Many people hear the word “probate” and assume that this area of law deals only with wills and Executors. In fact, matters in probate often involve a wide variety of important documents and the individuals appointed under them to serve in many different representative capacities. Trusts and trustees are a very common example.
Trusts are typically described as the counterpart, or alternative, to an individual’s Last Will and Testament. In many ways, the two documents can work exactly the same. Both documents can be used to transfer a person’s property at their death. Both documents can appoint an individual to responsibly manage a decedent’s assets for the benefit of someone else. Both documents can even be interpreted by the court when the language within them is unclear. But for all of their similarities in appearance and function, wills and trusts can be wildly different.
One of the most basic misconceptions we encounter regarding trusts is the notion that the Trust is an entity – a legal fiction that comes to life the moment that a person signs one. The common mistake is that “the Trust” can do things, such as own and sell property, incur and pay debts and even prosecute and defend lawsuits. This simply is not true.
A trust is often best described as a relationship, and the word “trust” does a pretty good job of explaining how that relationship should work. When a person creates a trust,the title to whatever property is going to be held “in trust” is divided into two pieces. Legal title is held by the Trustee. He or she is the named owner of the land, house, car, boat, and so on. Beneficial or equitable title is held by the beneficiaries of the trust. These are the people for whose benefit the Trustee owns the property. They are also the people to whom the Trustee owes certain and specific legal obligations.
The idea is that the Trustee will hold the trust property for the benefit of the beneficiaries, with obligations and instructions that come from Texas law or the trust instrument itself. Looking at it this way, it makes sense to recognize that the trust itself cannot do anything. Legal rights and obligations exist on both sides of the relationship between Trustees and beneficiaries, and this relationship can often become the source of disputes and litigation.
Why Would a Person Use a Trust?
There are a number of reasons that a person might use a trust rather than make an outright gift of property or leave property outright through a Last Will and Testament. Some basic and common reasons that a trust might be used include:
- Extended “dead-hand” control of assets by the testator
- Matching the receipt of assets with the accomplishment of specific objectives by the beneficiaries (e.g. graduation from universities)
- Planning for disabled or potentially disabled dependents
- Avoidance of formal probate procedures
- Avoidance of probate procedures when property is owned in multiple states and thus susceptible to different probate laws
- Ensuring responsible management for the “irresponsible” beneficiary
- Anticipating future disharmony among the family (e.g. children that divorce or spouses that remarry)
- Deferral or avoidance of state or federal taxation
Basic Terminology and Rules
In many ways, trusts are a lot like snowflakes. One is hardly ever just like another, and the fact that they can be tailored and customized so specifically is one of their primary advantages. But for all of their differences, there are some basics that apply to every trust in Texas. The key terms used throughout trusts are largely universal, and we have the benefit of knowing where to look when a question about the Trust comes up.
- Beneficiary – Any person for whose benefit or partial benefit the assets are held in trust. Broadly speaking, a beneficiary might include a person presently receiving trust property, expected to receive trust property in the future (a “remainderman”) or an individual that only might receive trust property if some specific event happens in the future.
- Trustee – The Trustee, or fiduciary, is the person that holds legal title to the property held in trust. Their “fiduciary duties” broadly refers to those duties owed by the Trustee to the beneficiary and imposed by statute, common law or the trust instrument itself.
- Settlor – The person that created the trust to begin with. This person might be referred to by a variety of names, including Grantor, Settlor, Testator or Trustor. The assets that they use to create the trust become the “corpus,” or principal property of the trust.
In terms of guidance, there are a number of sources of authority that every Trustee must look to when administering their trust. Trust law is primarily a result of specific state law, and the sources of guidance for the Trustee may vary greatly from one jurisdiction to another. In Texas, the most common sources of a Trustee’s duties that will determine if he or she is acting appropriately or inappropriately are:
- The Trust instrument itself
- The Texas Trust Code
- Opinions of appellate courts on trust matters
- The Restatement (Third) of Trusts
We often look to these sources of authority in descending order. For instance, if the Trustee wants to engage in a certain activity, he would first look to the trust instrument to see if that activity is specifically addressed. If not, the Trustee would look to the Texas Trust Code – that portion of the Texas Property Code that deals specifically with Trusts.
If there is still no answer, the Trustee would look to the history of cases in Texas to determine if a court had ever faced and decided a similar issue. Finally, if there is still no answer, the Trustee might look to the Restatement. The Restatement of Trusts is intended to represent the consensus of the American legal community based upon the treatment of similar issues in jurisdictions from all over the country.
Many trust disputes can appear very similar to a conflict concerning a Last Will and Testament. There may be similar concerns of the Settlor’s ability to understand the trust instrument at the time he signed it. Or, the dispute might be focused on the language of the Trust itself, and whether or not the trust results in one conclusion or another. In several cases, the conflict has nothing to do with the Settlor or the language of the trust document. Instead, the dispute might focus on the actions of the Trustee, and there might be claims of self-dealing, failures to account or a breach of some legal duty by the Trustee. Some common disputes in trust matters include:
- Challenges to a Settlor’s mental capacity
- Claims of undue influence over a Settlor
- Claims of forgery, fraud or mistake
- Actions to modify or reform a trust
- Actions to terminate a trust
- Actions to judicially declare the rights and responsibilities of parties to a trust
- Claims of breach of fiduciary duty
- Actions to compel accountings from a Trustee
- Actions to remove and replace a Trustee
A significant part of trust litigation focuses on the actions taken (or not taken) by the Trustee. Often, a Trustee will be granted wide discretion when dealing with trust assets, while other actions might be mandatory or prohibited.
When a person acts as Trustee, they take on some of the highest legal obligations that the law can impose on an ordinary person. The weight of these duties alone is often enough to convince many Settlors and Trustees to prefer the use of institutions, such as banks or trust companies to serve in these roles. Still, many Settlors often appoint trusted family members and friends to serve as Trustee, thereby often increasing the likelihood that at some point something will go amiss.
The core fiduciary responsibilities that, unsurprisingly, are also the ones most often breached, are:
The Duty of Reasonable Care
Every Trustee is obligated to use the same skill and prudence which an ordinary, capable and careful person would use in his or her own affairs. Under this duty, Texas Trustees have a duty to monitor and investigate anyone that they delegate for purposes of trust management, such as accountants or investment advisors.
The Duty of Loyalty
Every Trustee is obligated to put the interests of the trust’s beneficiaries above his or her own. Self-dealing is a sure-fire way to land in a beneficiary’s (and judge’s) crosshairs. Above all else, the Trustee is obligated to carry out the terms of the trust for the benefit of the beneficiaries, and not for his or her own gain. Trustees playing fast and loose with their duty of loyalty are inviting an unhappy beneficiary’s lawsuit.
The Duty of Impartiality
Trustees that occupy positions of trust to two or more beneficiaries are obligated to act impartially. They must take into account the differing interests of their beneficiaries, and playing favorites is not allowed. In the absence of some contradicting instructions in the trust instrument itself, the general rule is that all beneficiaries are created equal.
The Duty of Full Disclosure
Perhaps no single fiduciary duty is more important than the Trustee’s obligation to disclose all material facts affecting a beneficiary’s interest in the trust to a beneficiary. In most cases, this duty is directed at the Trustee’s obligation to inform and account, but disclosure often includes many other things, and Trustees should always be wary of holding information back from beneficiaries. Communication, and more specifically breakdowns in communication, is very likely the leading cause of trust litigation in Texas.
In every dispute concerning a trust, there are a handful of basic and “must-have” pieces of information that will guide the dispute toward resolution. Whether requesting the authority of the Court to modify or terminate the trust, or suing a Trustee for a breach of his legal obligations, key evidence will include:
- The trust instrument
- Notes, files and perceptions of the Settlor by individuals familiar with the trust’s creation, and the Settlor’s intentions
- Prior Accountings of the Trustee
- An Inventory or Schedule of Assets that identifies trust property and describes it sufficiently for a person to locate that property
- Records of communications with interested persons (including the Trustee, beneficiaries and creditors)
How can a Trustee or beneficiary help their own case? For beneficiaries, the mantra is simple – be vigilant. The Trustee is obligated to manage the trust property on your behalf. They are guided by the trust instrument and the relevant law in Texas. Never confuse their obligations to act under the trust with your best interests. The Trustee’s job does not include advising you of the extent of your legal rights, because those rights may conflict with the Trustee’s prior acts. Nor does the attorney for the Trustee have to tell you that you might be able to sue the Trustee for something that he did or did not do. Be watchful, be responsive to the Trustee’s requests for information and seek independent counsel when things appear to move off track.
For Trustees, the best practical step is to surround yourself with good advice. Trustees take on, often voluntarily, positions of significant responsibility and authority. While many trusts are handled without incident, beneficiaries (by their nature) can often be challenging to deal with, uncooperative or simply indignant to the idea that “their property” is held in trust. Upon accepting your position as Trustee, consider:
- Inventorying the assets of the trust
- Securing the property
- Evaluating the property’s worth and insuring assets, when appropriate
- Determining the property’s most effective use (or determining the property’s directed use when the trust instrument speaks to it directly)
- Diversifying and investing prudently
- Retaining sound advice in legal matters, tax concerns and investing decisions, and delegating responsibilities, where appropriate
- Communicating (often and effectively) to beneficiaries
- Documenting your exercise of discretion, when discretion is permitted
- Remaining consistent