How Typical Trust Agreements Clauses Can Get Turned Around in the Real World

Summary

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Episode Overview

Episode Title: How Typical Trust Agreement Clauses Can Get Turned Around in the Real World
Podcast: ACTEC Trust & Estate Talk
Date: December 17, 2024
Host: Connie Ister, ACTEC Fellow
Guests:

• Meg Lodice (Los Angeles)
• Ray Prather (Chicago)
• Eric Penter (Uniondale, NY)

Main Theme:
This episode explores how even well-intentioned or standard trust agreement clauses can lead to unexpected or adverse outcomes in real-world scenarios. The experts discuss common drafting issues, the clash of competing interests between settlors, trustees, and beneficiaries, and provide illustrative case law examples regarding conditional bequests, beneficiary conflicts, and trust situs selection.

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Key Discussion Points & Insights

1. Introduction and Framing the Issue

[00:39]

• Host, Connie Ister, frames the discussion by emphasizing that despite careful drafting, competing interests among settlors, beneficiaries, and trustees, as well as judicial interpretation, can result in outcomes far from the original intent.
  • Quote: “Sometimes the drafting goes awry. The competing interests of the settlor, the intended beneficiaries and the trustee may someday give us grief and stick dead of the promised joy.” – Connie Ister [00:39]

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2. Conditional Bequests and Religious Requirements

[01:33] – [04:22]
Speaker: Eric Penter

• Conditional Bequests: Focus on clauses requiring beneficiaries to marry within a particular religious faith to receive a bequest.
• Madara v. Feinberg (Illinois, 2009):
  • Such clauses are still relevant and raise tensions between the freedom of testation and public policies about marriage and religious freedom.
• Key Legal Distinctions:
  • Courts generally allow conditioning bequests on future marriages within a faith (as it narrows choices but does not outright prohibit marriage).
  • If a bequest would require someone to divorce in order to qualify, the provision is unenforceable.
• Illustrative Case – Estate of Kephalis (Pennsylvania, 1967):
  • Sons who were not yet married had to marry within the Greek Orthodox faith to benefit.
  • The daughter, already married to a non-Greek, could not be forced to divorce to qualify, so the provision was unenforceable as to her.
• Quote: "If it induces marriage to a particular person, it's enforceable. If it induces divorce, it's unenforceable." – Eric Penter [03:27]

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3. Beneficiary Conflicts and Information Rights

[04:22] – [07:00]
Speaker: Ray Prather

• Conflict Sources: Often arise from disputes over access to trust information or accountings.
  • Especially prevalent when a beneficiary is also a trustee.
• Pot Trusts: Increased likelihood of conflicts when multiple current beneficiaries must share information.
• Schwam v. Schwam (Massachusetts):
  • Children, as presumptive remainder beneficiaries, wanted information from their stepmother (the trustee and current beneficiary).
  • Court held they were not entitled to accountings while the current beneficiary was still alive.
  • Contrast: Illinois might have decided differently despite both states being Uniform Trust Code jurisdictions.
• Practical Drafting Advice:
  • Drafters should clarify how much trust information is shared with remainder beneficiaries to preempt such disputes.
• Quote: "I think the takeaway from the Schwam case is estate planners should always have this discussion with their clients and how much information should the presumptive remainder beneficiaries receive about the trust..." – Ray Prather [06:14]

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4. Situs and Jurisdictional Surprises

[07:00] – [10:02]
Speaker: Meg Lodice

• Situs Clauses: Aim to select the governing law and jurisdiction for trust administration, yet often fail in practice.
• Kloiber Dynasty Trust (Delaware, 2014):
  • Delaware trust included elaborate provisions to protect family interests and allow for movement of situs and change of law.
  • A Kentucky divorce court attempted to assert jurisdiction over the Delaware trust because the primary beneficiary became involved in a divorce in Kentucky.
  • Delaware courts found "impermance and potential temporariness" in the situs clause, in part due to provisions that discouraged court involvement and allowed free movement of situs.
• Key Takeaway:
  • Jurisdiction can be determined by courts based on factual context, not just the trust’s drafted clauses.
  • Even attempts to pre-establish jurisdiction may backfire if the action is merely advisory.
• In re Trust and Will of Flint for the Benefit of Shattuck (Delaware, 2015):
  • Declaratory proceedings that do not require judicial action may not suffice to establish jurisdiction.
• Quote: "No matter what your best attempts at drafting are, the courts and the beneficiaries may very well turn those attempts on their head." – Meg Lodice [09:50]

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Notable Quotes & Memorable Moments

• On Judicial Interpretation and Unintended Outcomes:

  • “Who says the law is fair?...That’s the lesson on those types of conditional bequests.” – Eric Penter [04:19]

• On Drafting to Address Beneficiary Conflicts:

  • “Estate planners should always have this discussion with their clients and how much information should the presumptive remainder beneficiaries receive about the trust...” – Ray Prather [06:14]

• On Situs Clauses and Jurisdictional Reality:

  • “Despite the best drafting attempts, the facts may outrun them and the courts will look to equitable factors.” – Meg Lodice [08:46]
  • “The bottom line is that no matter what your best attempts at drafting are, the courts and the beneficiaries may very well turn those attempts on their head.” – Meg Lodice [09:50]

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Timestamps for Important Segments

• 00:39 – Introduction: Why standard trust language can fail in the real world.
• 01:33 - 04:22 – Conditional bequests based on religious marriage and key case law.
• 04:22 - 07:00 – Beneficiary conflicts over information and accountings; pot trusts vs. individual trusts.
• 07:00 - 10:02 – Trust situs selection, the impact of jurisdiction, and illustrative Delaware case law.

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Conclusion

The episode provides practical and cautionary insights for estate planners and lawyers: even meticulously drafted trusts can result in unpredictable outcomes due to the realities of family conflicts, evolving beneficiary circumstances, and the fluid interpretation of jurisdiction. The key takeaway is the importance of candid discussions with clients about intent, expectations, and the practical limits of legal drafting in controlling outcomes after implementation.

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Transcript

[A]

How typical trust agreement clauses can get turned around in the real world. That's the subject of today's ACTEC Trust and Estate Talk.

[B]

Welcome to ACTEC Trust and Estate Talk from the American College of Trust and Estate Council, a professional society of peer elected trust and estate lawyers in the United States and around the globe. This series offers professionals best practice advice and insights and commentary on subjects that affect our profession and clients. And now our ACTEC Fellow host with today's topic.

[A]

This is ACTECH Fellow Connie Ister of Boulder, Colorado. The best laid schemes of mice and men isn't supposed to be a reference to your clients trust agreements, but sometimes the drafting goes awry. The competing interests of the settlor, the intended beneficiaries and the trustee may someday give us grief and stick dead of the promised joy. ACTEC fellows and litigators Meg Lodice of Los Angeles, Ray Prather of Chicago and Eric Penter of Uniondale, NY Join us today to identify potential issues in the judicial interpretation of often desired trust provisions. Welcome Meg. Do you want to start us off?

[C]

Thanks Connie. I'm going to just briefly introduce this Eric, Ray and I are going to go through a number of issues concerning distribution standards, competing beneficiaries and finally trust, citus and advisor issues which arise despite the attempts of draft drafters and advisors to create a well functioning trust. And I think we're going to start with Eric.

[D]

Yeah, well, an issue that has arisen from time to time over the years is the enforceability of provisions conditioning bequests on the beneficiary marrying within a particular religious faith. And while many of those cases are very old, the issue still exists. Indeed, the validity of such a provision was decided in a case by the Illinois Supreme Court, Madara Feinberg, as recently as 2009. So. So this is still a relevant topic. Those clauses involve more than attestators or grantor's desire that their descendants continue to follow their religious traditions after they're gone. The cases involve broader tension between competing values, the values of freedom of testation on the one hand and resistance to dead hand control on the other. And the cases also reflect the difficulties the judiciary has had at times attempting to reconcile the public policy of freedom of attestation that a person should be able to leave their estate to whomever they want and the policy favoring the right to marry and against inducing divorce. Now attempting to synthesize the case law on the subject. Although there are no bright line rules, the law appears to be that one conditioning a bequest on the Beneficiary marrying within a particular religious faith doesn't have constitutional freedom of religion implications because no state actor is involved. And provisions conditioning bequests on marriage within a faith are enforceable because they simply narrow the universe of persons the beneficiary can marry and still benefit from the bequest. However, to the extent the provision can be deemed to encourage divorce, it will be held unenforceable. So if it induces marriage to a particular person, it's enforceable. If it induces divorce, it's unenforceable. And while those principles, while seemingly reconcilable, can lead to remarkable results, in a 1967 decision of the Pennsylvania Supreme Court at State of Kephalis, the testator essentially conditioned bequests to his children on them marrying persons of true Greek blood and descent and of Orthodox religion. The court held that the provision was valid and enforceable as against the testator's unmarried sons because it merely encouraged them to marry within the faith. But the court held it invalid and unenforceable as against the testator's daughter who was married because she would need to divorce her non Greek Orthodox husband and marry a Greek in order to receive the bequest. So in the end she got to remain married to her non Greek husband and still received her bequest. But if the sons married non Greeks, they would forfeit their bequests. Which brings to mind the age old adage who says the law is fair? So that's the lesson on those types of conditional bequests.

[E]

My topic is beneficiary conflicts, and this can arise in a variety of ways. But I found that most of these conflicts begin as a dispute over receiving information, that is when one beneficiary wants to know how the trust is being used by another beneficiary. This can be a dispute between two current beneficiaries in a pot trust or or between a current beneficiary and the presumptive remainder beneficiaries and other trusts. And I've often found that it becomes a highly contested issue when one of the beneficiaries is also the trustee of the trust. Everyone knows the trustee must provide accountings or reports on the use of the trust funds. But who must they account to in the pot trust situation? With two current beneficiaries, it's highly likely that both beneficiaries will receive all the information on how the trust funds are being used. So for drafters who are worried about these issues and having and conflicting beneficiaries, it's probably better to avoid the pot trust situation, if you think that one person is going to be trying to look over the other person's shoulder on how they're using the funds for the current beneficiary, who is also a trustee, and the presumptive remainder beneficiaries wanting to know how the funds are being used for that current beneficiary. This is an issue that came up in the case Schwam D. Schwam out of Massachusetts. In that case, the decedent's children wanted to know how their stepmother, the current beneficiary and trustee of the trust, was using the trust that they were eventually going to receive. And in that case, the Massachusetts court held the decedent's children were not entitled to any accountings while they were presumptive remainder beneficiaries. Now, the law on this topic is highly variable among states, even among states that have adopted the Uniform Trust Code Code. For example, Illinois and Massachusetts are both Uniform Trust Code states. But I believe the result in Schwabm v. Schwam would have been very different had it been litigated in Illinois. So I think the takeaway from the Schwam case is estate planners should always have this discussion with their clients and how much information should the presumptive remainder beneficiaries receive about the trust while the current beneficiary is another person, perhaps a parent or a step parent. So having those discussions, they would be able to build into the drafts of their documents, you know, just exactly how much information and how often the presumptive remainder beneficiaries would receive that information. So with that, I'm going to hand it over to Meg, who I believe is going to talk about citis.

[C]

Thanks, Ray. Yes, I'm going to talk about sitis, which is a particularly prevalent issue. Trustors frequently draft trusts with the Citus selection clause along with a governing law clause to attempt to have the law of appropriate particular jurisdiction govern the administration of the trust. And although sometimes those Citus selection clauses may be governed by UTC or UPC provisions, I'm just dealing here with situations where it's in the trust itself. An interesting case on this issue is the Daniel Cloiber Dynasty Trust out of Delaware in 2014. It gives an excellent illustration of how Citus selection may go awry. In that case, the trustor established a Delaware trust with various provisions to protect his family, including a Delaware corporate trustee, a special trustee to direct investments, and with the power of trustee removal, as well as a holder who had the power to direct distributions to the beneficiaries. The trust also included various exculpatory provisions to protect the corporate trustee and the ability of the beneficiaries through the various advisors to change the law and Citus of the trust. Several years after the trust was established, the primary beneficiary's son became involved in a divorce proceeding in the state of of Kentucky. The Kentucky court attempted to assert jurisdiction over the Delaware trust and the son and his son attempted to wrest control back to Delaware through removal of the special trustee and appointment of a new one. Also notably not a resident of Delaware, the Delaware court found that it did not have exclusive jurisdiction despite the situs selection provisions of the trust. Notably, the Delaware court pointed to all the provisions of the trust that discouraged court involvement, such as waivers of accounting and the ability to move CITUS if the beneficiary checks chose. According to the Delaware court, this made the choice of Delaware law and Citus quote, impermanent and potentially temporary. I think the lesson from Kloiber is that despite the best drafting attempts, the facts may outrun them and the courts will look to equitable factors. I don't think it's completely irrelevant that the issues here were what assets would be available to the complaining wife in the Kentucky divorce proceedings. But as a practice pointer, if there is a concern about whether or not the desired court will assume jurisdiction, it may make sense to try to bring some sort of proceeding in the desired court to establish jurisdiction there, although even that strategy may not work if the court sees it as merely an advisory proceeding and not truly dealing with the matter in controversy. The Delaware case of inrae Trust and Will of Flint for the Benefit of Shattuck, which is a 2015 case, addresses this very point in the Court's opinion at page 186. It notes, A petition seeking consensual declarations that do not require judicial implementation does not give rise to an actual controversy supporting declaratory relief. So even if you try to bring the case in front of the court to acquire jurisdiction, the court may refuse you. The bottom line is that no matter what your best attempts at drafting are, the courts and the beneficiaries may very well turn those attempts on their head.

[A]

Thanks thank you Meg, Ray, and Eric for sharing your knowledge and wisdom on how trust provisions can have unintended consequences or unexpected application. We really appreciate your time today.

[B]

Thank you for listening to this episode of ACTEC Trust and Estate Talk, the podcast series about wealth planning matters from the American College of Trust and Estate Council. To find an ACTEC lawyer near you, visit Actec.org. please subscribe to this series and leave us a rating. Rating or a review.