. Under a trust agreement relieving the trustee from the necessity of keeping formal accounts, while a beneficiary cannot expect to receive reports concerning the trust estate, the trustee may be required in a suit for an accounting to show that he faithfully performed his duties, and is liable to whatever remedies may be appropriate if he was unfaithful to the trust. See 76 Am. Jur.2d Trusts, § 505, p. 726. This is because a trust instrument may relieve a trustee from the necessity of keeping formal accounts, but cannot legally relieve him from his duty to account in a court of equity.
As explained in Bogert, The Law of Trusts & Trustees (rev 2d ed), § 973, pp 462-464, 467:
“If the settlor attempts to eliminate any accounting duty of the trustee, by providing that it shall not be necessary for his trustee to account to anyone at any time, it would seem that the clause should be invalid and the duty of the trustee unaffected. The settlor ought not to be able to oust the court of its inherent equitable, constitutional or statutory jurisdiction, or to override the acts of the legislature concerning information to be furnished by trustees to their beneficiaries. Provisions of this sort in deeds and wills would seem against public policy and void, just as contract clauses to like effect are declared null. There is a small amount of authority on the subject. The better reasoned decisions hold that the trustee still must account to the proper court.
“A settlor who attempts to create a trust without any accountability in the trustee is contradicting himself. A trust necessarily grants rights to the beneficiary that are enforceable in equity. If the trustee cannot be called to account, the beneficiary cannot force the trustee to any particular line of conduct with regard to the trust property or sue for breach of trust. The trustee may do as he likes with the property, and the beneficiary is without remedy. If the court finds that the settlor really intended a trust, it would seem that accountability in chancery or other court must inevitably follow as an incident. Without an account the beneficiary must be in the dark as to whether there has been a breach of trust and so is prevented as a practical matter from holding the trustee liable for a breach.”
The case law of other states is consistent with the above authorities. In Wood v. Honeyman, 178 Or. 484, 566, 169 P.2d 131, 166 (1946), the Oregon Supreme Court stated:
“We are completely satisfied that no trust instrument can relieve a trustee from his duty to account in a court of equity. We are, however, [satisfied that when] a provision is found in a trust instrument [relieving a trustee from the necessity of keeping formal accounts] a beneficiary can not expect to receive reports concerning the trust estate. But even when such a provision is made a part of the trust instrument, the trustee will, nevertheless, be required in a suit for an accounting to show that he faithfully performed his duty and will be liable to whatever remedies may be appropriate if he was unfaithful to his trust. Such being our views, it follows that, so far as the Educational Trust [relieving the trustee from all obligation to account to the beneficiaries of this trust, or to anyone] is concerned, the defendant was not required to maintain formal records and supply information to the beneficiaries concerning the condition of the corpus of the trust. The provision under consideration did not, however, relieve him from the accounting which the circuit court exacted of him.”
Accord: Ferguson v. Mueller, 115 Colo. 139, 169 P.2d 610 (1946) (every trust beneficiary is entitled to a court accounting from his trustee, and this right cannot be barred by a term of the trust instrument); Salter v. Salter, 209 Ga. 90, 70 S.E.2d 453 (1952) (a provision in a trust instrument that the trustee need not account or file an inventory does not relieve the trustee from accounting in a court of equity); In re Porter’s Estate, 164 Kan. 92, 187 P.2d 520 (1947). (clause stating that trustees for charity are not to give bond or be under obligation to account to any person or court does not deprive the court of jurisdiction to hold the trustees to account).
It is the tendency of the courts to construe narrowly clauses in trust instruments relieving the trustee from the duty to account. 76 Am. Jur.2d Trusts, § 505, p. 726. Applying the above principles to the instant case, we find no error necessitating reversal in the probate court’s order requiring respondents to prepare an accounting of the trust assets. Petitioners have alleged the respondents breached their fiduciary duties to Berdena by converting items of personal property, failing to make payments on a promissory note, and removing papers and records. Paragraph 7 may relieve respondents from the necessity of keeping formal accounts but it does not relieve them of their duty to account in the probate court.
Jacob v. Davis, 738 A.2d 904
Appellant William H. Jacob (Bill) is the sole remainderman of two trusts established under the last will and testament of his father, John B. Jacob (John). Appellant sued Michael W. Davis, the surviving trustee of those trusts, and Davis’s law firm, Ahlstrom & Davis, P.A., appellees, alleging numerous violations of appellees’ fiduciary duties as trustees, and seeking an accounting, other equitable relief, and damages. The complaint included the following counts: 1) breach of fiduciary duty; 2) declaratory relief; 3) injunctive relief; 4) breach of contract; 5) tortious breach of covenants of good faith and fair dealing; 6) negligence; 7) trover and conversion; and 8) an accounting and establishment of a constructive or resulting trust. Ruling on a motion made by appellees at the end of appellant’s case, the trial court entered judgment pursuant to Maryland Rule 2-519 in favor of appellees on all eight counts. This appeal was timely filed from that judgment.
John died on January 22, 1994, leaving an estate valued at $853,164, and a will that created two trusts known as the Marital Trust, and the Family Trust, respectively (collectively, “the Trusts”). John’s surviving wife, Harriett Bell Jacob (Harriett) was the income beneficiary of the Trusts, and appellant was the remainder beneficiary. Harriett, appellant’s stepmother, had the right to make certain withdrawals of principal from the Family Trust, limited in amount and timing, and Davis, as independent trustee, had the authority to make discretionary distributions of principal from the Trusts to Harriett “as, in the sole and absolute discretion of [Davis], are necessary, desirable or appropriate for the health, education and support of [Harriett] in [her] accustomed manner of living.” The will directed that “in exercising such discretion, the Trustee may take into account other financial resources of the beneficiaries under consideration.” Harriett was prohibited from participating in the discretionary decision to distribute principal to her.
John bequeathed his residuary estate to the Marital and Family Trusts. The size of each trust was determined by a formula, which directed that the Family Trust receive an amount equal to the maximum amount that could pass free of federal estate taxes by utilizing the credit against estate and gift taxes (“unified credit”) available to John, and the Marital Trust receive the remainder. Application of this formula resulted in zero federal estate tax payable by John’s estate, because his available tax credit allowed $600,000 to pass to the Family Trust free of tax. Further, there were no taxes payable with respect to the assets passing to the Marital Trust, because the trust qualified for the federal estate tax marital deduction (“marital deduction”), and thus any tax was deferred until the death of Harriett.
Appellee Davis and Harriett were designated as personal representatives of John’s estate. The personal representatives were required to make an election on his federal estate tax return identifying what portion of the Marital Trust they elected to qualify for the marital deduction. Although all assets passing to the Marital Trust could so qualify, an election was required to effectuate the marital deduction.
The personal representatives were required to show on the estate’s Administration Account filed with the Orphans’ Court the exact amount passing to the Marital Trust The First and Final Administration Account for John’s estate, filed November 7, 1994, showed that $80,223 was to be distributed to the Marital Trust. This was consistent with the $80,476 elected by the personal representatives to qualify for the marital deduction on John’s federal estate tax return. In fact, however, no assets were distributed to the Marital Trust, and this trust never was funded. John’s entire residuary estate was distributed by appellee Davis and Harriett, personal representatives, to the Family Trust. The discrepancy between 1) the amount designated as passing to the Marital Trust on the distribution account for John’s estate ($80,476), which is consistent with the federal estate tax return, and 2) the actual amount distributed (zero), is one subject of appellant’s complaint.
Another subject of appellant’s complaint is the refusal of appellee Davis to provide appellant with an accounting for the Trusts. Appellant first requested an accounting in May of 1996, by letter to a paralegal at Ahlstrom & Davis, P.A., who assisted Davis in estate and trust matters. Responding in a May 28, 1996 letter (May 28 letter), Davis told appellant:
Your letter raised an interesting point regarding my duties to you under the Trust Agreement for the aforesaid Trust. As you know, I am a co-Trustee with your stepmother, Harriett Bell Jacob, of this Trust. Pursuant to the provisions of the Trust, the Trustee is to render an annual account to the “current income beneficiaries” of the Trust. At present, your stepmother is the only income beneficiary. Thus, I as Trustee, have no obligation to provide to you an accounting for the Trust.
If you wish, I will forward a copy of your letter to [the paralegal] to your stepmother for the purpose of obtaining her approval to give you an accounting for the Trust. Since she and I are co-Trustees, and since she is the sole income beneficiary, if I were to provide such an accounting to you without obtaining her consent first, I would be breaching my fiduciary obligations to her. Please let me know if you wish for me to do this…. Your stepmother is very active in the administration of this Trust, and, in fact, makes all decisions regarding any distributions from the Trust. My only role at this point is to facilitate her administration and to provide to her any counsel that she may wish regarding the Trust.
After receiving this letter, appellant called Harriett to request her permission for an accounting, but she declined. Harriett died in January 1997, leaving an estate valued at approximately $1,500,000.
On April 17, 1997, almost a year after his first request, appellant again requested by letter an accounting of the Trusts, this time through his attorneys, Christopher Wheeler and Gene C. Lange (collectively, “Wheeler”). In the letter Wheeler asked that the accountings “cover all assets, property, receipts, expenditures, distributions, trustee and other commissions, attorneys’ and other professional fees, and any and all payments or transfers to and from the two trusts and [Harriett’s] Estate.” The letter also requested all “books, records, tax returns, court filings or other information” concerning these items. Wheeler requested that the information be furnished by April 25, 1997. In response to this letter, Davis wrote to Wheeler on April 18, 1997, and said, inter alia:
[P]lease be advised that the John B. Jacob Marital Trust was never established since the total assets that were available from the Estate of John B. Jacob to be distributed to his Testamentary Trust did not exceed $600,000.
Davis enclosed in his letter copies of the following documents: 1) inventory and distribution account for John’s estate; 2) statements from the brokerage firm of Ferris, Baker Watts for the Family Trust; 3) the check register for the Family Trust checking account; 4) 1995 and 1996 balance sheets, prepared by the accountant for the Family Trust; 5) 1995 and 1996 “general ledgers,” prepared by the accountant, showing income and other deposits received, disbursements, plus sales of stocks; 6) income tax returns for 1995 and 1996 filed by the Family Trust; 7) a summary of profits and losses for 1995 and 1996 showing $143,543 in total distributions to Harriett over the two-year period; and 8) John’s will and First and Final Accounting for John’s Estate. Davis also provided a two-page document, unsigned, titled “John Jacob Family Trust, Recap of Transactions.” Pertinent portions of this recap are reproduced below:
JOHN B. JACOB FAMILY TRUST
RECAP OF TRANSACTIONS
1. JAN. ‘95
2 taxable GNMA/FNMA bonds (35,000/ea.) transferred to Harriett’s individual account, as well as 6,000 in cash
This transfer was to satisfy the following: $30,000 specific bequest under Mr. Jacob’s Will, the family allowance of $5,000, and all income and interest earned by the Estate during the time of administration
* * *
2. MAR. ‘95
400 shares of Pfizer, 100 shares of United Technology transferred to Harriett as reimbursement for living expenses she paid out-of-pocket during the course of Estate administration ($28,997 rent to Vantage House, $12,830 other living expenses and medical expenses paid on behalf of Mr. Jacob)
3. APR. ‘95
Balt. Co. MD RFDG, 5.7% ($15,000) bond sold to provide cash for expenses
4. MAY ‘95
100 shares of AT & T ($5600) transferred to Harriett’s account—per JD Ring, this was Trust income due to Harriett and she took the shares of AT & T rather than cash. Trust income thru May was approx. $9,290. $4,000 was transferred directly from FBW, and the remainder was taken in stock.
* * *
5. DEC. ‘95
$10,000 check requested from FBW to put cash into First National Trust checking for expenses.
6. DEC. ‘95
5% of the value of the Trust to go to Harriett pursuant to her 5/5 powers—she elected to take the $20,000 Md. 1st Ser. 6.5% bond and the $10,000 P.G. Co. MD IDA 6.65% bond. These were then transferred into her account.
* * *
7. DEC. ‘96
5% of the value of the Trust to go to Harriett pursuant to her 5/5 powers—she elected to take $10,000 Md. St. Dept. Trans. 6.375%; $15,000 MD CDA 6.3%, and 142 shares of Southern Co. ($3,159 value)
8. JAN. ‘97
$4,750 cash transferred from the Ferris, Baker Watts into First National Bank Trust account (in anticipation of having to pay medical bills)
There have been a total of 26 checks written from the Trust checking account since it was opened. 21 of the 26 checks were written to Vantage House for the monthly rental. The other checks were as follows:
1. Ahlstrom & Davis, P.A. 12/95—$1,931.40 (fees)
2. Harriett Jacob 6/96—$10,000 (repayment of loan—no interest requested)
3. Jeffrey D. Ring & Co. 10/96—$1,350 (fees)
4. Ahlstrom & Davis, P.A. 1/97—$3,095.63 (fees)
5. IRS 1/97—$327.73 (taxes due on ’94 return)
The recap summarizes distributions to Harriett, but often does not designate whether they were principal or income. For example, Harriett’s monthly expenses at Vantage House were paid in March 1995 from the Family Trust, but not designated as either principal or income. In addition to the Vantage House payments, stocks, bonds, and cash with an approximate value of $143,000 were transferred to her during the two-year period. According to the Family Trust checkbook, payments to Vantage House totaled $49,572.67. These distributions to Harriett or for her benefit substantially exceeded the Family Trust income during this period.
With respect to the other information requested by Wheeler, Davis said:
With such short notice, the above is the best that we can do to comply with your request that we provide you information by April 25, 1997. From these documents, you should be able to understand the relationship between the Estate of John B. Jacob, the John B. Jacob Family Trust, and Harriett Bell Jacob. I think you will find that there were no distributions from the Trust that did not comply with both the intent and the provisions of the Last Will and Testament of John B. Jacob.
Davis did not provide any further information to explain the discrepancy in accounting regarding the Marital Trust funding. Nor did he provide information as to how the expenses of the trust, such as trustees’ commissions and accountant fees, were allocated between the income beneficiary and the remainderman. Further, no information was provided to show how in kind distributions of stock to Harriett were valued, e.g., at inventory value or fair market value.
Davis did offer to meet with appellant and counsel and the accountant for the estate to discuss their concerns. On May 5, 1997, Wheeler replied that “a meeting would probably be beneficial, but [we] would prefer that we have a little longer to digest the information you provided.” In that letter Wheeler also said: “We have noted an omission in the documents you provided. As a result we hereby request a complete accounting of (including all documents related to) the transfer of assets owned by John B. Jacob at his death, to the Family Trust, for the period October, 1994, through January, 1995.” Wheeler also requested the federal estate tax return for John’s estate.
Davis responded to Wheeler’s letter on May 7, and enclosed the Ferris, Baker Watts statements for the period requested and the federal estate tax return. With respect to the statements, appellee Davis commented: “[p]lease note that there may be discrepancies between these statements and the accounting that was filed in the Orphan’s Court…. The Accounting does not provide a means to show changes in the prices of the equities during the time from when the estate is opened until the time the estate is closed.” He also said:
Please advise Mr. Jacob that we are currently in a position to wind up his father’s trust and make the final distributions as required under [his father’s] Last Will and Testament. Until any potential claims that Mr. Jacob wants to make are resolved, however, we cannot wind up the trust. We await Mr. Jacob’s pleasure with regard to the timing of this process.
On May 23, 1997, Wheeler again wrote to Davis, and requested that he “explain the justification for the removal of” five stocks and seven bonds from the trust, as well as other specific items, suggesting that these items “could only be removed from the Family Trust pursuant to the terms and intent of the Family Trust established by Mr. Jacob.” The record does not reflect Davis’s response to this letter. Bill testified that he never received any explanation or accounting from Davis regarding the trust principal that was distributed to Harriett. Appellees took the position at trial and on appeal that they had no obligation to account to Bill.
Although the letters refer to several telephone conversations between counsel, there is no indication that the parties ever had a meeting. Appellant filed suit on July 3, 1997.
We must determine the validity of the trial court’s entry of judgment on all eight counts of the complaint in favor of appellees at the end of appellant’s case. Our major focus in this opinion will be on Counts I, II, and III, all of which rest on the equitable claim that appellees violated their fiduciary duties as trustees. We vacate the judgment entered on these counts, and remand the case to the circuit court for further proceedings on these counts. We affirm the lower court’s judgment on Counts IV through VIII.
Count I—Breach of Fiduciary Duty
Appellant alleged several breaches of fiduciary duty by appellees, and included repetitive allegations in his complaint.
We have distilled the alleged breaches into three separate categories, and discuss each separately.
Entitlement to Accounting
Appellant complains that appellees never provided a full accounting of the Trusts created under John’s will. Appellees contend that they had no obligation to provide an accounting to appellant either during the lifetime of Harriett or after her death. Alternatively, they claim that the documents they provided to appellant in April 1997, after her death, were a sufficient accounting of the Trusts.
Appellees rely on section 10.02 of John’s will, which provides:
My Trustee shall be excused from filing any account with any court; however, my Trustee shall render an annual (or more frequent) account and may, at any other time, including at the time of the death, resignation, or removal of any Trustee, render an intermediate account of my Trustee’s administration to such of the then current income beneficiaries who are of sound mind and not minors at the time of such accounting. The written approval of such accounting by all of such income beneficiaries shall bind all persons then having or thereafter acquiring or claiming any interest in any trust, and shall be a complete discharge to my Trustee with respect to all matters set forth in the account as fully and to the same extent as though the account had been judicially settled in an action or proceeding in which all persons having, acquiring, or claiming any interest were duly made parties and were duly represented.
The trial court held that under the terms of the Trusts and applicable law, the trustees had no obligation to account to a remainderman such as appellant during the lifetime of the income beneficiary. The trial court seemingly agreed with appellant that an accounting was due after death, but found that the documents provided by appellees after Harriett’s death sufficed. Specifically, the court said:
[T]he Ferris, Baker Watt statements certainly show with respect to the stock portfolio [of] which much of this estate was comprised, indicates the transactions that took place, and also shows at the end [sic] of the taxable income. So there certainly is a reference as to what income was derived in a particular year.
We do not agree with appellees’ view that appellant is not entitled to request and obtain an accounting of the Trusts. The leading authorities on trusts are unequivocal in their articulation of the right of the remainder beneficiary to an accounting during the lifetime of the income beneficiary and after his or her death. Austin W. Scott and William F. Fratcher, The Law of Trusts, (Vol. IIA 4 th ed.1987) § 172 explains:
A trustee is under a duty to the beneficiaries of the trust to keep clear and accurate accounts. His accounts should show what he has received and what he has expended. They should show what gains have accrued and what losses have been incurred on changes of investments. If the trust is created for beneficiaries in succession, the accounts should show what receipts and what expenditures are allocated to principal and what are allocated to income.
If the trustee fails to keep proper accounts, all doubts will be resolved against him and not in his favor …
Not only must the trustee keep accounts, but he must render an accounting when called on to do so at reasonable times by the beneficiaries. Where there are several beneficiaries, any one of them can compel an accounting by the trustee. The fact that a beneficiary has only a future interest … does not preclude him from compelling the trustee to account.
Id. (emphasis added).
George Bogert, The Law of Trusts and Trustees, (Rev.2d ed.1983) § 961 takes a similar view:
[T]he beneficiary is entitled to demand of the trustee all information about the trust and its execution for which he has any reasonable use….
If the beneficiary asks for relevant information about the terms of the trust, its present status, past acts of management, the intent of the trustee as to future administration, or other incidents of the administration of the trust, and these requests are made at a reasonable time and place and not merely vexatiously, it is the duty of the trustee to give the beneficiary the information for which he has asked.
Both Scott, supra, and Bogert, supra, cite numerous cases in support of the rule that a remainder beneficiary is entitled to an accounting. Scott, supra, § 172 at 454; Bogert, supra, § 973.
Restatement (Second) of Trusts § 172, comment (b) states the rule in like terms:
The beneficiary may by a proper proceeding compel the trustee to render to the proper court an account of the administration of the trust…. The trustee may be compelled [to] account not only by a beneficiary presently entitled to the payment of income or principal, but also by a beneficiary who will be or may be entitled to receive income or principal in the future.
Maryland law is consistent with the law of other states. The Court of Appeals liberally construed the class of those beneficiaries who have a right to an accounting in the case of In Re Clarke’s Will, 198 Md. 266, 81 A.2d 640 (1951). There, a remainder beneficiary sought an accounting and declaratory relief and alleged that the trustee planned to sell a farm that was a trust asset and apply the proceeds for the benefit of her husband, an income beneficiary of the trust. The Court held that the contingent remainderman had standing to seek an accounting, and explained: “If the petitioner has any interest at all he is entitled to invoke the court’s protection.” Id. at 273, 81 A.2d 640; see also Baer v. Kalm, 131 Md. 17, 101 A. 596 (1917).
In Shipley v. Crouse, 279 Md. 613, 370 A.2d 97 (1977). the Court of Appeals articulated the general rule:
While … in the ordinary case, beneficiaries are entitled to receive ‘complete and accurate information as to the administration of the trust’ and ‘to know what the trust property is and how the Trustee has dealt with it,’ this is not absolute, if the trustee renders periodic reports showing collection of income and disbursements, if the trustee is acting in good faith and is not abusing his discretionary powers.
Id. at 625, 370 A.2d 97 (citations omitted). The Shipley Court did not indicate that the rights of the plaintiffs, who were remaindermen, were more restricted because they had no immediate possessory interest. The statement of the rule in Shipley, however, was dictum because the plaintiffs did not obtain the disclosures they desired. The Court held that a trustee’s duty to account did not require that the trustee disclose the specifics of delicate negotiations with a potential buyer regarding the sale of a business owned by the trust, especially when remaindermen had previously expressed their agreement that the business be sold. Id. at 625-26, 370 A.2d 97.
Appellees argue that section 10.2 of the will relieves them from any obligation to account to a remainder beneficiary. This section allows the trustee to provide an accounting at any time, and provides that if such accounting is approved in writing by the then income beneficiaries, then the trustee is discharged with respect to the matters covered by the account. Appellees would have us apply this section to modify the common law obligation of a trustee to account.
To our knowledge, no Maryland appellate decision has addressed the extent to which a decedent or testator may limit the common law duty of a trustee to account in a court of equity. Nor do we find any statute or rule, addressing this point. Bogert, supra, asserts that a trust beneficiary has a right to an accounting, notwithstanding language in the trust purporting to limit its obligation to account:
A [testator] who attempts to create a trust without any accountability in the trustee is contradicting himself. A trust necessarily grants rights to the beneficiary that are enforceable in equity. If the trustee cannot be called to account, the beneficiary cannot force the trustee to any particular line of conduct with regard to the trust property or sue for breach of trust. The trustee may do as he likes with the property, and the beneficiary is without remedy. If the court finds that the settlor really intended a trust, it would seem that accountability in chancery or other court must inevitably follow as an incident. Without an account the beneficiary must be in the dark as to whether there has been a breach of trust and so is prevented as a practical matter from holding the trustee liable for a breach.
Bogert, supra, § 973 at 467. In the present case we need not decide this interesting issue because we do not interpret section 10.02 in light of the will as a whole, to limit the trustees’ obligation to account under the present circumstances.
When interpreting a will, we must gather the intention of the testator from the language of the entire will. See LeRoy v. Kirk, 262 Md. 276, 280, 277 A.2d 611 (1971). Further, we must construe the provisions of a will to be consistent, rather than to be in conflict. See Veditz v. Athey, 239 Md. 435, 448, 212 A.2d 115 (1965).
When section 10.02 is considered in light of section 10.08, the former cannot reasonably be construed to deny appellant an accounting based on Harriett’s consent to some prior accounting. Section 10.08 provides:
Notwithstanding any other provision hereunder, no Trustee hereunder shall have a vote or otherwise participate in any decision regarding whether, and to what extent, any discretionary payment of principal or interest shall be made or allocated to or for such Trustee’s personal benefit or to or for the benefit of any person for whose support such Trustee may be legally obligated. Any such decision shall be made by the co-Trustee then serving, or if there is no such co-Trustee, then the Trustee shall appoint a co-Trustee to make such decision.
Clearly, if Harriett cannot participate in a decision to distribute principal to her, then her consent to such distribution cannot be considered binding upon a remainderman whose interest is adversely effected. Cf. Madden v. Mercantile-Safe Deposit & Trust Co.,, 27 Md. App. 17, 339 A.2d 340 (1975) (any laches which could have been chargeable to income beneficiary regarding misconduct of trustee cannot be binding upon the remaindermen). Since appellant’s claim for accounting is based upon his contention that principal amounts were improperly distributed to Harriett, section 10.02 of the will does not bar his suit. See also discussion in Section IB of this opinion.
Nor do we interpret the provision in section 10.02 of the will that the trustees “shall be excused from filing any account with any court” to mean that the testator intended to remove the jurisdiction of a court of equity to require an accounting upon the reasonable request of a beneficiary. See Salter v. Salter, 209 Ga. 90, 70 S.E.2d 453, 458 (1952). See also Bogert, supra, § 973.
Appellees suggested at oral argument that appellant was not entitled to an accounting in this proceeding because a court can only require an accounting if it assumes jurisdiction over the trust, and appellant did not follow the procedure under Maryland Ruel 10-501 to request that the court do so. We do not agree that a petition for assumption of jurisdiction pursuant to Rule 10-501 is required in order that a court order an accounting, and find Baer, supra, instructive. In Baer the Court held that the trustee’s mere refusal to account did not justify his removal, but that if an accounting were necessary in order to ascertain whether the trustee is executing the trust fairly and without abuse of the discretionary power reposed in him, a Court of Equity, upon being applied to, should order such information to be given; but until that is done and it is found that the trustee is not administering the trust in good faith, or is abusing the discretionary power granted him under the will, the Court should not against his wishes, assume supervisory jurisdiction of the trustee’s discretionary powers. Baer, 131 Md. At 29, 101 A. 596. What we glean from Baer is that seeking and obtaining an accounting will sometimes precede a request for a court to assume jurisdiction over a trust, and the results of the accounting may be the “reason for seeking the assumption of jurisdiction by the court …” required under Rule 10-501. Thus, we hold that appellant was not required to petition pursuant to Rule 10-501 in order to obtain an accounting.
In sum, we hold that appellant was entitled to an accounting during the life of Harriett and at her death, notwithstanding the language in section 10.02 of John’s will.
The Information Furnished by the Trustees
The trial court found that the documents provided by appellees in April 1997, were sufficient to meet any obligation to account because they provided the recap, brokerage statements from the firms holding the estate’s securities, and a list of payments and receipts for the two-year period of the Family Trust. We do not agree with the trial court’s conclusion that this information sufficed, because appellees still failed to provide certain critical information. This information is separated by category and discussed below.
Allocations of Expenses and Receipts Between Income and Principal
One of appellant’s complaints about the information furnished by appellees is that there was no allocation of receipts and expenses to either trust income or trust principal as required under Md.Code (1974, 1991 Repl.Vol.), §§ 14-201 et seq. of the Estates and Trusts Article (“Principal and Income Act”). Appellant’s expert witness testified that, based on the records provided, it appeared that the trustees had made no allocation; and therefore, the burden of all expenses was borne by the remainder interest. Section 14-202 of the Principal and Income Act provides in pertinent part:
(a) A trust shall be administered with due regard to the respective interests of income beneficiaries and remaindermen. A trust is so administered with respect to the allocation of receipts and expenditures if a receipt is credited or an expenditure is charged to income or principal or partly to each: (1) In accordance with the terms of the trust instrument, notwithstanding contrary provisions of this subtitle; (2) In the absence of any contrary terms of the trust instrument, in accordance with the provisions of this subtitle; …
Id. at § 14-202. The remaining sections of the Principal and Income Act set forth detailed rules as to how a trustee should allocate receipts and expenses between the income beneficiary and the remaindermen.
The parties have not directed us to, nor have we found, any clause in John’s will that would make the Principal and Income Act inapplicable. Further, a trustee’s obligation to make allocations between income beneficiaries and remaindermen is an obligation well recognized in common law. See Berlage v. Boyd, 206 Md. 521, 532, 112 A.2d 461 (1955); Scott, supra, § 172 at 452, and cases collected therein (“If the trust is created for beneficiaries in succession, the accounts should show what receipts and what expenditures are allocated to principal and what are allocated to income.”); Bogert, supra, § 970 at 377–78.
The documents that appear in the record do not make any allocations of receipts or expenses to principal or income. Income tax returns do not suffice for this purpose because federal law regarding what is taxable income, and what expenses are deductible from income, differs from determination of income and principal under the Principal and Income Act. Calvin H. Cobb, III, a lawyer specializing in estate and trust law, testified that he had reviewed all of the documents furnished by appellees, and was unable, based on that information, to reconstruct an accounting that made allocations between income and principal. Mr. Cobb testified that he “tried to recreate based on this information a proper accounting that would allocate income and principal [but there was] information that didn’t reconcile….” He observed that “it appears that rather than distributing net income to [Harriett], there was no effort to charge expense to income. They instead distributed gross income to [Harriett].”
A major theme advanced by appellees in defense is that appellant, in presentation of his case, was unable to demonstrate precisely where and how the trustees failed to follow their obligations under applicable law or John’s will. “[T]he burden of proof on the issue of breach of trust is not initially on the fiduciary….” Goldman v. Rubin, 292 Md. 693, 713, 441 A.2d 713 (1982). The burden, however, shifts to the trustee once the beneficiary has introduced a certain quantum of proof:
[T]he person who challenges the conduct of a trustee, must first allege that the trustee has a duty and has been derelict in the performance of this duty, and offer evidence in support of this allegation. Then, and not until then, does the trustee have the burden of rebutting the allegation. In the absence of such proof, there is no duty on the trustee to prove a negative: i.e., that he has not been derelict in the performance of his duties.
Id. (quoting Lopez v. Lopez, 250 Md. 491, 501, 243 A.2d 588 (1968); see also Md. Nat’l Bank v. Cummins, 322 Md, 570, 581-82, 588 A.2d 1205 (1991); Wood v. Honeyman, 178 Or. 484, 169 P.2d 131, 162 (1946); Scott, supra, § 172 at 452 (“If the trustee fails to keep proper accounts, all doubts will be resolved against him and not in his favor.”).
We have reviewed all of the documents provided by appellees to appellant in response to appellant’s request for an accounting. Based on our review, in conjunction with the testimony of Mr. Cobb, we conclude that appellant met his initial burden to show that appellees breached their fiduciary duties by failing to make any allocations between principal and income. Accordingly, it was incumbent upon appellees to come forward and explain this apparent failure. Without such explanation, the trial court should not have granted the motion for judgment on Count I.
Failure to Account for Non–Funding of Marital Trust: Marital Trust Bequest of $80,223 Pursuant To Formula In Will
Another deficiency asserted by appellant regarding the information furnished by appellees relates to the Marital Trust. The documents initially provided to appellant showed a $80,223 distribution to the Marital Trust from the estate, but nothing about a Marital Trust thereafter. After a second request by appellant’s counsel, appellees advised counsel that this trust “was never established since the total assets that were available … to be distributed from [John’s estate] did not exceed $600,000.” No explanation was then offered regarding the discrepancy between appellees’ non-funding of the Martial Trust and the $80,223 distribution shown on both the estate’s administration account and John’s federal estate tax return.
The assets held in John’s estate may well have decreased in value between the date of John’s death and the date assets were distributed from his estate. If such occurs, however, the personal representative must follow the funding formula set forth in the will to determine how the decrease is allocated between the Trusts. We explain below.
The size of the bequests to the Marital Trust and the Family Trust is determined by formula. The formula is tied to the amount of assets that can pass free of tax to a decedent’s heirs under federal estate tax law by application of an individual’s “unified credit.” I.R.C. § 2001 (1998). Expressed in non-technical terms, the federal tax law allows an individual to pass to his or her heirs, free of tax, assets totaling no more than $600,000 in value. For purposes of the federal estate tax, the value of each asset is determined as of the date of the decedent’s death. When the values of the assets change during estate administration, at the time of distribution, the personal representative must look to the will for instructions regarding how to value those assets. In the absence of instructions, a Maryland statute governs. See Md.Code (1974, 1991 Repl.Vol.), § 11-107(2) of the Estates and Trusts Article (“E & T”).
John’s will did provide such instruction—section 7.02 requires the assets distributed to the Marital Trust shall be selected in such manner that the cash and other property distributed will have an aggregate fair market value fairly representative of the distributee’s proportionate share of the appreciation or depreciation in the value to the date or dates of distribution of all property then available for distribution. Any property assigned or conveyed in kind to satisfy the aforegoing bequest shall be valued for that purpose at the value thereof as finally determined for Federal Estate Tax purposes.
John’s personal representatives held the responsibility to determine how to allocate the residuary estate between the Marital Trust and the Family Trust. Under the funding formula set forth in section 7.02, if the estate assets decrease in value, the Marital Trust would be diminished on a pro rata basis with the Family Trust and would absorb no more than its pro rata share of such decrease. In light of this mandatory directive we do not see how the Marital Trust could be legitimately “wiped out” by a decrease in overall value, when the Family Trust bequest remained intact.
The discrepancy regarding the funding of the Marital Trust is not explained by appellees’ assertion that the “total assets that were available … to be distributed … did not exceed $600,000.” Proof of the discrepancy was sufficient to place the burden on the trustees to offer a better explanation and accounting with regard to this issue. Accordingly, it was error for the trial court to enter judgment in favor of appellees in appellant’s suit for such accounting.
Appellees suggest that the discrepancy regarding funding of the Marital Trust is only of theoretical concern because appellant is the remainderman under both the Marital and Family Trusts. We do not agree with this analysis because the terms of John’s will differ with respect to principal distributions authorized to be made from each of the Trusts. Under section 8.03 of John’s will, Harriett could withdraw annually the “greater of (a) Five Thousand Dollars ($5,000) or (b) Five Percent (5%) of the value of the principal of the Family Trust.” By contrast, she had no right of withdrawal from the Marital Trust. Thus, if the Family Trust were funded with assets that properly belonged to the Marital Trust, then the five percent of the trust subject to Harriett’s withdrawal right became correspondingly larger. The record suggests that Harriett exercised this right in full. Thus, it appears that some assets that should have remained in trust for Bill were, in fact, distributed to Harriett.
The trial court rested its decision on the Marital Trust issue in part upon the following language in John’s will:
[The trustee] shall have the power to make any election required to be made to qualify the Marital Trust for the federal estate and/or gift tax marital deduction. If the federal estate tax laws applicable to my estate permit a partial election to be made or permit such an election with respect to a specific portion of the Marital Trust, my Trustee may in its discretion make such election with respect to less than all the Marital Trust, and such portion shall be treated for all purposes as a specific portion of [the Marital] Trust and as a separate Trust share. My Trustee shall not be liable for any decision made in good faith and with reasonable diligence with respect to such election.
The discretion accorded the trustees by this section to make a “partial election” allows the trustees to “qualify the Marital Trust for the federal estate tax marital deduction.” Such partial election will have an impact on the amount of the Marital Trust that qualifies for the marital deduction, but it does not cause any portion of the Marital Trust to be merged with the Family Trust. As the clause indicates, if a partial election is made, the portion elected to so qualify, “shall be treated for all purposes as a specific portion of this Trust and as a separate Trust share.” The trustees’ power to create two separate trusts which together comprise the Marital Trust is not equivalent to the power to transfer assets from the Marital Trust to the Family Trust. Harriett’s power to withdraw principal extends only to the Family Trust, and does not extend to the Marital Trust, even if divided.
Appellees also suggest that because Harriett bequeathed her estate to trusts for the benefit of Bill’s children, appellant’s concern about the size of the Trusts is only theoretical. Regardless of any emotional appeal that this contention may have, it has no legal merit in its own right. To the extent that assets were improperly distributed to Harriett, and passed to trusts under her will, Bill is denied the right to those assets, even though his children receive an interest as trust beneficiaries.
Although we have expressed our disagreement with appellees’ explanation, offered in their April 18, 1997 letter to appellant, for why the Marital Trust was not funded, we do not now hold that John’s estate was distributed improperly. We think that such decision must be reserved until appellees provide a full accounting of how they applied the formula in the will to distribute assets to the Marital Trust and Family Trust, respectively. We do hold that, in the absence of a better explanation, the trial court should not have granted the motion for judgment on Count I.
Summary Regarding Count I
In sum, we conclude that appellant produced sufficient evidence to meet his initial burden to show a specific breach of duty by appellees regarding their failure to account, their failure to fund the Marital Trust, and improper delegation of their discretionary power to distribute principal and to select assets to satisfy Harriett’s right of withdrawal. Therefore, the trial court erred in granting judgment against appellant at the end of his case. Rather, the trial court should have required appellees to present their case and rebut or explain the evidence presented by appellant. We remand for that purpose.
12.2 To Inform
Cook v. Brateng, 262 P.3d 1228
¶1 A. Diane Brateng appeals the trial court’s division of Elmer Cook’s trust property. We hold that Diane, who was both a beneficiary and trustee of Elmer’s trust, did not breach her fiduciary duties when she: (1) did not inform John Cook, her brother and also a beneficiary of Elmer’s trust, that she decided to claim and defer charges against Elmer’s estate for providing Elmer’s care; and (2) decided not to encumber Elmer’s house to pay for his care. We reverse the trial court’s finding that Diane breached her fiduciary duties, hold that she is entitled to reasonable compensation for providing Elmer’s care, and remand to determine her compensation and to redistribute the property. We hold that Diane is entitled to funds she spent to repair and remodel a portion of Elmer’s home, and we do not disturb the trial court’s use of a 2007 appraisal it used to determine the value of Elmer’s home.
¶2 The following facts are undisputed. Diane and John are siblings. In November 1995, their father, Elmer, executed a living trust, naming himself and Diane as trustees. Elmer’s health deteriorated; two years later, in November 1997, he was declared incompetent, and Diane became sole trustee of his trust.
¶3 With Elmer declared incompetent, the trust required Diane, the sole remaining trustee, to apply all trust property exclusively for Elmer’s benefit. Specifically, the trust required Diane to “provide as much of the principal and net income of [the] trust as is necessary or advisable, in [Diane’s] sole and absolute discretion, for my health, support, maintenance, and general welfare.” CP at 36. The trust also required Diane to make information available to the beneficiaries:
My trustee shall report, at least semiannually, to the beneficiaries then eligible to receive mandatory or discretionary distributions of the net income from the various trusts created in this agreement all of the receipts, disbursements, and distributions occurring during the reporting period along with a complete statement of the trust property.
CP at 60.
Upon Elmer’s death, the trust directed Diane, as the trustee, to divide all remaining trust property among herself, John, the Salvation Army, and the Finnish Assembly of God Church. The trust allocated to each Diane and John a 9/20th share and to each charity a 1/20th share. The trust also directed Diane to distribute the home to herself, “AS PART OF, AND NOT IN ADDITION TO, that share of [the] trust distributed to [Diane].” CP at 46.
¶4 In November 1997, after Elmer was declared incompetent, Diane decided to move Elmer from his home in Ilwaco, Washington, into her home in Kirkland, Washington, where she could more easily care for him. Elmer died in January 2000.
¶5 During the time Diane cared for Elmer from November 1997 to January 2000, she used $59,176.67 from the trust’s liquid funds to pay for Elmer’s medical expenses and personal expenses, as well as maintaining, repairing, and remodeling the Ilwaco home. Diane spent $20,319.75 of the trust funds to repair water damage to the Ilwaco home and to remodel its kitchen. At the time of Elmer’s death, the trust had $16,439.62 in liquid funds remaining. The only other remaining trust asset was Elmer’s Ilwaco home.
¶6 Diane kept meticulous records of her time and expenses related to caring for Elmer and her time and expenses related to driving from Kirkland to Ilwaco. She carefully recorded her time spent caring for him from 1996 to 1997—before she moved him to Kirkland—and she recorded her time spent caring for him while he lived with her in Kirkland as “24 hour In-home Care.” Ex. 26. She also kept track of the fuel used to drive to Ilwaco, her meals along the way, and the cost per mile. Finally, she recorded bills that she personally paid for Elmer, recording the exact amount and method of payment. Diane’s claim against the estate for acting as Elmer’s care giver totaled $142,171.10.
¶7 Although Diane kept these meticulous records, she did not disclose her intention to claim reimbursement to John until he filed suit and requested an accounting. Before Elmer’s death, Diane never discussed with John her expenses as a care giver, the value of her services as a care giver, or her decision not to encumber Elmer’s Ilwaco house to pay for his care.
¶8 John filed suit against Diane in October 2001, which led to mediation and arbitration under the “Trust and Estate Dispute Resolution Act”. John appealed the arbitrator’s decision and requested a trial de novo. The trial court issued a memorandum opinion on June 20, 2008, followed by findings of fact and conclusions of law on May 26, 2009.
¶9 The trial court concluded that Diane, as trustee of her father’s estate, had a duty to inform John that (1) she decided to claim and defer charges against Elmer’s estate for providing Elmer’s care, and (2) she decided not to encumber Elmer’s Ilwaco house to pay for Elmer’s care. The court further concluded that she breached her fiduciary duties and, thus, could not compensate herself for providing Elmer’s care. The trial court awarded the Ilwaco house to Diane, but gave John a 9/20th interest in its 2007 appraised value. The court also awarded Diane a credit for one-half the value of a property adjacent to the Ilwaco house that is not part of this appeal.
I. DUTY TO INFORM
¶10 Diane argues that she did not have a duty to inform John that she was claiming and deferring her charges for providing Elmer’s care until his death because neither the trust nor the applicable statutes required her to provide her brother with accounting statements. She also argues, for the same reason, that she did not have a duty to inform John that she decided to refrain from encumbering the Ilwaco house to pay for Elmer’s health costs. We agree.
¶11 A trustee, as a fiduciary, owes beneficiaries the “highest degree of good faith, care, loyalty and integrity.” Esmieu v. Schrag, 88 Was. 2d 490, 498, 563 P.2d 203 (1977). “It is the duty of a trustee to administer the trust in the interest of the beneficiaries.” Tucker v. Brown, 20 Wash.2d 740, 768, 150 P.2d 604 (1944). A trustee’s duties and powers are determined by the terms of the trust, by common law, and by statute. In re Estate of Ehlers, 80 Wash.App. 751 757, 911 P.2d 1017 (1996). At common law, Washington courts have defined a trustee’s duty of care, skill and diligence to be that degree of care, skill and diligence that an ordinary prudent man exercises in similar affairs. In re Nontestamentary Trust of Parks, 39 Wash.2d 763, 767, 238 P.2d 1205 (1951); Monroe c. Winn., 16 Wash.2d 497, 508, 133 P.2d (1943).
¶12 Diane first contends that the trust did not require her to provide John with an accounting during Elmer’s life. Without any analysis, she cites the following language of the trust to support her contention:
My Trustee shall report, at least semiannually, to the beneficiaries then eligible to receive mandatory or discretionary distributions of the net income from the various trusts created in this agreement all of the receipts, disbursements, and distributions occurring during the reporting period along with a complete statement of the trust property.
CP at 60 (emphasis added); Br. of Appellant at 14. The crux of her argument is that the trust language does not require Diane to provide John with an accounting because he was not “eligible” as a remainder beneficiary to receive distributions. CP at 60.
¶13 We ascertain a settlor’s intent and purpose from the four corners of the trust instrument, construing all of its provisions together. Templeton v. Peoples Nat’l Bank, 106 Wash.2d 304, 309, 722 P.2d 63 (1986). Here, Diane had sole and absolute discretion to use the trust assets to provide for Elmer if he was incapacitated, as article four, section 3 of the trust stated:
My Trustee shall provide as much of the principal and net income of my trust as is necessary or advisable, in its sole and absolute discretion, for my health, support, maintenance, and general welfare.
CP at 36. Only the trust property not distributed to Elmer during his lifetime was to be divided between Diane and John as beneficiaries. Neither Diane nor John was eligible to receive their distributions during Elmer’s lifetime, as the clear intent of the trust instrument was to provide for his needs. Therefore, any mandatory accounting was primarily intended to benefit Elmer, as the sole income beneficiary; we agree with Diane that the trust did not require her to report receipts, disbursements, and distributions to John while Elmer was still living. The trust required Diane to provide Elmer, as the sole income beneficiary, with an accounting only upon distribution. John does not argue that Diane failed to report to Elmer.
¶14 Diane also correctly notes that the law did not require her to provide John with an accounting. Under RCW 11.106.020, a trustee must provide at least an annual accounting to “each adult income trust beneficiary … of all current receipts and disbursements.” In contrast, any beneficiary, including one holding only a present interest in the remainder of a trust, may petition the court for an accounting. RWC 11.106.040, see Nelsen v. Griffiths, 21 Wash.App. 489, 493, 585 P.2d 840 (1978); see. Lastly, a trustee has a common law duty to give a beneficiary, upon his reasonable request, complete and accurate information about the nature and amount of trust property. Tucker, 20 Wash.2d at 769, 150 P.2d 604. Here, because John was not an income beneficiary, RCW 11.106.020 did not compel Diane to provide him with an accounting. Because John never petitioned the court for an accounting, RCW 11.106.040 did not compel Diane to provide an accounting. And, finally, because John never requested an accounting from Diane, she did not have a common law duty to provide him with such accounting.
¶15 But determining that Diane was not required to provide an accounting is not dispositive of John’s issues because a mandatory accounting would not have disclosed Diane’s decision to defer charges and to refrain from encumbering the Ilwaco house during her father’s lifetime. Here, any accounting would have revealed only those receipts and disbursements actually made. RCW 11.106.020. The plain language definition of these terms suggests that a trustee need only provide an accounting for transactions actually paid from the trust. Future contemplated transactions that have not yet occurred would not be shown on an accounting. Thus, because mandatory accounting would not have disclosed Diane’s decisions to defer payment for her services rendered on her father’s behalf, we turn to the more general question of whether Diane had a duty to inform John of how she was managing the costs associated with Elmer’s care.
¶16 A trustee’s duty “includes the responsibility to inform the beneficiaries fully of all facts which would aid them in protecting their interests.” Allard v. Pac. Nat’l Bank, 99 Wash.2d 394, 404, 663 P.2d 104 (1983) (citing Esmieu, 88 Wash.2d at 498, 563 P.2d 203). “That the settlor has created a trust and thus required the beneficiaries to enjoy their property interests indirectly does not imply the beneficiaries are to be kept in ignorance of the trust, the nature of the trust property, and the details of its administration.” Allard, 99 Wash.2d at 404, 663 P.2d 104. A trustee’s duty includes the responsibility to inform the beneficiaries periodically of the status of the trust, its property, and how the property is being managed. Allard, 99 Wash.2d at 404, 663 P.2d 104. “If the beneficiaries are able to hold the trustee to proper standards of care and honesty and procure the benefits to which they are entitled, they must know of what the trust property consists and how it is being managed.” Allard, 99 Wash.2d at 404, 663 P.2d 104.
¶17 Allard holds that a trustee has a duty to inform beneficiaries about management of the trust that significantly affects their interest or, put differently, that a trustee breaches its duty to inform when it withholds information that would prejudice the beneficiaries. Allard, 99 Wash.2d at 404-05, 663 P.2d 104. In Allard, Pacific Bank held in trust for certain beneficiaries a quarter block of property in downtown Seattle. Allard, 99 Wash.2d at 396, 663 P.2d 104. The property was the sole trust asset. Allard, 99 Wash.2d at 396, 663 P.2d 104. Under the trust provisions, Pacific Bank had full power to manage trust assets according to the judgment and care that “prudent men exercise in the management of their own affairs.” Allard, 99 Wash.2d at 396, 663 P.2d 104. In 1978, Pacific Bank sold the downtown property before informing the beneficiaries of the sale more than a month later. Allard, 99 Wash.2d at 397, 663 P.2d 104.
¶18 The beneficiaries brought suit against Pacific Bank for breach of its fiduciary duties, arguing on appeal that Pacific Bank had a duty to inform them before selling the property. Allard, 99 Wash.2d at 401, 663 P.2d 104. Our Supreme Court agreed with the beneficiaries and held that Pacific Bank had a duty to inform them of the sale. Allard, 99 Wash.2d at 405, 663 P.2d 104. The court reasoned that, although Pacific Bank could manage trust assets without seeking the beneficiaries’ consent, and although the trust provisions required Pacific Bank to furnish only an annual statement for the prior year’s investments, Pacific Bank, as part of its fiduciary duties, had to inform the beneficiaries of all material facts of the downtown Seattle property transaction before the sale because such a sale was a nonroutine transaction that significantly affected the trust estate and the beneficiaries’ interests. Allard, 99 Wash.2d at 403-05, 663 P.2d 104; cf. In re Estate of Ehlers, 80 Wash.App. 751, 758-59, 911 P.2d 1017 (1996). (holding that a trustee does not breach her duty of care in failing to provide timely mandatory accounting when the trustee eventually provides accounting and the untimeliness does not cause any loss to any beneficiary).
¶19 Here, Diane had a duty to inform John about matters that would significantly affect his interests. But unlike in Allard in which selling the only trust asset significantly affected the beneficiaries’ interest, providing Elmer’s care was a routine practice to fulfill the trust’s primary purpose, which, therefore, did not significantly affect John’s remainder interest. In fact, the trust specifically gave Diane authority to “provide as much of the principal and net income of my trust as is necessary or advisable, in [her] sole and absolute discretion, for my health, support, maintenance, and general welfare.” CP at 36. John could also reasonably expect that his ailing father, declared incompetent by two physicians and aged 95 at the time of his death, would require full-time care, which care could consume substantial portions, if not all, of the trust’s assets.
¶20 Because the trust clearly provided for Diane to spend any amount of trust assets to care for Elmer, John suffered no loss whether Diane planned to defer the costs and compensate herself in the future or hire a care giver who she paid during Elmer’s lifetime; he could reasonably expect those types of expenses on behalf of his incompetent and dependent father and he knew that the trust provided that Diane could pay for those expenses in her sole discretion. We hold that Diane had a duty to inform John about significant matters that affected his beneficial interest in the estate assets but that she did not breach her fiduciary duty in failing to inform John about how she was managing the routine expenses associated with Elmer’s care, as John was not prejudiced by her conduct. Nor did Diane breach her duty to inform John of her management of the Ilwaco property when, without telling John, she decided not to encumber the Ilwaco house for the cost of their father’s care.
¶21 The trust divided the remaining estate assets equally to Diane and John in 9/20th shares, with the Ilwaco home left to Diane “as part of, and not in addition to” her 9/20th share. CP at 46 (emphasis added)**1234 (capitalization omitted). If the value of the house exceeded Diane’s 9/20th share of the remaining estate, Diane had the option of purchasing the house for any amount of value exceeding her 9/20th share of the entire estate, in effect, giving John cash payment for his interest in the estate. If Diane declined to purchase the house, the property would pass as if Elmer had died intestate.
¶22 It is inconsequential whether Diane took the money from the trust during her father’s lifetime and encumbered the house at that time to pay herself or whether she deferred her claim for reimbursement and refrained from encumbering the house. Diane and John each had a remainder interest in the estate. If Elmer’s needs during his lifetime exceeded the trust’s liquid funds, Diane would necessarily have had to encumber the Ilwaco home to pay his additional expenses. If the liquid trust funds were depleted, John and Diane would be entitled to a 9/20th share of the remainder of their father’s estate, here, the Ilwaco house, and Diane could purchase the house and pay John his 9/20th interest. Thus, depleting the trust’s liquid funds during her father’s lifetime or delaying her payment until after his death did not change the fact that, with those funds depleted, Diane would have only the option to purchase the house.
¶23 Further indication that John did not suffer any prejudice is that he failed to object to Diane’s decisions at any point before Elmer’s death, even though he had reason to know that she was maintaining the Ilwaco home, that she was Elmer’s care giver, and that she would charge the estate for her care giving. John lived on property adjoining Elmer’s Ilwaco home and saw Elmer visit when Diane took him there. Diane also generally maintained the Ilwaco home and undertook repairs for water damage.
¶24 John also was on inquiry notice that Diane would charge the estate for caring for Elmer, as she had absolute authority to pay for his “health, support, maintenance, and general welfare.” CP at 36. The trust had paid a nurse to care for Elmer before Diane took him into her home and care. When Diane started caring for him, it was certainly foreseeable that she would reasonably charge for the personal services she rendered. But John never took care of his father and never inquired about whether Diane was going to charge the estate for her care. John’s failure to object, even though he had reason to know that Diane was caring for Elmer and that she would reasonably charge the estate for her services, belies his assertion now that he suffered harm as a result of her decisions.
¶25 We hold that Diane did not have a duty to inform John that she decided to claim and defer charges against Elmer’s estate. Nor did she owe him a duty to inform him that she decided to refrain from encumbering the Ilwaco home to pay for Elmer’s care.
II. CARE–GIVING COMPENSATION
¶26 Diane next argues that under both the trust and the applicable statutory authority, she had authority to pay herself “as trustee” for providing Elmer’s care. Br. of Appellant at 17, 29. Although Diane conflates being compensated as a trustee with being compensated as Elmer’s care giver, we agree that she can recover her care-giving expenses from the trust.
27 Diane’s confusion arises from the following trust language:
My trustee shall pay itself reasonable compensation for its services as a fiduciary as provided in this agreement, and shall reasonably compensate those persons employed by my Trustee, including agents, auditors, accountants, and attorneys.
CP at 68. Diane understands this language to mean that a trustee may be paid reasonable compensation for fiduciary services, and she assumes that personal care giving is within the scope of a trustee’s services. Her understanding ignores the language “as fiduciary,” which distinguishes Diane’s ability to pay herself in her fiduciary capacity from paying those who she employs. CP at 68. Diane conflates her dual role. On one hand, she was a trustee, with duties that included managing trust funds for Elmer’s benefit and managing his needs. On the other, she was Elmer’s care giver.
¶28 A fiduciary is “required to act for the benefit of another person on all matters within the scope of their relationship … who must exercise a high standard of care in managing another’s money or property.” Black’s Law Dictionary 702 (9th ed. 2009). While managing Elmer’s trust funds, managing his personal affairs, and managing his other needs were within the scope of Diane’s fiduciary duties as his trustee, actually providing Elmer’s personal care was not.
¶29 Diane’s confusion of her dual roles is not fatal, however, as the trust also requires her to “reasonably *793 compensate those persons [she] employ[s].” CP at 68. If Diane had hired a full-time nurse to provide Elmer’s health care, the trust would have required her to use trust funds to reasonably compensate the nurse. Notably, the trust does not prohibit Diane from compensating herself as an employee in addition to her role as trustee. The trust’s only requirement is that the compensation be “reasonable.” CP at 68. We hold that Diane, as trustee, could compensate herself as an employee who provided for Elmer’s personal needs.
¶30 In addition to Diane’s reasonable expenses related to caring for Elmer, she is also entitled to reasonable compensation for her services as trustee. The trial court awarded her $5,000 for her services as trustee. She does not challenge this finding on appeal; therefore, we do not disturb that award. We hold that Diane is entitled to reasonable compensation as Elmer’s caregiver and remand to the trial court to evaluate
the reasonableness of the costs of the services she rendered in providing his care.
III. REPAIR OF PROPERTY
¶31 Diane next contends that the trial court erred in subtracting $10,000 from the roughly $20,000 she spent to repair and remodel the Ilwaco house kitchen. We agree that there was no reason to deduct this expenditure, as it was within her discretion to make.
¶32 Under the trust’s express language, Diane could “hold property which is non-income producing … if the holding of such property is, in the sole and absolute discretion of [Diane], in the best interests of the beneficiaries.” CP at 71. Diane also, had authority to take any action “reasonably necessary for the preservation of real estate and fixtures comprising a part of the trust property.” CP at 74. Based on the trust’s plain language, Diane had authority not only to keep the Ilwaco house but also to preserve it and its fixtures.
¶33 Webster’s defines “preservation” as “the act of preserving or the state of being preserved,” and it defines “preserve” as “to keep safe from injury, harm, or destruction … to keep alive, intact, in existence, or from decay.” WEBSTER’S THIRD NEW INTERNATIONAL DICTIONARY 1794 (2002). In the context of real estate, the plain meanings of “preservation” and “preserve” indicate that Diane could not only maintain the Ilwaco house, but also could use trust funds to improve the house. Preserving a house entails keeping it as an appreciating asset.
¶34 Here, even though Elmer was only visiting from time-to-time, the costs associated with maintaining the property contributed to its valuation’s increase from $90,000 in 2001 to $217,000 in 2007. This increase reflects the reasonableness of expending trust funds to maintain the asset, possibly for future use if it had to be sold or mortgaged to provide funds to care for Elmer. Therefore, under the express trust language, we hold that Diane had authority to repair water damage and to remodel the kitchen and the trial court erred in reducing her interest in the remaining estate by $10,000.
¶35 Diane did not breach any duty to inform John of how she was managing their father’s trust estate because his lack of knowledge did not cause him prejudice. She is therefore entitled to reasonable compensation for her fiduciary actions as well as her personal care of their father. We affirm the trial court’s approval of the $59,176.67 Diane used of the liquid trust funds during Elmer’s life for her personal care and, although the trial court may have found Diane’s accounting of her personal care expenses adequate, the court did not determine whether the total of her claimed expenses were “reasonable.” Accordingly, we remand to the trial court to reexamine and determine whether her remaining claimed expenses were reasonable and to award her further compensation for personal care she provided, in accord with the terms of the trust.
¶36 We hold that Diane is entitled to funds she spent to repair and remodel the Ilwaco kitchen after water damage. And we hold that the trial court properly used the 2007 appraised value of $217,000 for the Ilwaco house.
¶43 Reversed and remanded.
1. Henry’s will stated, “I leave the residue of my estate to Carrie in trust to provide for the education of my nieces, Creola and Pandora. I trust Carrie completely, so she does not have to keep any accounts.” A few years after Carrie assumed her duties as trustee, Creola suspected that Carrie was misappropriating the trust funds. Thus, Creola filed an action for an accounting. In response, Carried stated that she was not required to give an accounting. What result?
2. During his marriage Kevin had an affair that resulted in the birth of a child, Camille. Kevin’s wife, Bertha, knew about Camille, but Kevin’s and Bertha’s child, Zeno was not aware that she had a half-sister. In his will, Kevin left his entire estate in trust for the benefit of Camille and Zeno. After Kevin died, his business partner, Mateo, assumed his role as trustee. When Zeon discovered that her father had left Camille trust money, she became suspicious. Hence, she asked Mateo to see a copy of the trust instrument. Mateo complied with Zeno’s request, but he redacted the portions of the trust instrument referring to Camille. Zeno filed an action claiming that Mateo had violated his duty to inform. What result?
3. Gary’s will stated, “I leave my entire estate to Max in trust for the benefit of my wife, Dena. If Dena’s remarries, the remaining trusts funds are to be held in trust for the benefit of the Animal Rights Society.” After Gary died, Max assumed his role as trustee. Two years after Gary died, Dena married Curtis. However, Max continued to give Dena money out of the trust. Seven years later, the director of the Animal Right’s Society discovered that Dena had been remarried for over nine years. The director sued Max to recover the trust money he wrongfully paid to Dena. Max responded by pointing out that he had fulfilled his duty to account and inform because he informed the director of all the payments he made to Dena. According to Max, since the director did not object to his accountings in a reasonable time, he was not liable for breaching any of his trust duties. What result?
4. Theresa was suffering from mild memory loss. Thus, Byron, Theresa’s husband, established a trust for her benefit. According to the terms of the trust, the trustee was to provide enough money to support Theresa. After Bryon died, the Main Bank assumed its role as trustee. The Main Bank gave yearly accountings. Theresa signed off on all the accountings. Later, Theresa’s friend suspected that Main Bank was not paying enough to support Theresa. Thus, the friend hired a lawyer for Theresa to sue Main Bank for violating its duty to support Theresa. What result?
12.3 The Trustee’s Liability
In re Wilson, 930 N.E.2d 646
BAKER, Chief Judge.
The trust at issue herein held certain real estate that the settlor intended to be sold, with the proceeds to be distributed to the beneficiaries. For a time, the trustee delayed selling the real estate for valid reasons. He continued to delay to sell the property, however, until over a year past the point at which those reasons no longer existed. His inaction constituted a breach of fiduciary duty. His breach may have caused the corpus of the trust to suffer significant financial harm, and his general reluctance and/or refusal to communicate with the beneficiaries forced them to resort to litigation to find that out. Under these circumstances, we find that the trial court did not err by ordering the trustee to pay the beneficiaries’ attorney fees, by reducing the requested trustee fees, or by reducing the amount of the trustee’s attorney fees to be borne by the trust.
Appellant-respondent Fred Monroe Wilson (Trustee) appeals the trial court’s order entering judgment in favor of appellees-petitioners Marcia Wilson Barker (Marcia), Carol Perrine (Carol), Nicholas Barker (Nicholas), Christopher Barker (Christopher), and Sarah Barker (Sarah) (collectively, the Objecting Beneficiaries) sustaining the Objecting Beneficiaries’ objections to the Trustee’s final accounting. The Trustee argues that the trial court erred by (1) finding that the Trustee committed multiple breaches of fiduciary duty; (2) ordering the Trustee to pay the attorney fees of the Objecting Beneficiaries; (3) reducing the fiduciary fees requested by the Trustee from $140,000 to $75,000; and (4) ordering that a portion of the Trustee’s attorney fees be paid by the Trustee personally.
We find that the Trustee breached duties owed to the Objecting Beneficiaries and that the trial court properly ordered the Trustee to pay the Objecting Beneficiaries’ attorney fees, reduced the Trustee’s requested fiduciary fees, and ordered that the Trust only be responsible for a portion of the Trustee’s attorney fees. We also find, however, that it was error to order that the Trustee bear the remaining portion of his attorney fees personally. Therefore, we affirm in part and reverse in part.
On May 15, 1997, Elizabeth F. Wilson executed a Revocable Trust (the Trust). Elizabeth’s three children—the Trustee, Marcia, and Carol—are the Majority Beneficiaries of the Trust, receiving a combined 89.75% interest therein. Elizabeth’s nine grandchildren, including Nicholas, Christopher, and Sarah, share the remaining 11.25% interest equally. The Trustee was Co–Trustee with Elizabeth until she died on July 31, 2005, at which time he became the sole Trustee.
At the time of Elizabeth’s death, the Trust held the following assets: (1) tangible personal property, the distribution of which was governed by a list that had been prepared by Elizabeth and incorporated into the Trust; (2) a checking account and an investment account; and (3) an 82.795% ownership interest as a member of Wilson–Hussey Lane, LLC (the LLC).
The LLC’s primary asset was approximately 17.5 acres of real estate located in Carmel (the Real Estate). The Trustee became the Manager of the LLC at the time of Elizabeth’s death.
At the time of Elizabeth’s death, the Majority Beneficiaries also owned, as tenants in common, Elizabeth’s former residence in Carmel (the TIC Property), which is adjacent to the Real Estate. The TIC Property held, among other things, the tangible personal property included in the Trust.
Almost immediately after Elizabeth’s death, the Trustee was faced with issues regarding the payment of real estate taxes and other necessary expenses on behalf of the LLC and the TIC Property. During her lifetime, Elizabeth had personally paid these obligations. The Trustee presented Marcia and Carol with options as to how to handle those expenses but did not receive a response. The Trustee was concerned about protecting the Trust’s tangible personal property located in the TIC Property and the Trust’s interest in the Real Estate owned by the LLC. Accordingly, the Trustee facilitated the payment of TIC Property and LLC expenses from the Trust’s assets and accounted for and verified those payments as loans totaling over $100,000 made by the Trust. Although the Trustee had no promissory notes documenting the loans, he accounted for all payments in his Final Accounting.
The Trust’s tangible personal property was sorted and inventoried by the Trustee to facilitate distribution to the Majority Beneficiaries pursuant to Elizabeth’s list. The Trustee also obtained an appraisal of the property. On November 17, 2005, the Majority Beneficiaries met and the majority of the Trust’s tangible personal property was distributed at that time.
On January 23, 2006, the Objecting Beneficiaries filed a Petition for a Trust Accounting.
On March 16, 2007, the TIC Property and remaining undistributed portion of the Trust’s personal property were destroyed as the result of a fire. The Majority Beneficiaries submitted an insurance claim and received insurance proceeds for the damage to the residence and the property therein.
The Real Estate
The Trust’s primary asset was the Real Estate, and the Majority Beneficiaries desired, ultimately, to sell the Real Estate and the adjacent TIC Property as a single parcel. Pursuant to his fiduciary duty to handle all transfer tax matters arising from the Trust’s assets, the Trustee obtained an appraisal of the Real Estate and a valuation opinion from a certified valuation analyst to propose a discounted fair market value of the Trust’s ownership interest in the LLC, primarily due to the lack of marketability in that interest.
The Trustee was concerned that the Trust would have to pay an additional 47% federal estate tax on proceeds received in excess of the appraisal value if the Real Estate was sold prematurely. Additionally, the Trustee was counseled not to sell the Real Estate before the insurance claim stemming from the fire at the TIC Property was resolved. Therefore, the Trustee decided not to distribute the Trust’s LLC units to the beneficiaries or market the Real Estate for sale until the audit review of the Trust’s federal estate tax and Indiana inheritance tax returns were finalized and the insurance claims were resolved. The IRS issued a clearance letter in January 2007, the Indiana Department of Revenue issued a clearance letter in May 2007, and the insurance claim was satisfied in August 2007. Shortly thereafter, the Majority Beneficiaries met to discuss the sale of the Real Estate, at which time the Trustee agreed that he would begin to compile marketing packets and begin the process of selling the Real Estate. The Trustee did not begin marketing the Real Estate for sale until July 2008, a few weeks before a scheduled July 29, 2008, hearing on the Objecting Beneficiaries’ objections to the Final Accounting.
The Final Accounting
On March 4, 2008, the Trustee filed the Final Accounting and in March and April 2008, the Objecting Beneficiaries filed objections to the Accounting. Following a hearing that concluded on September 19, 2008, the parties stipulated that the Final Accounting met the burden required under Indiana Code section 30-4-5-13 (a), meaning that the burden of persuasion regarding the alleged instances of impropriety shifted to the Objecting Beneficiaries. On July 6, 2009, the trial court entered an order sustaining many of the Objecting Beneficiaries’ objections. Among other things, the trial court found and concluded as follows:
• The Trustee’s use of Trust funds to pay TIC Property expenses constituted improper commingling of assets and was a breach of trust. The trial court specifically found fault with the lack of documentation that the payments made from the Trust were loans.
• The Trustee’s decision to loan Trust Assets to the TIC Property and the LLC without documenting the loans violated the Statute of Frauds.
• The loans to the TIC Property and the LLC without approval of the beneficiaries or a court order constituted self-dealing and improper conflict of interest, resulting in a breach of trust.
• The delay in the sale of the Real Estate constituted a violation of the Trustee’s duty to preserve trust property and make trust property productive.
Appellant’s App. p. 11–25.
Having found those breaches of duty, the trial court ordered the Trustee to pay the attorney fees of the Objecting Beneficiaries, which totaled $50,375. Although the Trustee requested trustee fees totaling $140,000, the trial court ordered that he receive only $75,000 because of the multiple breaches of duty. Furthermore, much of the time for which he requested payment was spent defending against the objections, which he precipitated and which would not otherwise have been necessary to administer the trust. Finally, the trial court found that the Trustee’s attorney fees, totaling $280,000, were reasonable but that the Estate should not have to bear the entire burden of those fees because the Trustee’s failure to communicate with his family caused much of the litigation, and the fees would not otherwise have been necessary to administer the trust. Thus, the trial court ordered that the Estate pay $175,000 of the Trustee’s attorney fees, with the remainder to be borne by the Trustee personally. The Trustee now appeals.
DISCUSSION AND DECISION
I. Standard of Review
When, as here, the trial court has entered an order containing findings of fact and conclusions of law, we apply a two-step review. First, we consider whether the evidence supports the findings, and second, whether the findings support the judgment. Hardy v. Hardy, 910 N.E.2d 851, 855 (Ind. Ct. App. 2009). We will neither reweigh the evidence nor assess witness credibility, considering only the evidence most favorable to the judgment. Id. We will set aside the trial court’s findings and conclusions only if they are clearly erroneous, that is, if the record contains no facts or inferences supporting them. Id. We apply a de novo standard of review to conclusions of law. Id.
II. Breach of Trustee’s Duties
A trust is “a fiduciary relationship between a person who, as trustee, holds title to property and another person for whom, as beneficiary, the title is held.” Ind. Code § 30-4-1-1(a). A breach of trust is “a violation by the trustee of any duty that is owed to the settlor or beneficiary.” Ind. Code § 30-4-1-2(4).
Generally, a trustee bears the burden of justifying the propriety of items in a trust account. Matter of Willey’s Trust, 443 N.E.2d 1191, 1193 (Ind.Ct. App. 1982). But when, as here, a trustee files specific accounts and makes a prima facie showing that the accounts are proper, the burden of persuasion shifts to the beneficiaries to show specific instances of impropriety. Id. at 1193-94.
Solely for argument’s sake, we will assume that the Trustee is correct that his decision to loan money from the Trust to the LLC and the TIC Property was not a breach of duty. We will turn immediately, therefore, to the trial court’s conclusion that the Trustee’s decision to delay the sale of the Real Estate breached his duties to preserve the trust property and make the trust property productive for both the income and remainder beneficiaries.
The record here reveals that the Trustee elected to wait to sell the Real Estate until he received clearance letters from federal and state government agencies in an effort to avoid incurring substantial additional transfer tax liability. Furthermore, he elected to wait to sell the Real Estate until the insurance claim on the TIC Property was processed in an effort to ensure that the Majority Beneficiaries received the full amount of their claims. We find that these actions were prudently taken, well considered, and taken upon the advice of counsel.
That said, we agree with the trial court’s implicit conclusion that while the Trustee was waiting for the clearance letters and the settlement of the insurance claim, he should have begun the process of selling the property by, among other things, taking steps to find potential buyers and putting together marketing information about the property. Even more compelling, the insurance claim had been settled and all clearance letters received by August 2007, but it was not until July 2008, more than a full year after receiving the last tax clearance letter and shortly before a scheduled court hearing, that the Trustee began marketing the Real Estate for sale. He could point to no significant steps he had taken during the intervening months to prepare to sell the Real Estate.
Although the Trustee is correct that the Trust does not mandate the Trustee to sell any asset, it is evident from the way in which the Trust is structured that Elizabeth intended that the Trust assets be relatively quickly distributed and/or sold. Moreover, the Objecting Beneficiaries made it abundantly clear to the Trustee starting in August 2005 that they desired a quick wrap-up of the Trust and hoped that the Real Estate would be sold in a timely fashion. Although we find that the Trustee’s decision to delay the sale until after the tax clearance letters were received and the insurance claim was settled was prudent and did not constitute a breach of fiduciary duty, we agree with the trial court’s conclusion that his failure to prepare the Real Estate for sale during the waiting period and the extra delay of over one year after the clearance letters were received was a breach of his fiduciary duties to comply with the settlor’s intent and to preserve the value of the Trust property.
The Trustee notes that the Trust does not actually own the Real Estate. Instead, it owns a majority interest in the LLC, a separate entity, which owns the Real Estate. The Trustee argues that he could not have a duty to sell an asset the Trust does not actually own. We find this to be a distinction without a difference. He is both the Trustee of the Trust and the Manager of the LLC. Regardless of which proverbial hat he was wearing, it was his responsibility to sell the Real Estate or, at least, the Trust’s interest in the Real Estate. Thus, we do not find this argument to be compelling.
Although the trial court did not award any specific damages to the Objecting Beneficiaries based upon the Trustee’s breaches, it ordered the Trustee to pay the Objecting Beneficiaries’ attorney fees, reduced the fees requested by the Trustee, and ordered the Trustee to pay a portion of his attorney fees personally. The Trustee argues that all of these actions were erroneous.
If a trustee commits a breach of trust, the trustee is liable to the beneficiaries for: (1) any loss or depreciation in the value of the trust property as a result of the breach; (2) any profit made by the trustee through the breach; (3) any reasonable profit which would have accrued on the trust property in the absence of a breach; and (4) reasonable attorney’s fees incurred by the beneficiary in bringing an action on the breach.
I.C. § 30-4-3-11(b). If the trust is not harmed by any breach of trust committed by the trustee, the beneficiaries may not complain of the breach of trust. Gavin v. Miller, 222 Ind. 459, 467, 54 N.E.2d 266, 280 (1944).
Here, the trial court found that the Objecting Beneficiaries failed to offer evidence establishing that they suffered a financial harm—i.e., that the Real Estate depreciated in value during the delay—as a result of the Trustee’s breach. The only evidence in that regard came from the testimony of Marcia, who is not an expert but testified that in her personal opinion, the real estate market in Indiana was not as good as it had been three years earlier. The trial court determined that Marcia’s testimony was insufficient to establish damages, and we agree with that conclusion.
Although we conclude that the Trust corpus, itself, suffered no harm as a result of the Trustee’s breach, the Trustee’s actions, including a general reticence or refusal to communicate with the Objecting Beneficiaries, compelled the Objecting Beneficiaries to solve these problems in court. Put another way, the Trustee’s behavior forced the Objecting Beneficiaries to enlist the aid of attorneys and a trial court to determine that, in fact, they had not sustained financial harm as a result of his inaction. Under these circumstances, we find that the trial court did not err by ordering the Trustee to pay the Objecting Beneficiaries’ attorney fees or by reducing the fees the Trustee requested based upon the breach of duty.
As for the Trustee’s attorney fees, we likewise find that the trial court did not err by ordering that the Trust pay only $175,000 of those fees. To the extent that the trial court ordered the Trustee to personally pay the remainder of his attorney fees, however, we disagree. Neither the trial court nor we have jurisdiction over the relationship between the Trustee individually and his attorneys. The way in which the Trustee’s attorneys choose to collect the remainder of their fees, if at all, is not at issue in this proceeding, and we reverse the trial court’s order to the extent that it orders the Trustee to bear that burden personally.
The judgment of the trial court is affirmed in part and reversed in part.
The following fact pattern is included as a means of reviewing all of the issues that arise in a trust transaction. In particular, the student should focus upon identifying all of the breaches of trust duties.
Collaborative Learning Exercise
A codicil to Judy’s will established a trust naming her brother, Richard, as the life time beneficiary. The will directed the trustee to terminate the trust, upon Richard’s death, and distribute the balance of the principal and accumulated income to Judy’s three children, their heirs and assigns.
The only asset placed in the trust was an installment real estate contract executed between Judy and Howard in 1992 for the sale of three multi-family dwellings. Under the installment contract, Howard was to purchase the three properties for $250.000. The three parcels of real estate were commonly known as 155 Third Avenue South, 215 Turtle Lane, and 122 Madison Street North. The three parcels contained twenty apartment units.
The trust instrument also directed the trustee to use $250,000 of the funds in the estate to acquire additional rental property to add to the corpus of the trust. Judy’s will directed the trustee to pay Richard during his lifetime “monthly, all of the net income of the trust, or $3000.00, whichever is greater.”
During her life time, Judy had a management company to maintain the rental property. At that time, the property was considered to be in good condition. Judy died in 1995. A few months later, the trustee, Benjamin Taylor, accepted the duty of trustee. Benjamin immediately began making monthly payments to Richard.
Benjamin took the $250,000 from the estate and placed it in his savings account while he looked for rental property to purchase. Benjamin did not have experience in real estate investment, so he asked his friend, Katherine, a real estate broker, to find property to purchase. Katherine identified several properties and mailed Benjamin information on them.
Six months later, Benjamin met Katherine for lunch and told her that he did not have time to sift through information about real estate. Benjamin gave Katherine a blank check written on his account, and told her to buy the property that she felt was most suitable. His only condition was that Katherine purchase property with high income return. He stated, “I don’t care what the property is worth in 10 years. Richard needs the money now.”
Katherine purchased a four-unit apartment building located at 1022 Weaver Street for $200,000. Benjamin recorded the title to the Weaver Street property in his name. He transferred $200,000 from his savings account into his checking account to cover the purchase price. He left the remaining $50,000 trust money in his savings account. At the time of the purchase the fair market value of the Weaver Street property was $150,000. The neighborhood was revamped and the market value of the property steadily increased. Benjamin made income payments to Richard out of the rents the trust received from the Weaver Street property.
In 1999, Howard assigned his interest in the real estate contract to Larry. A few months later, Larry assigned his interest to Benjamin’s daughter, Susan. The contract called for monthly payments of $7500, and obligated Susan to make timely payments of taxes and insurance. She was required to keep the property in good repair. When the properties were sold to Susan, Benjamin did not personally inspect them. In addition, at that time, neither an official inspection nor appraisal was made on the properties.
When Susan purchased the properties, the Third Avenue and Turtle Lane properties were deteriorating. Susan made no efforts to improve the properties. In March 2000, city housing inspections began issuing notices of intent to “placard” the dwellings for housing violations. Five units of the Third Avenue property were deemed unfit for human habitation in July 2001; the entire building was cited for violations in April 2002. In September 2002, the Turtle Lane property was placarded as uninhabitable due to problems ranging from missing windows to leaking ceilings, exposed wiring and peeling paint. A storm blew the roof off of the Madison Street building, but it was never repaired. Benjamin received all of the notices, but took no action to address the problems.
Susan made the contract payments on time, but she failed to pay real estate taxes from 1999 to 2003. In April 2003, when Benjamin was notified of the tax delinquencies, he contacted Susan and she promised to pay the back taxes. As a result of Susan’s failure to pay the back taxes, the Third Avenue, Turtle Lane, and Madison Street properties were sold at a tax sale in September 2003. Benjamin received the notices of the tax sale and expiration of the right to redeem. Benjamin took no action to redeem the property and did not insist that Susan redeem the property.
Katherine advised Benjamin that, if he sold the Weaver Street property, he would have enough money to redeem and repair the three properties. Benjamin rejected Katherine’s advice because rents from the Weaver Street property were sufficient for him to pay Richard’s monthly income. However, in February of 2004, a highway construction project made the Weaver Street property undesirable as a rental property. The monthly rents received from the property decreased to $800. To cut back on expenses, Benjamin allowed the fire insurance policy on the building to lapse. In October 2004, the Weaver Street property was destroyed by fire. In addition to the total property loss, the city assessed the demolition costs against the trust.
In November 2004, Benjamin notified Richard that the trust’s assets were depleted, and issued him a final monthly payment of $2000. Benjamin sold the Weaver Street lot for $50,000. After paying off outstanding liens and expenses, he issued a lump sum payment to Richard of $1500 in March 2005. Richard died in November 2005.
Judy’s three children did not find out about the dissolution of the trust until after Richard’s death.
Judy’s children have contacted your firm seeking advice about their rights and remedies. Please analyze the relevant legal issues that arise from the facts.