Trustee’s Duty of Impartiality – When The Trustee Must Say “No”

Take-Away: Greenleaf Trust (GLT) is often selected to act as trustee of a trust. GLT must serve in an impartial manner with respect to all of the beneficiaries of the trust, that’s both current and remainder trust beneficiaries, a fact that is often overlooked by settlors and  individual co-trustees. The implications of acting impartially  can create conflicts for the trustee, particularly in dynasty-type trusts established for multiple family members over multiple generations.

Hypothetical Trust: Assume that grandfather (GF) creates an irrevocable trust for the benefit of his child (C) and his 3 grandchildren (GC) all of whom are over age 18. Grandfather funds the trust with $2.5 million. The trust names GLT and C as co-trustees. Grandmother (GM) creates an identical trust for the same child and grandchildren, funding that trust with another $2.5 million. Because the two trusts are identical and each contains a consolidation/merger provision, the two trusts are promptly merged into one trust to save administration expenses; thus, the merged trusts consist of $5.0 million in assets. This  trust gives the co-trustees the authority to distribute trust income or principal in the trustee’s discretion for the child’s and grandchildren’s health, education, support and maintenance. None of these distribution standard terms used in the trust instrument are further defined or refined. In sum, the co-trustees hold $5.0 million  for the benefit of C and the 3 GC for their health, education, support and maintenance. The trust is silent with regard to any  priority limitations, e.g. ‘ first meet the needs of C before distributions are made to C, ’ nor any financial restrictions, e.g. ‘taking into consideration any other financial resources then available to each beneficiary.’

Hypothetical Facts: GC comes to GLT and C and asks for a $50,000 distribution so that GC can attend the Cordon Bleu Culinary School in Paris. Co-trustee C abruptly roars,  ‘no way.’ Further embellishing his ‘no way’ response,  C says to GLT, ‘my child has attended the University of Colorado for the past three years now and has roughly one and a half years of classroom credit towards a 4 year degree. Her proposed study abroad is merely a pretext for a year’s vacation. Education means a four year course of study at an accredited US college or university, leading to a degree and then a job. My other two children graduated from Harvard and Yale in 4 years; this kid should do the same.’ GC responds after she hears her father’s reaction to her request: ‘My father just wants to save money. He claims the trust is for grandchildren, of whom there are none today. In reality, he wants the trust to rent a private jet, which he claims is for travel to his doctor in Naples, but what he really wants the jet for is to travel to fly to Scotland so he can play golf with his buddies . Dad seems to forget that GF and GM paid for my siblings college education at those Ivy League Schools, not this trust. And while I did not get a full three years of college behind me while at the UofC, it was because I had mono one year and had to miss a lot of classes. There is nothing in the trust instrument that says that education must be at a four year college or university, or that trade-schools are excluded. Therefore I renew my right to request for a trust distribution in order to attend school in Paris.”  Not surprisingly, the problem does not go away. C then enlists GF, now at an age that makes him a tad bit cranky albeit glib,  who shares his unvarnished opinion with GLT that ‘my intent was that education expenses under the trust instrument was for legitimate education, not some damn frolic and detour in France for a year drinking wine and smoking Gaulise cigarettes on the Left Bank.’ C then adds his two cents, ‘yah, and I’m a trust beneficiary too, and I resent the waste of trust assets sending my kid to Paris for a year to have fun, when all she eats if Raman Noodles anyway. Her desire to become an executive chef is nothing but a joke.’ GF adds: ‘I created the trust. I know what I intended, and I tell you,  don’t make the distribution to my granddaughter.’ C piles on: ‘As a beneficiary of the same trust, I think any distribution that enables my daughter to go to France is a needless dissipation of trust assets to which I strongly object as one of its beneficiaries.’ GM remains silent in all of these exchanges, although GF says that she thinks the same way that he does. Given this impasse,  GLT files a petition with the local probate court for instructions as to whether the scope of education  permits a distribution to enable a beneficiary to spend a year abroad attending the Parisian Cordon Bleu Culinary School in one of the most expensive cities in the world because she wants to become an executive chef.

Duty of Impartiality:  Trust beneficiary  is broadly defined by the Michigan Trust Code to include both persons who have a present or future beneficial interest in the trust, whether vested or contingent. MCL 700.7103(l)(i). Michigan’s Trust Code contains several references to a trustee’s duty to administer a trust in good faith, in accordance with the terms and purposes of the trust, and for the benefit of [all] the trust beneficiaries- the duty of care. MCL 700.7801.  As for the trustee’s duty of loyalty, the Trust Code simply says that ‘the trustee shall administer the trust  in the interests of the trust beneficiaries. MCL 700.7802(1). The Trust Code’s provision with regard to the trustee’s duty of impartiality is not particularly helpful: “The trustee shall act as would a prudent person in dealing with the property of another, including following the standards of the Michigan prudent investor rule.”

Trustee’s Role: What position must GLT take in the probate court hearing on what was intended by the trust’s use of the term education? GC will assert a broad construction of the term- it is not limited to 4 year colleges and universities and encompasses all types of higher education. C will assert a much narrower scope for the term education– alluding to the 4 year university education that his other to children received (but not from the trust.) GF may even be drafted by C to offer his opinions to the probate judge as well, but the probate judge might find GF’s opinions irrelevant; extrinsic evidence may not be considered to construe the trust if the trust arguably contains no ambiguity as to its use of the term education. [GF will get even more testy when he discovers that no one will listen to the guy who created and funded the trust.] The probate judge wants to hear GLT’s view, the only neutral party sitting in the courtroom. In fact, that is why the judge will want to hear from GLT through its attorney. How does GLT respond to the judge’s question: ‘as a professional trustee what do you think education means?’

Trustee’s Response: Technically GLT is required to not answer the probate judge’s direct question, difficult and uncomfortable as that position may be and feel with the judge staring down at the trust officer sitting at one of the tables. Both GLT and its attorney are under a fiduciary duty to act impartiality towards the interests of all trust beneficiaries, meaning C, GC, and perhaps unborn or more remote contingent remainder trust beneficiaries.  GLT’s duty to ‘stand mute’ is clearly expressed in a California decision which focused on the trustee’s common law fiduciary duty of impartiality:

“It has been long settled, not only in California but elsewhere, that a fiduciary (such as the trustee of a trust or the personal representative of a decedent’s estate) administering property on behalf of multiple beneficiaries must act impartially towards all of the beneficiaries and must not favor, or expend funds litigating, the interest of one beneficiary over another. The fiduciary may not take sides when a dispute arises as to the relative rights and interests of various beneficiaries, and may not work to advance or oppose the claim of any beneficiary.” Estate of Goulet v Goulet, 898 P.2d 425, 432 (Cal. 1995)

Accordingly GLT would be in error to support the positions of either C or GF in the court proceedings, even if it angers GF or C who may also be  clients apart from the trust, no more than would GLT  could advance GC’s interpretation of education.

Hopefully C would have hired his own attorney, since he could not advance his own interpretation of the trust instrument in his role as co-trustee and expect the trustee’s attorney to advance his interpretation over that of GC. Nor could C use trust assets to hire that independent attorney who would advance his interpretation of the trust.

Unfortunately many probate judges overlook, or conveniently forget,  the trustee’s duty of impartiality when the judge poses a ‘what do you think it means?’ question to the lawyer who represents the independent trustee in the court proceedings. Needless to say, the trustee’s duty to not take a side will also irritate the co-trustee, or the settlor, both of whom will come away from the court hearing accusing the professional trustee of being spineless. Neither will be aware of, nor particularly interested in,  the trustee’s delicate balance of responsibility to all trust beneficiaries to carry out its duty of impartiality.

One ugly example of where a court found a professional trustee to have stepped over the line with regard to its duty of impartiality involved our friends at Northern Trust. In that case Northern Trust advocated for a construction of a trust instrument that was unfavorable to one beneficiary. The court held that while it was proper for Northern Trust to seek the court’s construction of the trust instrument by filing a petition to seek its construction and that it was acceptable for the trustee to gather and to present the information necessary for the probate judge to interpret the trust, nonetheless Northern Trust breached its duty of impartiality and it exceeded its duty as trustee when it argued for an interpretation that was adverse to the beneficiary. More to the point, in disallowing Northern Trust’s petition for legal fees and costs that it had incurred in the court proceedings that were related to what the judgedescribed as  inappropriate activity, the court said:

“[g]enerally the costs of litigation to construe a trust in which there are adverse claims are paid by the trust estate… where a trustee breaches its duty to administer the trust according to its terms and performs in a manner which favors one beneficiary over another, the trustee is not entitled to attorney fees and costs even though the breach is technical in nature, done in good faith and causes no harm.” Northern Trust Company v Heuer, 560 N.E.2d 961 (Ill. App. Ct. 1990) In that same Northern Trust decision the court noted ‘…it is preferable that we reiterate established precedent and foster every incentive for a trustee to adhere to its well-established duty of impartiality.” Pages 964-965

Seldom will a consent/waiver by the trust beneficiaries whose interests are adverse protect the trustee. Even in the case where there is a purported waiver or consent signed by the current beneficiaries which empower  the independent trustee to take a formal position to resolve an ambiguity, that position might have a negative impact on trust beneficiaries who are not yet alive, e.g. unborn great-grandchildren of the settlor of a dynasty trust. How does the trustee act impartially with regard to their interest in the trust when it takes a position that favors a current beneficiary over the interests of more remote remainder beneficiaries?

If the hypothetical case played itself out in a Michigan court it is hard to anticipate the outcome.

• Probably the probate court would ignore the opinions of the settlor-GF unless there were truly some ambiguous words used in the trust instrument since those opinions would be extrinsic evidence; [a material purpose clause in the trust might help shed light on what the settlor’s intended, though;]
• If GC had jumped the gun and filed the petition for breach of trust against GLT and C for not making the requested education distribution, GLT’s defense of the terms of the trust would be consistent with its duty to administer the trust in accordance with its terms and purposes. A claim that the Trustee acted with partiality or hostility toward the beneficiary simply by seeking to uphold the terms of the trust that the beneficiary did not like would be viewed as without merit by the court. But C-trustee’s vocal response to his child’s request might precipitate some legitimate concerns by the probate judge that the co-trustee was partial or hostile to the request, and thus implicate GLT if it did not formally distance itself from its co-trustee’s reasoning and assertions. Pollack v Barron (In re Gerald l. Pollack Trust) 309 Mich App 125 (2015);
• If the facts were that the Cordon Bleu Culinary School did not confer any degrees per se, then maybe it is not an educational institution, and thus any distribution to attend ‘school’ might be an abuse of the distribution standard in the trust. A recent comparable decision was a trust that  was established for the ‘current beneficiary’s health, support or maintenance.’ At issue was a trust distribution to a church scholarship fund and to the current beneficiary’s orphaned grandchildren. The claim was that these trust distributions benefited the current beneficiary’s mental health. The Court of Appeals found that: “care of a beneficiary’s mental health should include such things as psychological exams and treatment, not anything that makes a person ‘feel good.’” Thus, the trust distributions were found to be a breach of the trustee’s fiduciary duty to administer the trust for the benefit of the beneficiaries of the trust and, somewhat of a surprise, also a violation of the trustee’s duty to ’control and protect trust property’ as imposed by MCL 700.7810. Thus, any distribution contrary to the trust’s purpose, or outside the distribution limitations,  arguably is a failure to protect the assets held in trust, exposing  the trustee to surcharge.
• Suppose that C was the one who wanted to attend the cooking school in Paris, claiming it was for his education, something GF never contemplated for his 55 year old son. C argues that if the distribution is denied, then C would simply spend his own money, leaving less for GC on C’s death. Consequently, C reasons, why not have the trust grant the distribution request at this time, ‘as its all really the family’s money anyway, right?’  Much to the surprise of many families,  court refuse to use a different judicial standard of review when a trust is limited to distributions to family members, contrary to a ‘let’s just look the other way because we are all in the same family’ approach to trust administration in family settings.  Even though the trust involves a family situation that does not excuse the trustee for playing ‘fast and loose’ with the trust’s administration or any departure from its distribution standard. In re Vogel, 2010 LEXIS (May 27, 2010)

Conclusion: The point in all this is that with the increasing multiple dynasty trusts,  and the use of trust beneficiaries to serve as a co-trustee with GLT, or perhaps with the qualified dispositions trusts now permitted in Michigan, as the independent trustee  we will need to spend  more time on the ‘front-end’ of the new trust relationship explaining what the trustee’s duty of impartiality towards all trust beneficiaries actually means, and what behaviors that duty requires of the trustee. Several ‘what if..?’ scenarios will need to be played out to fully explain GLT’s role and its inability to take an advocacy role in the event that its duty of impartiality comes into question, or the need for its co-trustee/beneficiary to hire his/her own legal counsel if the dispute implicates the competing interests of two or more beneficiaries. Both the settlor and a co-trustee who is also a trust beneficiary need to be reminded of this duty of impartiality, in writing, and how GLT will respond in situations where beneficiaries quarrel over the interpretation of the trust- that it is not spineless, but faithful to its duty of impartiality. It would also be wise to pass along to the settlor and beneficiaries the viewpoint taken by courts in family situations, which is that a trustee may not ‘play fast and loose’ with trust assets or chose to ignore trust provisions just because family is involved.