Standing to Object to Revocable Trust Transactions during Settlor’s Life
- 10-17-2012
09:29
AM - Author:
Often the settlor of a lifetime
revocable trust is the only person who has an interest in the income and
principal of the trust during his or her lifetime. Sometimes the settlor of
such a trust is the sole trustee or serves with another. In other
circumstances, there are trustees other than the settlor. In any of these
situations the trustees have a duty to comply with the directions of a settlor
who has capacity to act even though the direction of the settlor is contrary to
the terms of the trust or the trustees’ normal fiduciary duties. Restatement
of Trusts (3d), at §74. In such a context, the rights of the remainder
beneficiaries are exercisable by and subject to the control of the settlor (Restatement
of Trusts (3d), at §74(1)(b)). Thus the remainder persons have no interest
in the trust until the settlor dies and the trust becomes irrevocable. This is
because the settlor who holds a power of revocation generally has full
authority to revoke or amend the trust, and thus can properly extinguish or
modify the rights and interests of any or all of the remainder beneficiaries. This
comprehensive power to modify the terms of a trust enables the settlor, without
actually amending the trust, to bind all the beneficiaries to clarify a
particular action by the trustee or even consent and authorize certain acts of
the trustees for which they would otherwise clearly be liable for as a breach
of trust. Indeed it is generally held that a trustee of a revocable trust
during the life of the settlor/income beneficiary trustee has no obligation to
inform the remainder beneficiaries of the trust and/or its administration. In
this context, trust law conforms to most lay persons’ understanding of
revocable living trusts as will substitutes. They understand so long as they
are living and competent, trust assets remain essentially under their control
and that they may freely change their mind about the beneficiary’s interest. Contrast
at least one state’s case that created a duty for the trustee of the revocable
trust to keep the beneficiaries informed of the trust and its administration. JP Morgan Chase Bank NA v. Longmeyer,
275 S.W.3d 697 (Ky. 2009) [enhanced version available to lexis.com subscribers].
This case has been heavily criticized. See
Turney P. Berry et al., Longmeyer Exposes or Creates Uncertainty About Duty to Inform Remainder
Beneficiaries of a Revocable Trust, 35 ACTEC Journal 125 (2009).
In
New York, as a corollary of the concept that the remainder persons have no
interest in the trust until the settlor dies and the trust becomes irrevocable,
it has become well-settled law that the remainder persons lack standing to
object to any trust transactions that occurred during settlor’s life. Matter of Malasky, 290 A.D.2d
631, 736 N.Y.S.2d 151 (3d Dep’t 2002) [enhanced version available to lexis.com subscribers];
Matter of Sofi, 36 Misc. 3d 1223A,
2012 N.Y. Misc. LEXIS 3683 (Sur. Ct. Bronx County 2012) [enhanced version available to lexis.com subscribers];
Matter of Shay (Edna Block Revocable
Trust), 33 Misc. 3d 1230A, 941 N.Y.S.2d 541 (Sur. Ct. Bronx County 2011) [enhanced version available to lexis.com subscribers];
Matter of Central Hanover Bank
Trust Co., 176 Misc. 183, 26 N.Y.S.2d 924 (Sup. Ct. Spec. T. New York
County 1941) [enhanced version available to lexis.com subscribers],
aff’d, 263 A.D. 801, 32 N.Y.S.2d 128
(1st Dep’t) [enhanced version available to lexis.com subscribers],
aff’d, 288 N.Y. 608, 42 N.E.2d 610
(1942) [enhanced version available to lexis.com subscribers]. The only known exception to this rule is when the remainder person establishes
that a trustee, other than the settlor, did an improper act during settlor’s
life without the settlor’s approval or ratification. See Siegel v. Novack, 920
So. 2d 89 (Fla. Dist. Ct. App. 4th Dist. 2006) (applying New York Law) [enhanced version available to lexis.com subscribers].
The
Restatement of Trusts (3d) makes clear that the Malasky case is “consistent with reasonable settlor
expectations and reflective of modern authority….” See Restatement of Trusts (3d), § 74, cmt. (a)(1). Thus, it is controlling law that the
remainder beneficiaries of a revocable trust lack standing to object to post
death accountings for the period of trust administration during the lifetime of
the settlor-trustee.
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