Overview

Our client was the trustee of a trust that had been created by his sister and her husband, both of whom had recently died. The couple had gone to a document preparation service to prepare their trust, rather than utilizing the services of a qualified estate planning attorney. The language of the document was unclear about how the proceeds from the sale of the trust’s primary asset – the decedent’s home – should be distributed. The instrument simply stated that the home should pass to the couple’s children.


While the language may seem unambiguous on its face, it was possible to interpret it in a variety of ways, since the decedents did not have any children together but had three children each from a previous marriage. Before the decedents had become incapacitated, the trustee had spoken to them about whom they wanted to inherit their home.

Since the home had been the separate property of the wife before she got remarried, the couple had informed our client that they wanted their home to pass to the wife’s three children upon their death. The husband’s three children, however, disagreed. Since the trust did not specify to which children the home should pass, they believed that the proceeds from the sale of the home should be divided equally among all the children.

The trustee came to Keystone for help interpreting the trust. Keystone’s lawyers thought the trustee’s best route of action would be to file a Petition for Instructions with the court so that the court could issue an order clarifying the ambiguity.

TELL US WHAT HAPPENED. WE’LL BE IN TOUCH SOON.
Petitions for Instructions

If there is ambiguity in a trust, trustees should generally refrain from attempting to resolve it themselves, even if they claim to know the settlor’s original intent. Our client had spoken to the decedents when they were competent about their intention to leave the home to wife’s children.

Nevertheless, because that could not be surmised from the language of the trust, Keystone’s probate attorneys thought it would be a good idea to file a Petition for Instructions asking the court to clarify the ambiguity by ordering the trustee to distribute the property to her sister’s children.

When reviewing Petitions for Instructions, the court will generally look to other parts of the trust for context on how to interpret the ambiguous portion of the trust. If it cannot find any clues, it will turn to extrinsic evidence to make a determination. In some instances, the problematic portion of a trust may be so unclear that it fails completely, so the asset or assets in question pass through the estate administration process.

After reviewing our client’s Petition for Instructions, the court called for something known as a Mandatory Settlement Conference, which required the attendance of all interested parties. Apart from recounting his conversation with the decedents regarding their intentions for who should receive their home upon their death, our client abstained from participating in the litigation, including attending the conference, because doing so could have been deemed a breach of his fiduciary duties.

A Trustee’s Fiduciary Duties

The husband’s children were accusing our client, the trustee, of impartiality, arguing that our client was favoring his sister’s children. If true, our client’s actions would have been considered a breach of his fiduciary duties. As fiduciaries, trustees are obligated to always act in the best interest of the trust and its beneficiaries, and they have a duty to treat all beneficiaries equally. This duty of impartiality can get sticky when a trustee is also a beneficiary and is expected to never place their own interests above those of the other beneficiaries.

While our client’s claim of having spoken to the decedents about their intentions regarding the disposition of their home might have caused the husband’s children to be suspicious, our client had no reason to engage in misconduct since he had not been named as a beneficiary of the trust. He nevertheless, deferred to the court for instructions on how to distribute the property. He also upheld his fiduciary duties by not participating in litigation (other than filing the Petition for Instructions to start the proceeding), allowing the heirs to litigate the matter and reach an agreement among themselves.

The client had acted prudently before hiring Keystone, opening one bank account to hold the proceeds from the sale of the home and another bank account for the residue (i.e., the trust assets that were not assigned to anyone, not accounted for, or were failed gifts, etc.). These separate bank accounts streamlined his duties down the road when he had to distribute funds to beneficiaries from the bank account containing the sale proceeds and utilize the funds in the residue account to cover expenses incurred over the course of administration.

Breach of fiduciary duty is a serious form of trustee misconduct, so it is important for trustees to avoid it all costs. If it is successfully proven that a trustee breached their fiduciary duties, they could be suspended or removed, and surcharged. Depending on the gravity of the misconduct, they may also be held liable for covering the plaintiff’s attorney’s fees and costs. Trustees should strongly consider hiring a trustee lawyer to help guide them through the trust administration process. This way, they can rest assured that they are fulfilling their duties ethically and diligently.

An In-Depth Look Into Keystone’s Ambiguous Trust Case

Online estate planning services for preparing wills and trusts – whether they are a do-it-yourself cloud software solution or an in-person document preparation company – can seem like an inexpensive and efficient alternative to retaining an estate planning attorney to draft documents.

However, using these services can have significant drawbacks — they typically employ a cookie cutter, one-size-fits-all approach to preparing estate planning documents that does not take into account the varying nature of people’s estates and trusts. The documents created by document preparers too often present ambiguities, which not only can cause trust disputes or estate disputes among interested parties, but can also lead to litigation that can drain an estate or trust of its resources before any distributions are even made.

In the case of the trust in question, the wording may not have been problematic had the decedents only had one set of biological children between them, but because each of the decedents had three children from a prior marriage, the decedents were not specific enough in their declaration that the home should go to their children, if their intention had been for the home to go specifically to the wife’s children.

Results

For the most part, our client’s interpretation of the trust instrument carried weight as the settlement reached by the beneficiaries called for the majority of the proceeds from the sale of the home to be distributed to the sister’s children. The husband’s three children received a portion of the proceeds, but it was a fraction of what they would have received had the proceeds been divided equally among the six children. The residue account covered trustee compensation, the expenses related to the court hearing, and all other expenses incurred over the course of administration.

 

With Keystone’s support and guidance, the trustee managed to uphold the final wishes of the decedents, protect himself against liabilities, and receive the compensation to which he was entitled for his work administering the trust.

“They Handled a Tough Situation”

Had our client opted to dispose of trust assets based on his previous conversation with the decedents, he could have found himself entangled in a court battle with the husband’s children, who could have called for him to be removed and surcharged for breach of fiduciary duty. Our client paid for our legal services using trust funds. However, if the husband’s children had successfully proven that he breached his duties, the surcharge would have likely come out of his own pocket.

As I began to manage my sister’s and her husband’s living trust, I knew I would need a qualified firm with the proper trust and probate credentials…They handled a tough situation, marshaled it through the courts and beneficiary negotiations, and most important, protected me against liability. At all times, I was kept apprised of what was going on… Look no further. This is the firm you want.

The Takeaway

One of the primary takeaways from this case should be for people who are working on executing their estate plans to not cut any corners. While document preparation services may bring savings now, they could potentially cost beneficiaries their inheritances if ambiguous language or errors require them to litigate.

It is also important for trustees to remember to tread carefully, just as our client did. They should never assume that they know what the settlor wanted. If the trust does not clearly state which beneficiary should receive a particular asset, or if the beneficiaries have conflicting interpretations of a trust term, the trustee should bring the matter to a lawyer, who can then, if necessary, bring the matter to the court.

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The duties of a trustee are complex. If you have a choice, you should not go about them alone. By having our team of experienced trustee lawyers on your side, you can rest assured that your job will get done right. Regardless of whether you need help interpreting a trust or preparing trust accountings, our trust attorneys are standing by to help. Call us for a free consultation today!