Trustee’s On-Going Duty to Ascertain Beneficiary’s Status

Take-Away: Despite some blunt court decisions from the past, some courts may not view a fiduciary as having an ongoing duty to ascertain a beneficiary’s eligibility status under a trust. At best, the law remains unsettled as to a trustee’s continuing duty to follow up to ascertain a beneficiary’s entitlement to receive distributions from a trust.

Background: Many trusts are drafted which condition a beneficiary’s right to receive income, principal, or both,  on the status of the trust beneficiary. For example, an irrevocable trust could give to a surviving spouse the right to withdraw 5% of the trust assets each year so long as the surviving spouse remains unmarried. If the surviving spouse remarries, then the trust instrument could suspend the survivor’s withdrawal right and direct to the trustee to make distributions of trust income or principal to the surviving spouse only in the trustee’s sole and absolute discretion taking,  into consideration any other financial resources then available to the surviving spouse, including any other person’s legal duty to support the surviving spouse (such as his or her new spouse.) This type of condition imposed on the survivor’s withdrawal right would necessitate the trustee inquiring each year when the withdrawal right was to be exercised by the surviving spouse if he or she had remarried in order for the trustee to administer the trust instrument according to the trust’s express terms.

Cambridge Trust Case: Shortly after I started the practice of law (a long time ago!) one case quickly got the attention of the entire estate planning bar across the country. In National Academy of Science v. Cambridge Trust Co., 370 Mass. 303; 346 N.E. 2d 879 (1976) a corporate trustee was held liable for having made income distributions to the settlor’s surviving spouse, after the survivor had remarried, contrary to the terms of the trust instrument. The trustee’s judicially settled accountings that had shown the distributions to the surviving spouse were reopened because they were deemed by the presiding judge to be constructively or technically fraudulent. The trustee was ordered by the judge to restore to the trust corpus the amounts of the payments the trustee had made to the remarried surviving spouse, with interest. The court’s holding that the trustee’s accountings were fraudulent rested on its finding that the trustee “made no reasonable efforts to ascertain the true state of facts that it stated in the accounts it rendered.” The court felt that the trustee should have taken steps at least annually to ascertain the marital status, even if only by requiring a certificate of marital status signed by the surviving spouse. Which, no doubt, is why Greenleaf Trust places such an importance on regularly meeting with trust beneficiaries to understand their needs, and also to verify their continuing status as trust beneficiaries. But sometimes the conditions imposed by a trust instrument on a beneficiary’s right to receive distributions from a trust are not as readily determined as the trust beneficiary’s marital status. Recently courts are starting to, once again, revisit the question of a trustee’s continuing duty to make inquiry as to the beneficiary’s status which entitles the beneficiary to a trust distribution.

In re George Parsons Trust: [I apologize in advance for the long set of facts. Trust me,  I don’t make these things up, I just report them. No, they aren’t false facts.] In this case the Maine Supreme Judicial Court recently held that under the law of Maine “there is no legal basis… to support a continuing duty to monitor a person’s status”  as trust beneficiary. [In re George Parsons 1907 Trust, 2017 WL 3866418 (Me. 2017).] The Trust was created in 1907. It was to terminate in 2023, 21 years after the death of the last to die of a group of named individual beneficiaries. The present trust beneficiaries are Mr. Parson’s descendants, one of whom, Thomas,  is a non-marital child who was born to one of Mr. Parsons’ descendants,  but who was then adopted by the mother’s sister, who was also a descendant and thus a beneficiary of the Trust. At the birth mother’s death, the question arose who was entitled to the income that had been formerly paid to her: Thomas, her only child, or her sister, Thomas’ recently adoptive parent. That question was easily resolved when the adoptive parent (sister) assigned all of her rights to the income that had been paid to her deceased sister to her adoptive son Thomas. [There was no mention of whether the 1907 Trust instrument had a spendthrift provision which would have arguably prevented any assignment of the beneficial interest in the Trust.]

Over the next four years, Thomas received the income distributions from the Trust. In 1995 the co-trustees of the Trust began a separate legal proceeding for instructions from the probate court with regard  to whether an adopted person could be a beneficiary of the Trust. Thomas did not participate in those proceedings for instructions because the then acting co-trustees assured him that the proceedings for instructions would not affect the trust income that was then being paid to him. The probate court found in those proceedings for instructions that Mr. Parsons did not intend to include adopted persons as beneficiaries of the Trust, the result of which was that two adopted children who had been parties to that proceeding for instructions were determined to not be beneficiaries of the Trust. Needless to say, that probate court ruling got the co-trustees nervous about Thomas’s continuing right to receive income from the Parsons Trust. Was Thomas entitled to income as the child of his birth mother ( a descendant of Mr. Parsons), or did he receive income distributions only by reason of the assignment from his adoptive parent ( a sister of the deceased mother) when he arguably was not entitled to receive distributions as an adopted child of a descendant-beneficiary?)

In 1996 the co-trustees adopted a resolution that Thomas was a beneficiary of the Trust and not merely an assignee of his adoptive parent. Much later, in 2014, one of the co- trustees then initiated a declaratory action in court that Thomas was not a trust beneficiary because he was an adopted child,  and therefore Thomas was excluded as a beneficiary under the terms of the Parsons Trust as construed in the earlier probate court instruction proceedings. (It is unclear is why this co-trustee ‘flip-flopped’ having earlier having signed the resolution that Thomas was, in fact,  a trust beneficiary.) The probate court initially held for Thomas on the basis of statute of limitations had run- the claim arose in 1996 when the co-trustees adopted the resolution clarifying Thomas’s status as a trust beneficiary. But in holding for Thomas the probate court also found that as a matter of law the terms issue and descendants used in Mr. Parsons’ trust instrument excluded non-marital (adopted) children and descendants as trust beneficiaries.

Enter the Supreme Court’s Tribble Case: But the George Parsons Trust case did not end with the probate court finding the co-trustee’s claim was barred by the statute of limitations which ran 6 years after 1996. The co-trustee immediately moved to amend the probate court’s judgment on the basis of Tribble v. Edison International, 135 S. Ct. 1823 (2015) that had been decided the prior day. That U.S. Supreme Court decision held that “a new cause of action accrues each time a trustee breaches a continuing fiduciary duty owed to a beneficiary”, in Tribble case the trustee’s duty to monitor investments. With the Tribble pronouncement on a trustee’s continuing duty under fiduciary law, the probate court promptly reversed its decision for Thomas and granted the co-trustee summary judgment, finding that Thomas was not a trust beneficiary and that the claim that he was not had not been barred by the statute of limitations (the result of the Tribble Supreme Court decision.)

Yes, But, Says the Maine Supreme Court: The last step in this litigation saga was the appeal taken to the Maine Supreme Court, which reversed the probate judge and found that Thomas was a legitimate beneficiary of the Parsons Trust. The Maine Supreme Court, in a split decision, acknowledged that Tribble was based on a ‘good reason’ which is the ongoing duty of a trustee to monitor the performance of  the trust investments under the trustee’s control. But the Maine Court then went on to distinguish the application of Tribble to the pending question that pertained to the Parsons Trust. The Maine Supreme Court held that a trustee does not have a continuing duty to monitor the status of the trust beneficiaries because income is distributed to those beneficiaries periodically, in contrast to a trustee’s continuing and ever-present duty to competently monitor investments under the trustee’s control. Two dissenting Justices of the Maine Supreme Court felt that a trustee does have a continuing duty to be sure that distributions are being made in accordance with the terms of the Trust instrument. They felt this continuing duty was consistent with the trustee’s statutory duty to administer the Trust in accordance with the Trust’s terms. [See MCL 700.7801.] In these Justices’ view,  every distribution made by the trustee to someone who is not entitled to a distribution under the Trust instrument is a violation of that trustee’s fiduciary duty to administer the Trust according to its terms.

Conclusion: Some conditions on the eligibility to receive a distribution from a Trust are fairly easy to determine by a trustee, such as a beneficiary’s marital status. But then again, maybe even marital status may not be all that apparent, when you consider that 10 states still recognize common law marriages without the benefit of a marriage ceremony, a marriage license,  or a marriage certificate. Or, as in the Parsons Trust case, whether an adopted individual qualifies as an issue or descendant, considering that some states acknowledge what is called common law or equitable adoption, again without formal legal proceedings or certificates of adoption or amendments to birth certificates. If a trust instrument does not contain clear definitions of some of these critical terms or conditions upon which the entitlement to a trust distribution ‘swings, ’ the trustee will be forced to require periodic certifications from trust beneficiaries. It would probably be most helpful if the trust instrument: (i) expressly conditioned a trustee’s distribution to a beneficiary  on the beneficiary providing some certification, under oath, that the beneficiary satisfies all trust-imposed conditions or satisfies the trust’s definitions of an eligible beneficiary; and (ii) exonerate the trustee from  liability when it relies upon such an eligibility certification provided to it by the trust beneficiary. While this sounds like a lot of ‘busy work’ prior to making a trust distribution,  apparently a trustee’s continuing duties to inquire and verify eligibility remain alive and well long after the Cambridge Trust decision,  and not all probate courts may be as sympathetic as the Maine Supreme Court was in the George Parsons Trust.