Trustee’s Continuing Fiduciary Duties

Take-Away: Just because a trustee is removed, or resigns, does not mean that the trustee’s multiple fiduciary duties comes to an end. A trustee has continuing fiduciary responsibilities until the delivery of trust assets to the successor trustee. And on rare occasions, the departing trustee may continue to hold onto trust assets, despite the existence of a  cotrustee to whom the trust assets could be delivered.

Background: The Michigan Trust Code imposes several duties on a trustee and powers when the trustee is about to end its responsibilities under the trust instrument.

• Duties: One key duty imposed on the trustee to take reasonable steps to control and protect trust property. MCL 700.7810. Another equally important duty is the responsibility to take reasonable steps to locate trust property and to compel former trustees or other persons to deliver trust property to the trustee. MCL 700.7813(1). These broad duties do not end when the trustee resigns or is removed.
• Removal and Resignation: The Michigan Trust Code contains a specific provision that addresses a trustee’s continuing power (and responsibility) once it is removed or it resigns. Unless a cotrustee remains in office or the court otherwise orders, and until the trust property is delivered to a successor trustee or other person entitled to it, a trustee who has resigned or been removed has the duties of a trustee and the powers that are necessary to protect the trust property. This statute authorizes a trustee who has resigned or been removed to continue to exercise the powers of a trustee to the extent necessary to protect trust property unless either a cotrustee is then serving or the trustee is prohibited from acting by a court order. The trustee who has resigned or been removed must proceed expeditiously to deliver the trust property in the trustee’s possession to the cotrustee, successor trustee, or other person entitled to it. MCL 700.7707
• Reasonable Reserves: A resigning trustee or a trustee who is being replaced by a successor trustee may retain a reasonable reserve for the payment of debts, taxes and expenses, including attorney’s fees and other expenses incidental  to the allowance of the trustee’s accounts. MCL 700.7813(2).

Refusal to Deliver Trust Assets:  A case was recently reported in New York where a removed corporate trustee refused to deliver the trust assets to an individual cotrustee. The corporate trustee was sued by the individual cotrustee of converting the trust assets to its own use. In essence, the New York court found that withholding the delivery of trust assets was part of the removed trustee’s continuing duty to protect trust assets.

The facts were pretty straightforward. Merrill Lynch Trust was validly removed from as corporate trustee of the trust by the individual cotrustee who held that removal power under the trust instrument. The individual cotrustee filed a claim against Merrill Lynch for failing to adhere to its duties under New York’s trust laws and also for common law conversion ( by treating another’s assets as its own.) The individual cotrustee (the settlor’s son) announced his intention as the sole trustee of the trust to terminate the trust using his discretion and to deliver all of the trust’s assets to the lifetime beneficiary of the trust (the settlor’s spouse, the son’s mother.) The New York court held in favor of Merrill Lynch, noting the following:

• Interpreting the trust instrument, the settlor intended that a corporate trustee would serve at all times after his death.
• Merrill Lynch Trust did not convert the trust’s assets, since it never asserted title to the trust assets but only temporarily withheld delivery of them to the individual cotrustee until a corporate cotrustee was appointed to replace Merrill Lynch Trust.
• Merrill Lynch Trust acted prudently and consistent with its fiduciary duties when it refused to deliver the trust assets to the sole individual cotrustee, as that would be inconsistent with the terms of the trust.
• Merrill Lynch Trust had a continuing duty to the remainder beneficiaries of the trust; it fulfilled that duty when it refused to turn over the assets of the trust to the settlor’s son, the sole individual trustee of the trust.
• Merrill Lynch Trust’s refusal was prudent since the individual cotrustee refused to appoint a successor corporate trustee which was a power and responsibility given to the individual cotrustee, in light of his announced plan to distribute all remaining trust assets to his mother and thus terminate the trust.

Matter of Sinzheimier, 2917 NY Slip Op 31379 (U) Surrogate Court, NY County, 2017)

Conclusion: The New York decision reflects the importance of the trustee’s continuing duty to protect trust property, even after the trustee has been validly removed from that fiduciary position, and its continuing duty to protect trust beneficiaries even after removal. It also suggests that when an individual and corporate trustee are paired together to act as cotrustees under a trust instrument, the settlor’s intention whether there  always needs to be a corporate trustee serving should be ascertained.