Wills, Trusts & Estates Prof Blog

Should Trust Law's "Make-Whole" Relief Be Available Under ERISA § 502(A)(3)?

Susan Harthill (associate professor of law, Florida Coastal School of Law) has published her article entitled A Square Peg in a Round Hole: Whether Traditional Trust Law "Make-Whole" Relief is Available Under ERISA Section 502(A)(3), 61 Okla. L. Rev. 721 (2009).  

The following is taken from the introduction to the article:

In June 2008, the Supreme Court denied a petition for writ of certiorari in the case of Amschwand v. Spherion Corp. Amschwand involved a recurring remedial issue under ERISA-whether a participant or beneficiary in an employee welfare benefit plan is entitled to individualized monetary relief for losses caused by a fiduciary breach. The controversy stems from ERISA's detailed remedial scheme, which requires participants and beneficiaries to squeeze their request for relief into one of the statutorily defined categories. Participants and beneficiaries like the plaintiff in Amschwand are relegated to obtaining only “appropriate equitable relief” under ERISA section 502(a)(3), which the Supreme Court has interpreted so narrowly as to effectively preclude relief in many instances where a fiduciary breach has clearly caused a loss.  . . . 

Part I provides an overview of the Amschwand case, which frames the litigation posture in this sub-set of breach of duty to inform cases. Part II reviews the pertinent provisions of ERISA's regulatory scheme. Part III summarizes the major Supreme Court decisions that forced ERISA commentators and litigants into the pre-fusion trust world and examines how make-whole relief fits into this emerging jurisprudence. Parts IV and V line up the arguments for and against the availability of make-whole relief under ERISA section 502(a)(3) and analyze the viability of these competing views by digging more deeply into traditional trust law using the only tools available, the major trust law treatises and pre-fusion trust law cases that addressed individualized remedies for analogous fiduciary breaches. The Article first concludes that equity courts recognized two types of make-whole relief, one of which contemplated recovery to the trust and is echoed in ERISA section 502(a)(2) and one which contemplated recovery to the aggrieved beneficiary and is echoed in ERISA section 502(a)(3). The Article also concludes with the argument that make-whole relief's required harm to the trust corpus is irrelevant. The traditional trust law corpus finds its analogue in the present day employee welfare benefit plan context in the promised benefit, such as Mr. Amschwand's life insurance proceeds. Thus, to the extent that harm to the corpus is required, such harm exists in the loss or depreciation of the benefit. And, in any event, make-whole relief in the traditional trust law context was available even where there was no trust corpus, usually because it had ceased to exist, or there was no harm to the trust corpus itself. 

This Article concludes, therefore, that make-whole relief was an equitable remedy available to individual beneficiaries to redress breaches of fiduciary duty, even in the absence of harm to the trust corpus. Under the Supreme Court's precedents, such relief should be available to Mrs. Amschwand. 

California: Spendthrift Clause May Not Protect Trustee Who is Also Beneficiary and Breaches Fiduciary Duty

In Chatard v. Oveross, 2009 Cal. Slip Op. B213392 (Ct. App.--4th Dist., 2nd Div. Nov. 30, 2009), the California Court of Appeals held that the share of a trustee-beneficiary who breached her fiduciary duty could be reached by the other beneficiaries to satisfy the surcharge ordered for the breaches despite a spendthrift clause in the trust. The court held that this type of case was an exception to the rule that a spendthrift clause prevented creditors from attaching the beneficiary’s interest and the exception was endorsed by both the Restatement (Second) of Trusts § 257 and the Restatement (Third) of Trusts §59, comment a(2). Some of the breaches of fiduciary duty were using trust property to pay personal expenses, residing in trust property without paying rent, and paying herself excessive commissions.

Special thanks to Martin Beglieter (professor of law, Drake University) for providing this information.

Texas Trust Law -- Cases and Materials (2nd edition) released

The second edition of Texas Trust Law -- Cases and Materials by Gerry W. Beyer (Governor Preston Smith Regents Professor of Law, Texas Tech University School of Law) has just been released.

Here is a description of this book:

This book is designed for law school courses covering trusts. The cases, problems, and questions are drawn extensively from Texas materials and attempt to provide the student with a comprehensive understanding of how trust creation, administration, and enforcement are handled in Texas. Resulting trusts, constructive trusts, and trust accounts are also discussed.

Did the testator's conduct create a trust or debtor-creditor relationship?

The testator gave stock in a closely-held family corporation subject to the condition that the dividends on some of the stock be given to the testator’s sister.

Litigation ensued over the question of whether the gift created a trust for the benefit of the sister or a debtor-creditor relationship between the sister and the legatee.

Relying on the Restatement of Trusts, the trial court held and the intermediate appellate court affirmed that the gift created a trust, refusing to follow In re Pollock’s Estate, 159 A. 555 (1932), because the court did not have the benefit of the Restatements at the time of its decision.

The Supreme Court of Pennsylvania reversed, holding that the Restatements are not the law until the Supreme Court adopts them, and even under the Restatement of Trusts, the gift would not create a trust because the legatee was given the stock for his own use, not solely to distribute the dividends to the sister. The result is a debtor-creditor relationship.

Three of the seven justices joined in a concurrence which argued that the result would be different under Pennsylvania’s version of the Uniform Trust Code because of the Code’s reliance on the Restatement (Third) of Trusts.

In re Estate of Stephano, 981 A.2d 138 (Pa. 2009).

California case holds that response to petition for instructions violates no-contest clause

In Cook v. Cook, 99 Cal. Rptr. 3d 913 (Cal. Ct. App. 2009), the California intermediate appellate court held that a beneficiary’s pleading violated the no-contest clause in his parents’ trust when the pleading (which asserted that debts the beneficiary owed to his parents were unenforceable due to the statute of limitations) indirectly contested the validity of the trust and an amendment in an attempt to receive an increased share of the trust.

A writing by the settlors (construed by the court as an amendment as a matter of law) specifically directed that debts be deducted prior to trust distributions and listed the past loans the settlors had made to this beneficiary.

Enforceability of in terrrorem clause in trust -- Virginia style

The Supreme Court of Virginia held that a no-contest provision in a revocable trust “that constitutes part of a decedent’s testamentary estate plan” is subject to the same principles applied to such clauses in wills, in particular the principle that such clauses are to be strictly construed.

Keener v. Keener, 682 S.E.2d 545 (Va. 2009).

Petition to compel arbitration on question of the competency of the trustee/beneficiary does not violate no-contest clause

The Supreme Court of California reversed the intermediate appellate court by holding that a petition to compel arbitration in accordance with the terms of the trust on the question of a trustee/beneficiary’s competency to take various actions authorized by the trust terms did not violate a no-contest clause directed at actions seeking to “void, nullify, [or] set aside” or to change trust provisions.

The clause does not apply to proceedings to determine competency to exercise rights conferred by the trust terms.

Johnson v. Greenelsh, 217 P.3d 1194 (Calif. 2009).

Estate Planning Mistakes Revealed

Herbert E. Nass (attorney, New York, NY) has recently published his book entitled 101 Biggest Estate Planning Mistakes.

Here is a description of this book:

A trust and estate lawyer to the stars offers an engaging look at how to avoid numerous estate planning mistakes

In The 101 Biggest Estate Planning Mistakes, author Herbert Nass, an estate planner for some of today's most famous celebrities, offers an entertaining look at what not to do when setting up an estate plan, or administering an estate. By examining the mistakes made by some of the most well-known celebrities-from Bob Marley to John F. Kennedy, Sr. and Jr.-this book will guide readers toward making a successful estate plan and help them avoid many common pitfalls. Chapters cover such topics as: mistakes involving tangible personal property, real estate, executors and trustees, minors, or persons with disabilities; as well as disgruntled family and friends left behind.

• Puts estate planning in perspective through entertaining examples of mistakes celebrities have made in developing their own plans
• Taps into the voyeuristic interest we have in the lives of the rich and famous
• Offers an insider's look at many fascinating wills of the rich and famous

Given the emotional, financial, and legal issues that arise from the death of a loved one-and the substantial assets that are transferred from one generation to the next at this time-understanding estate planning is essential. This book will put you in a better position to make more informed estate planning decisions.

Kentucky: Uncertainty & the Longmeyer Decision

Turney P. Berry (attorney, Louisville, Kentucky), David M. English (professor of law, University of Missouri), & Dana G. Fitzsimons, Jr. (associate, Mcguire Woods) have published their article entitled Longmeyer Exposes (or Creates) Uncertainty About the Duty to Inform Remainder Beneficiaries of a Revocable Trust, 35 Am. C of Trust and Estate Counsel J. 125 (2009).

A synopsis of the article is below:

This article discusses the surprising Longmeyer decision, handed down by the Supreme Court of Kentucky earlier this year, in which a predecessor trustee was held to have a duty to give certain notifications of former remainder beneficiaries of a revocable trust.  The authors then examine how Longmeyer might have been decided in other states and under other statutory schemes.  The article concludes with observations concerning when certain notices to trust beneficiaries may be conductive to effective trust administration and suggestions to those who administer trusts on how to best comply with beneficiary notice requirements.

Charitable and Purpose Trusts in Delaware

Adam J. Hirsch (William and Catherine VanDercreek Professor of Law, Florida State University College of Law) has recently published his article entitled Delaware Unifies the Law of Charitable and Noncharitable Purpose Trusts, Est. Plan., Nov. 2009, at 13.

Below is the abstract of his article from the SSRN version of the article.

Whereas benefactors typically create trusts that provide for one or more individuals, some instead create trusts to accomplish or to promote purposes. Historically, trust law divided purpose trusts into a trio of categories, based on the sort of purpose the benefactor had in mind. Trusts for harmful or capricious purposes were void per se as contrary to public policy. Trusts for purposes beneficial to society were given effect in perpetuity as charitable trusts. Trusts for purposes neither harmful nor affirmatively useful - such as those to care for a grave or a pet animal - were not enforced as full-fledged trusts, but the intended trustee nevertheless had a power to carry them out, only within the period of the rule against perpetuities, as "honorary trusts." Statutory rules in many jurisdictions have tinkered with this framework, by making trusts for some or all noncharitable purposes fully enforceable, while continuing to limit their duration, depending on the purpose. New legislation in Delaware is still more innovative. The new Delaware statutes pare back the category of purposes contrary to public policy, while effectively amalgamating charitable and noncharitable purposes into a single category. Under the new legislation, trusts in Delaware can serve any purpose that is not genuinely harmful, and may do so in perpetuity, applying subsidiary rules that have traditionally been confined to charitable trusts. This Article details and critiques Delware's latest trust initiative, exploring the legislation's technical strengths and weaknesses, while also examining the legislation within the context of trust policy, and within the context of inter-jurisdictional competition for trust business.

Large Qualified Plan Benefit Processor Applies for Trust Charter in South Dakota

PenChecks, Inc., claimed to be the largest qualified plan benefit distribution processing organization in the nation, has applied for a trust charter in South Dakota. 

Currently, PenChecks serves primarily bank trustees and self-trustees by providing retirement plan benefit check processing and tax return preparation.  By establishing a trust company in South Dakota, PenChecks will be able to offer an affordable, all-in-one service in the state.

See Jerry Cooper, America’s Largest Qualified Plan Check Processor to Launch South Dakota Trust Company, The Trust Advisor Blog, Nov. 27, 2009. 

Trust Beneficiary as Owner for Income Tax Purposes

Jonathan G. Blattmachr (retired partner, Milbank, Tweed, Hadley & McCloy LLP), Mitchell M. Gans (professor of law, Hofstra University), & Alvina H. Lo have published their article entitled A Beneficiary as Trust Owner: Decoding Section 678, 35 Am. C of Trust and Estate Counsel J. 106 (2009).

A synopsis of the article is below:

This article explores under what circumstances a person who did not actually contribute property to a trust can be considered its "owner" for income tax purposes.  In particular, the article undertakes a detailed examination of whether a non-grantor holding a power to distribute trust property to himself or herself, subject to an "ascertainable standard," is properly treated as the trust's owner for income tax purposes and the extent to which a non-grantor who held an unrestricted power of withdrawal that has lapsed may continue to be treated, for income tax purposes, as the owner of the portion of the trust with respect to which the power lapsed.

Overview of Creating an Intentional Grantor Trust

Stephen R. Akers (managing director of a trust company), Jonathan G. Blattmachr (retired partner, Milbank, Tweed, Hadley & McCloy LLP), & F. Ladson Boyle (professor of law, University of South Carolina) have published their article entitled Creating Intentional Grantor Trusts, 44 Real Prop. Trust & Estate L. 208 (2009). 

A synopsis of the article is below:

The changes in the progressive tax structure over the past decades have greatly reduced the tax incentive to divert income from a taxpayer with substantial income to a trust or its beneficiaries.  As a result, although grantor trusts were once avoided, the "intentional grantor trust" has become a viable option that can, if properly structured, produce significant tax savings for many taxpayers.  In this Article, the authors present an overview of the mechanics of a grantor trust and provide guidance on how to structure an intentional grantor trust to produce tax savings and avoid the potential hazards that may arise. 

Special Needs Trusts for Children With Autism

The National Constitution Center is sponsoring an audio conference CLE entitled Special Needs Trusts: Financial Planning for Children with Autism on Dec. 8, 2009.

Here is a summary of the program:  

Planning for the long-term care of a child with autism or special needs can be quite challenging. Properly ensuring that your clients' assets protect special needs children for a lifetime is essential when drafting a Special Needs Trust. What are the appropriate legal guidelines for protecting trust assets & establishing long-term public benefits & insurance? Join us for this 60-minute audio program where you will discover: 

• Estate Planning for Children with Autism: Keys to Drafting SNTs 
• How to Preserve Eligibility for Essential Public Benefits & Insurance 
• Keys to Prepare & Plan a Budget for the Long-term Care of a Child 
• Strategies to Identify the Unique Benefits that Protect Children with Autism

Potentially Problematic Trust Funding the Milton Hershey School

Milton Hershey used his chocolate fortune to found a trust to benefit children. Robert Sitkoff (professor of law, Harvard) recently commented on this potentially problematic trust in a Wall Street Journal article:

• The trust funds the Milton Hershey School, which serves 1,700 underprivileged children.
• The school's endowment is worth $6.2 billion.
• Nearly half of the trust's assets are invested in the Hershey Company and lacking diversification.
• Hershey is expected to bid over $16 million to purchase Cadbury, a possibly dangerous move for the undiversified trust.
• The trust attempted to diversify in 2002, but efforts were prevented by Pennsylvania Legislature.

The article concludes as follows:

There are only a handful of universities with bigger endowments than the Hershey Trust, yet the Hershey School has something like 2,000 children. Why aren’t there more Hershey Schools? Why aren’t they helping more children? Instead of a larger, more secure corpus, the Trust has a smaller, undiversified portfolio – and this has been required of it by Pennsylvania lawmakers.

 Michael Corkery, Cadbury-Hershey: Too Much Risk for the Kid's?, WSJ, Nov. 24, 2009.

Illinois: Changes Promote Private Trust-Admin. Settlement Agreements

Lyman W. Welch (partner, Sidley Austin LLP) & Susan T. Bart (partner, Sidley Austin LLP) have published their article entitled New Law Promotes Private Trust-Administration Agreements, 97 Ill. Bar J. 562 (2009).  

The following is an excerpt taken from the beginning of the article:

Effective January 1, 2010, the Illinois Trusts and Trustees Act has been revised to significantly expand the use of nonjudicial settlement agreements in resolving disputes, ambiguities, and operational difficulties in trust administration.  The revision removes limitations of the original section 16.1 of the Act, which applied only if all "primary beneficiaries" were adults and not disabled.  Further, it greatly expands what can be properly addressed by nonjudicial settlement agreements.

Common SOL Problems For Estate Planners

Jerry Frank Jones (attorney, Austin) & Laurie Ratliff (attorney, Austin) have published their article entitled Statute of Limitations Issues in the Probate, Guardianship & Trust Context, The Advocate, Fall 2009, at 81.  

The following is an excerpt from the introduction of the article:

The focus of this paper is to highlight common statute of limitations issues in probate, guardianships and trusts.  Some time limits (such as filing a bond) are discussed, even though they are not technically statues of limitations.  They are mentioned because they may be important in monitoring the actions of a fiduciary to avoid his being (or to cause him to be) driven from his office. 

Jurisdiction and Venue for Will and Trust Disputes in Texas

M. Keith Branyon (partner, Jackson Walker LLP) has published his article entitled Jurisdiction and Venue for Will and Trust Disputes, The Advocate, Fall 2009, at 61. 

An excerpt from the article is below:

Jurisdiction and Venue in will and trust disputes are difficult areas of law, particularly due to the interplay between the Texas Probate Code ("TPC") and probate courts, on the one hand, and the Texas Trust Code ("TTC") and district courts, on the other hand.  Complicating the situation even more is the reality that courts sitting in probate differ in jurisdictional scope.  The purpose of this article is not to exhaustively cover all of the nooks and crannies of these areas of law.  Instead, the focus will be on general concepts and how courts have construed them.  As the analysis begins, it is important to remember that improper jurisdiction will always be fatal, but faulty venue is not.

Texas Wills & Trusts Case Law Survey

Gerry W. Beyer (Governor Preston E. Smith Regents Professor of Law, Texas Tech University School of Law) has recently posted on SSRN his article entitled Wills & Trusts, 62 SMU L. Rev. 1499 (2009).  Here is the abstract of his article:

This article discusses judicial developments relating to the Texas law of intestacy, wills, estate administration, trusts, and other estate planning matters during the Survey period of November 1, 2007, through October 31, 2008. The discussion of most cases includes a moral that is the important lesson to be learned from the case. By recognizing situations that have resulted in time consuming and costly litigation in the past, the reader may be able to reduce the likelihood of the same situations arising with his or her clients.

California: Beneficiary's Challenge of Debts Owed to Parents Violates No-Contest Clause

Despite recent legislation tightening the enforceability of no-contest clauses in California, the court in Cook v. Cook, 99 Cal. App. 3d 913, 2009 Cal. App. LEXIS 1595 (2009), held that a beneficiary’s pleading violated the no-contest clause in his parents’ trust when the pleading (which asserted that debts the beneficiary owed to his parents were unenforceable due to the statute of limitations) indirectly contested the validity of the trust and an amendment in an attempt to receive an increased share of the trust.

 

A writing by the grantors (construed by the court as an amendment as a matter of law) specifically directed that debts be deducted prior to trust distributions and listed the past loans to this beneficiary by the grantors.

 

Special thanks to Martin D. Begleiter (Professor of Law, Drake University) for providing this information.