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George F. Bearup, J.D. Senior Legal Trust Advisor

18-Sep-18

Former Trustee and The Duty to Deliver

Take-Away:  A trustee is required to take reasonable steps to locate trust property and to compel a former trustee to deliver trust property to the acting trustee. Much less clear under the Michigan Trust Code is the delivery of prior communications between the former trustee and the trust beneficiaries and between the former trustee and its legal counsel.

Background: Occasions exist where one trustee is asked to resign and is replaced by a successor trustee. The transfer of assets from a former trustee to a current trustee is expressly addressed in the Michigan Trust Code, along with the duties and responsibilities to implement that transfer of trust assets and the transition in trustees and their respective responsibilities. A quick summary of some of the  Michigan Trust Code provisions follows:

  • A trustee is required to take reasonable steps to locate trust property and to compel a former trustee or other person to deliver trust property to the successor trustee. [MCL 700.7813(1).]
  • Until the trust property is delivered to the successor trustee, or another person who is entitled to it, a trustee that has resigned or that has been removed continues to have the duties of a trustee and the powers necessary to protect the trust property. This continuing duty/power held by the former trustee comports with the basic duty imposed on all trustees to take reasonable steps to take control of and protect trust property. [MCL 700.7810.]
  • However, the former trustee must proceed expeditiously to deliver the trust property in the former trustee’s possession to the successor trustee. [MCL 700.7707(1) and (2).]
  • A resigning trustee, or a trustee that is being replaced by a successor trustee, may retain a reasonable reserve for the payment of debts, taxes, and expenses, including attorney fees and other expenses incidental to the allowance of the trustee’s accounts. [MCL 700.7813(2).]
  • A successor trustee is required to take reasonable steps to enforce claims of the trust and to defend claims against the trust. [MCL 700.7812.] This affirmative duty includes the duty on the part of the successor trustee to redress a breach of trust known to the successor trustee to have been committed by a predecessor trustee.
  • The Restatement (Second) of Trusts, Section 223, provides that a successor trustee is not liable for a breach by a predecessor trustee. But that same Restatement also notes that a successor trustee is liable for the breach of a predecessor trustee if the successor trustee knows, or should have known, of the earlier breach and fails to redress that breach.
  • Knowledge is defined in the Michigan Trust Code as both actual knowledge and constructive knowledge which is based upon notice as well as information of which the trustee as has reason to know based on all known facts and circumstances. [MCL 700.7104.]
  • Apparently there was concern when the Michigan Trust Code was written that adopting the language used in the Uniform Trust Code [Section 812]  would impose some type of affirmative due diligence duty of inquiry on the successor trustee to ascertain if an earlier breach of trust had been committed by the predecessor trustee, which in turn would either cause successor trustees decline to serve or would unnecessarily cause the trust to incur additional expense and consume limited trust resources in conducting such an investigation into the activities of the predecessor trustee. The Comments to the Michigan Trust Code suggest that a successor trustee must take reasonable steps to enforce a breach of trust of which the successor trustee has actual knowledge, despite the broader definition of knowledge that includes constructive knowledge as contemplated by  the Michigan Trust Code. [MCL 700.7707.]

Communications:

  • Trust Records: While there are extensive Michigan Trust Code provisions that deal with a trustee’s duty to communicate with trust beneficiaries, e.g. MCL 700.7814, there is not much in the Trust Code that addresses what records generated by a predecessor trustee in performing its duties, or in its prior communications with trust beneficiaries, must be conveyed along with the trust property to a successor trustee. More likely a probate court would compel the predecessor trustee to provide copies of all prior annual or periodic accountings required by statute, along with all notices that the Trust Code requires to be provided to trust beneficiaries under MCL 700.7814. The same can be said with regard to previous releases and waivers provided by trust beneficiaries to the predecessor trustee that were relied upon by that trustee in the administration of the trust, and any non-judicial settlement agreements that are authorized under MCL 700.7111 with regard to the predecessor trustee’s administration of the trust.
  • Trustee Communications: What if the successor trustee asks the predecessor trustee for copies of all prior communications between the predecessor trustee and its legal counsel with regard to the prior administration of the trust? Are copies of those communications trust property that the predecessor trustee is required to expeditiously deliver to the successor trustee? There is probably not much expectation of privacy or confidentiality with respect to a trustee’s communication with trust beneficiaries with regard to the trust and its administration, either the trust’s interpretation, or the trustee’s exercise of its discretion to make trust distributions. But it is an entirely separate matter to ask for copies of correspondence between the predecessor trustee and its legal counsel.

California Decision: This latter question was the subject of recent litigation in California when a trustee was removed on petition filed by trust beneficiaries, which in turn then activated an unusual exculpatory clause contained in the trust instrument.

  • Reported Case: Morgan v. Superior Court, 23 Cal. App. 5th 1026, 233 Cal. Rpt.3d 647 (4th 2018)
  • Exculpation Clause: The trust instrument included statutorily permitted exculpatory language that was authorized under California statutes. [Probate Code Section 16461, relying on Restatement 3d (Trusts) Section 96.], But this trust clause went even further to include exculpatory language that made all communications between the trustee and legal counsel ‘absolutely protected and free from any duty or right of disclosure to any successor trustee or any beneficiary and any duty to account.’
  • Trial Court: Despite this exculpation clause,  the Superior Court entered an order that required the former trustee to turn over to the successor trustee and its legal counsel, but not to the trust beneficiaries, specified communications between the former trustee and his legal counsel, to include invoices, billing statements and fee agreements. This court order was entered over the former trustee’s objection.
  • Appellate Court: On appeal the California Court of Appeals denied the former trustee’s petition to set aside the Superior Court order of document disclosure. That Court found that the exculpatory clause used in the trust instrument that purported to make absolute the privileged and confidential nature of all communications between the trustee and his legal counsel was against California public policy and void.
  • The Court also found that the trust instrument cannot prevent a successor trustee from obtaining the documents necessary to establish whether the predecessor trustee did indeed act with gross negligence, bad faith or reckless indifference, which comes close to the standard that is used in the Michigan Trust Code. [MCL 700.7908(1)(a) provides that a trustee exculpation clause is unenforceable to the extent that it attempts to relieve the trustee from liability for breach of trust committed in bad faith, or with reckless indifference to the purposes of the trust or the interests of the trust beneficiaries.]
  • With regard to the former trustee’s claim that the court ordered communications were protected by the attorney-client privilege, the Court found that position was not viable under California case law, which holds that a trustee cannot assert attorney-client privilege with regard to communications related to the trustee’s request for advice and guidance in administering the trust sought be a successor trustee. Moeller v. Superior Court 16 Cal. 4th 1124, 69 Cal.Rpt2d 317 (1997.)
  • The Court observed that if the predecessor trustee was concerned about possible personal liability for actions that he took as trustee, and he wanted to preserve his attorney-client privilege with respect to representation relate to possible personal liability, the trustee must seek separate legal counsel and pay for that legal counsel out of the trustee’s personal funds. That seems to be the practice followed in Michigan with regard to the attorney-client privilege in estate and trust administration, but unlike California, Michigan has chosen to not adopt a specific statute on how a trustee or any other fiduciary protects their attorney client privilege.

Conclusion:  Clearly a former trustee has a statutory duty to expeditiously transfer trust property to the successor trustee. Probably a probate court would expect that critical records created during the predecessor trustee’s administration of the trust would be included in what is considered to be trust property, particularly if it is important to assist the successor trustee in the on-going administration of the trust. Less clear, however, are other records generated in connection with trust administration, like correspondence with trust beneficiaries. Even less clear are communications between the predecessor trustee and its legal counsel. A few years ago the Probate and Estate Planning Council looked into a proposed statute that would clarify the scope of a trustee’s attorney-client privilege in connection with that trustee’s administration of a trust. That effort died due to either a lack of interest or due to strongly opposing positions on whether the trustee’s attorney-client privilege should even exist vis-à-vis trust beneficiaries.