Texas Courts Conflict On Whether Contingent Remainder Beneficiaries Have Standing To Assert Claims Regarding Trust Administration
Texas has recently had two opinions that seemingly take opposite views on whether a contingent remainder beneficiary has standing to sue a trustee for trust administration issue.
In In re Estate of Little, a settlor of a revocable trust withdrew trust assets and deposited them into an account with rights of survivorship with one child as the beneficiary. No. 05-18-00704-CV, 2019 Tex. App. LEXIS 7355 (Tex. App.—Dallas August 20, 2019, pet. denied). His other children, who were beneficiaries of the revocable trust, sued the non-settlor co-trustee for allowing that to happen. The trial court granted summary judgment for the co-trustee, and the beneficiaries appealed.
The court of appeals first held that the beneficiaries had standing to bring their claims. The co-trustee argued that as contingent beneficiaries of a revocable trust, the beneficiaries had no standing to complain about what the settlor chose to do with his money during his lifetime. The court of appeals disagreed with this argument:
[Texas Property Code] Section 115 gives a district court jurisdiction over proceedings against a trustee or concerning a trust. Under the property code, “any interested person may bring an action under Section 115.001 . . . .” Tex. Prop. Code §115.011(a). An “interested person” is defined as “a trustee, beneficiary, or any person having an interest in or claim against the trust or any person who is affected by the administration of the trust.” Tex. Prop. Code § 111.004(7). A “beneficiary” is “a person for whose benefit property is held in trust, regardless of the nature of the interest.” Id. at 111.004(2). And an “interest” is “any interest, whether legal or equitable or both, present or future, vested or contingent, defeasible or indefeasible.” Id. §111.004(6). Mary Ann and Jay are trust beneficiaries, assignees of the trustee’s claims, and interested persons as defined by the property code. Therefore, regardless of their ability to succeed on the merits, they have standing to assert their claims against Dan as co-trustee when the transactions occurred.
Regarding the merits of the beneficiaries’ claims, the court held that the breach of fiduciary duty claims failed because the funds in dispute were not trust funds, but from other sources. Id. Moreover, the court held that the settlor had the authority to remove assets from a revocable trust: “Moreover, the Trust was a revocable trust. Father as settlor and co-trustee had the power to revoke the Trust and was the sole beneficiary of the Trust while alive. Father was free to fund the Trust and dispose of its property as he saw fit.” Id.
The court then turned the co-trustee’s duties:
Furthermore, Dan, as co-trustee of a revocable trust, owed his fiduciary duty to Father while Father was alive. The general rule is that: “[T]he duties of a trustee of a revocable trust are owed exclusively to the settlor . . . the rights of non-settlor beneficiaries are generally subject to the control of the settlor. Thus, as a general rule, the trustee cannot be held to account by other beneficiaries for its administration of a revocable trust during the settlor’s lifetime.”
Dan was co-trustee of the Trust during Father’s lifetime and ceased being a trustee when Father died. There is no evidence that he misappropriated or did anything with Trust property during his tenure as trustee. The uncontroverted evidence is that, while a co-trustee, Dan also made no decisions about the expenditure of funds from the survivorship account, nor did he claim entitlement to any funds in that account. Instead, he helped Father pay his living expenses from the survivorship account as Father directed. It was not until Father died and Dan was no longer a trustee that he claimed the $216,000 in the account for which he was the named the surviving party. Sums remaining in a survivorship account after the death of one of the parties belong to the surviving party.
Id. Accordingly, the court of appeals affirmed the summary judgment for the co-trustee.
In Berry v. Berry, a son and his daughter sued his mother and her brothers regarding a trust and family partnership regarding the operation of a ranch and family business. No. 13-18-00169-CV, 2020 Tex. App. LEXIS 1884 (Tex. App.—Corpus Christi March 5, 2020, no pet. history). The defendants asserted that the plaintiffs did not have standing to assert their claims.
The court of appeals described a person’s standing under the Trust Code:
The trust code further provides that “[a]ny interested person may bring an action under Section 115.001 of this Act.” An “interested person” as defined by the trust code is: “a trustee, beneficiary, or any other person having an interest in or a claim against the trust or any person who is affected by the administration of the trust. Whether a person, excluding a trustee or named beneficiary, is an interested person may vary from time to time and must be determined according to the particular purposes of and matter involved in any proceeding.” See id. § 111.004(7). Necessary parties to an action are those beneficiaries of the trust “designated by name,” “a person who is actually receiving distributions from the trust estate at the time the action is filed,” and the trustee serving at the time the action is filed. Id. § 115.011(b)(2), (3), (4).
Id. The court held that as a present beneficiary of the trust, that the son had standing under the trust code.
The defendants alleged that the son’s daughter, as a contingent remainder beneficiary, did not have standing to assert claims regarding the administration of the trust. The court of appeals noted that the Trust Code defined “Interest” as “any interest, whether legal or equitable or both, present or future, vested or contingent, defeasible or indefeasible.” Id. The court noted that the daughter’s interest in the trust is that of an unnamed contingent beneficiary and as a demand beneficiary who may receive a portion of the trust income upon demand on the trustee as set forth in the trust document. Defendants argued that Texas Property Code Section 115.011, which provides that contingent beneficiaries named as a class are not necessary parties to an action, means that the son’s daughter does not have the right to bring an action against the trustee. The court of appeals noted a case from 1942 that stated: “[a]n expectant heir has no present interest or right in property that he may subsequently inherit and consequently he cannot maintain a suit for the enforcement or adjudication of a right in the property.” Id. The court agreed with this statement and held that “the trial court properly granted the plea to the jurisdiction against Chelsea and dismissed her from the suit.”
The trial court also found that the son as co-trustee had standing to sue his co-trustees but did not have standing to sue derivatively for the family ranch of which the trust was a limited partner or as a trustee to sue non-co-trustee third-parties. The court of appeals noted that, as a general rule, limited partners, do not have the right to sue on behalf of a limited partnership. “In addition, the other limited partners have released their claims against such third parties and called on Kenneth to drop his claims in a derivative capacity. Based upon the plain language of the statute, Kenneth may not maintain those derivative claims. See § 153.402. Under these circumstances, the trial court properly held that Kenneth did not have standing as a co-trustee to sue the third parties on behalf of the Trust and the release rendered most of his claims moot.” Id. (citing In re XTO Energy Inc., 471 S.W.3d 126, 130 (Tex. App.—Dallas 2015, no pet.)).
Interesting Note: The Corpus Christi Court’s holding that the daughter did not have standing to assert complaints about the trustees administration of the trust because she was solely a contingent remainder beneficiary seems wrong under the plain terms of the statutes. Texas Property Code Section 115.001 provides:
[A] district court has original and exclusive jurisdiction over all proceedings by or against a trustee and all proceedings concerning trusts, including proceedings to: (1) construe a trust instrument; (2) determine the law applicable to a trust instrument; (3) appoint or remove a trustee; (4) determine the powers, responsibilities, duties, and liability of a trustee; (5) ascertain beneficiaries; (6) make determinations of fact affecting the administration, distribution, or duration of a trust; (7) determine a question arising in the administration or distribution of a trust; (8) relieve a trustee from any or all of the duties, limitations, and restrictions otherwise existing under the terms of the trust instrument or of this subtitle; (9) require an accounting by a trustee, review trustee fees, and settle interim or final accounts; and (10) surcharge a trustee.
Tex. Prop. Code 115.001. This provision clearly allows parties to assert claims that a trustee has mismanaged a trust. Under the property code, “any interested person may bring an action under Section 115.001 . . . .” Tex. Prop. Code §115.011(a). The Property Code defines an “interested person” as “a trustee, beneficiary, or any person having an interest in or claim against the trust or any person who is affected by the administration of the trust.” Tex. Prop. Code § 111.004(7). A “beneficiary” is “a person for whose benefit property is held in trust, regardless of the nature of the interest.” Id. at 111.004(2). An “interest” is “any interest, whether legal or equitable or both, present or future, vested or contingent, defeasible or indefeasible.” Id. §111.004(6). Therefore, under the plain terms of the Texas Property Code, contingent remainder beneficiaries generally have standing to bring trust administration claims.
The Corpus Christi Court also seems to confuse the concept of a necessary party under the Texas Property Code and someone who has standing to bring a claim. Even though a party is not a necessary party under Section 115.011, he, she, or it may still have standing to bring a claim under Section 115.001. Courts in other jurisdictions conflict on this important issue. Apparently, there is confusion in Texas as well.