Trusts are becoming an ever more common part of our lives. You are not atypical any longer if you can talk about your Irrevocable Life Insurance Trusts holding large life insurance policy on your life, or how you set up an Education Trusts to hold money earmarked for the education of generations of your family. But typically, the most likely trust that you would have is the Revocable Living Trust.
No matter what trust you form, there are three components. A Grantor who formed the trust, a Trustee who holds the asset, and the Beneficiary for whom the asset is held. In a Revocable Living Trust, the Grantor, Trustee and Beneficiary are all the same person. You form the trust, you transfer your assets to the trust and you hold them for your own benefit. For discussion about why you would form a Revocable Living Trust, please read my article Is a Revocable Living Trust Right for Me?.
Again, typically, if you form a Revocable Living Trust it replaces your will, and the assets that remain at your death pass to your heirs. This raises a far reaching question. Each trust has a Trustee, and each Trustee owes a fiduciary duty to the beneficiary. If that fiduciary duty is breached, then a court can make the Trustee compensate the Beneficiary for the harm caused. So, does the Trustee of a Revocable Trust (yourself) owe a fiduciary duty to the beneficiaries that receive your assets through the Revocable Living Trust at your death?
When asking a legal question about your own jurisdiction, it can help to see how similar cases are being handled in other states. As the cases work their way through the various state courts, different facts and circumstances slowly help a consensus form. With that in mind, a very interesting case out of Indiana is worth examination.
In Fulp v. Gilliland, 998 N.E. 2d 204 (Ind. 2013), the Indiana Supreme Court was recently addressed the following facts and questions:
Facts: Widow Ruth Fulp formed a revocable living trust and placed in the trust her family farm. As is typical with Revocable Living Trusts, she remained the only beneficiary of the trust during her lifetime and as trustee had broad powers to sell the land and amend or revoke the trust. The trust terms stated that at her death the trust would become an irrevocable and any remaining assets would pass to her children.
Later, Ruth moved to the Indiana Masonic Home and decided to sell the family farm to her son in order to pay her ongoing expenses. As Trustee Ruth planned to sell him the farm at a discount. Previously, Ruth had sold some of the farm to her daughter at the same discounted price. The daughter learned of the sale and raised objections. Prior to the closing, Ruth resigned as trustee and the daughter took over as successor trustee. The daughter refused to complete the sale and the son filed suit to force specific performance.
Lower Court: The lower court ruled against the son and determined that Ruth had breached her fiduciary duty to her children by selling the farm at a discounted price.
Court of Appeals: The Court of Appeals disagreed with the Lower Court, and found that Ruth sold the farm as the Grantor and not as the trustee.
Supreme Court of Indiana: In its analysis, the Court determined that it would have to interpret the terms of the trust to determine the duties imposed on Ruth and then make sure that the trusts’ application did not violate the Trust Code.
Reasoning: the Indiana Code and case law states that a revocable trust creates a fiduciary relationship between the trustee, who holds the property, and the beneficiary, for whom the property is held. The Grantor creates the revocable living trust and takes legal title to the property while the beneficiary takes equitable title. The Grantor can continue to use the property during lifetime and retains the power to revoke or amend the revocable living trust at any time. So at the time of the sale, Ruth was the Grantor, the trustee and primary beneficiary of the trust. The children were contingent remainder beneficiaries and Ruth could have removed them, or revoked the trust, at any time.
The court recognized that Ruth owed herself a fiduciary duty, but they had never been asked to determine if Ruth, as Trustee, also owed the remainder beneficiaries a fiduciary duty.
The Court first looked at the terms of the trust, and determined that because she could revoke the trust at any time and that the trust language stated that the trust was for her own use and protection, the only person to whom she owed a duty was to herself. The Court also determined that this reasoning was consistent with the Uniform Trust Code.
Conclusion: That the Grantor of a Revocable Living Trust who also serves as Trustee doesnot owe a fiduciary duty to the remainder beneficiaries while the trust is revocable. The trustee only owes herself a duty. The court ordered the farm be sold to the son under specific performance.
For further reading, here is a link to entire case of Fulp v. Gilliland.
Peter Klenk, Esq. LL.M.