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.

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]

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]

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]

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]

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]

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.

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.