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April 19, 2014

Trusting a Trustee-Is the Duty To Communicate with Beneficiaries Always Present?

The courts have long imposed a duty of communication on trustees. It is no secret that a trustee's and beneficiary's interests can be different. The trustee is responsible for trust administration, often with considerable latitude in making decisions with limited risk; the beneficiaries must acquiesce to the decisions of the trustee and bear the risks of a trustee's poor or misguided decisions and/or management. Thus, addressing the trustee's requirement to communicate and share information with beneficiaries is needed to ensure a basic sense of equality between the roles. In simplest terms, a communication requirement serves as a check on the trustee's power. Yet, trust laws have historically favored the intent of the settlor of a trust and the restrictions that he may place on it or the beneficiaries. 

The intricacies and exact obligations of the communication requirement are dictated by state law. There is little consistency from state to state on this issue. This is because state laws are usually piecemealed, with elements of common law and statutory provisions drawn from the Uniform Probate Code, the Uniform Trust Code, or the Restatements of Trusts.  

The Restatement (Second) of Trusts described the trustee's duty to furnish information as "a duty to the beneficiary to give him upon his request at reasonable times complete and accurate information as the nature and amount of his property" and to allow the beneficiary to review trust accounts and related documents.[1]

The Restatement (Third) of Trusts, however, changed the duty to notify beneficiaries of their status as beneficiaries and keep "fairly representative" beneficiaries informed of significant developments regarding the trust and its administration.[2] The Comments to this Restatement define "fairly representative" beneficiary as those who currently are entitled or eligible to receive income or principal from the trust and those who would receive income or principal if the current beneficiaries' interests or the trust terminated. Restatement (Third) obviously extended the right to information to remainder beneficiaries, but how far down the remainderman ladder?

Confused yet? There's more. Section 813 of the Uniform Trust Code also speaks of the duty of the trust. Under it, "a trustee shall keep the qualified beneficiaries of the trust reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests. Unless reasonable under the circumstances, a trustee shall promptly respond to a beneficiary's request for information related to the administration of the trust."[3]

And now it really gets complicated. What if the trust is revocable? Revocable trusts are created during one's lifetime (contrary to a "testamentary trust" that may be established in one's will). Such a trust may be changed or revoked any time prior to the death of the creator ("settlor") of the trust. Normally, the settlor will act as trustee of the trust until death or incapacity so that he can control the assets that are contributed to the trust. Thus, the assets of the trust and its beneficiaries are always subject to change.

Both the Restatement (Third) and Uniform Trust Code account for this conundrum by generally providing that a trustee has no duty to notify beneficiaries of trust administration for a revocable trust, unless the settlor is incapacitated. As long as the settlor is competent, the trust remains revocable. If the settlor is unable to change the trust due to his incapacity, then the trust is by definition, irrevocable.

That principle seems easy enough, but a 2009 Kentucky Supreme Court case caused great confusion. In JP Morgan Chase Bank, N.A., v. Longmeyer, the Court made no distinction between revocable and irrevocable trusts.[4]While the facts of the case are unique, the Longmeyer Court found that Kentucky trust law imposes a duty to keep beneficiaries of a trust reasonably informed of material facts affecting their interests, no matter what label the trust had. The Court was without power to distinguish between a revocable and irrevocable trust because the applicable Kentucky statute made no such distinction.

Thus, in Longmeyer, Bank One (trustee of a revocable trust) was found to have followed its fiduciary duty by informing charities that they were originally named as beneficiaries in revocable trust and later removed. This was a shocking decision because modern policy and practice clearly would have imposed no duty on the bank to inform a beneficiary who was named and subsequently removed from a revocable trust of such action. The fundamental benefit of having a revocable trust is so that the settlor may modify it during his lifetime as he sees fit, without having to communicate those changes to anyone.

Shortly after the ruling, Kentucky amended their statute, in effect overruling Longmeyer. Now, the statute provides, in part:

While a trust is revocable by the settlor and, in the reasonable belief of the trustee, the settlor has capacity to revoke the trust, the trustee's duties under this section [to inform and account to beneficiaries] extend only to the settlor.

KRS 386.715(4)(emphasis added).


[1] §173

[2] §82

[3] §813(a)

[4] 275 S.W.3d 697 (Ky. 2009).

© 2014 by McBrayer, McGinnis, Leslie & Kirkland, PLLC. All rights reserved.

About the Author

Terri R. Stallard, McBrayer Law Firm, Estate Planning Attorney
Member

Terri R. Stallard is a Member of McBrayer, McGinnis, Leslie & Kirkland, PLLC and practices from the Lexington and Louisville offices. Ms. Stallard concentrates her practice in the areas of estate planning, trust and estate administration, and charitable planning. She is licensed to practice law in Kentucky, Georgia, and Tennessee, and in the U.S. Tax Court. She received her B.A. from Transylvania University, her J.D. from the University of Louisville Louis D. Brandeis School of Law, and attended the LLM program in Taxation at Emory University School of Law.

Ms. Stallard has...

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