Successor Trustee Liability - Kevin Matz & Associates

1 Kevin MATZ & Associates PLLC. This article was published in a slightly different format in the March 2010 issue of Trusts & Estates. Successor Trustee Liability What you must know before accepting a fiduciary appointment Kevin Matz, Esq. Kevin Matz, , , (Taxation); Irina S. Shea In recent years, as the economy has predecessor. 1 Pennsylvania, where there is no such faltered and banks have failed, merged duty. and re-emerged, the fiduciary business Presumably successors should know . with its annuity revenue stream seems of a breach if they've vetted the prior More specifically: under more attractive than ever. But is it, trust accounting thoroughly. The Massachusetts law, a Successor Trustee really?

2 The fact is that the fiduciary courts generally treat layperson has both the right and the duty to business can be a bit of a minefield. trustees more leniently with respect to collect against a breaching previous Issues that could destroy profits (and what they should know. Still, all Trustee on behalf of trust beneficiaries. peace of mind) include surcharges, loss successors must take proper steps to In the 2006 case of Zoppo v. Zoppo, a of fiduciary commissions resulting redress any breaches of trust court held that a Successor Trustee did from a predecessor's errors, plus committed by predecessors. At in fact bring a proper action seeking additional risk management costs.

3 Minimum, such steps will include redress of a former Trustee 's disclosing the potential problems In Zoppo, however, the trust was a What's a Successor Trustee to do? calmly and clearly to both the trust special Massachusetts nominee There are some practical preventatives beneficiaries and the predecessor. trust more akin to an agency and solutions ranging from This disclosure may take place in an relationship rather than a true trust.. exculpatory and indemnification informal setting or such formal clauses to decanting and alternative settings as negotiations, mediations, In 2008's much-publicized case of dispute resolution procedures. Here arbitrations or litigations. The goal is to O'Connor v.

4 Redstone, the Supreme are the general rules of the road. work with the beneficiaries to correct Judicial Court of Massachusetts any unintended errors as quickly and reviewed the obligation of the Legal Backdrop calmly as possible. If beneficiaries are Successor Trustee to closely scrutinize included in the process and any errors the actions of a predecessor As a general principle of fiduciary law, and remedies are explained fully, there In that case, beneficiaries brought suit Successor trustees are not liable to is a far greater likelihood of peaceful against media mogul Sumner M. beneficiaries for breaches committed resolution to the breach. Redstone, one of America's wealthiest by predecessor trustees unless, as the men, and his brother, Edward Restatement (Second) of Trusts puts it, A Successor Trustee 's guideposts vary Redstone, for allegedly breaching their the Successor Trustee either (a) knows from state to state and are more fiduciary duties to both men's children or should know of a situation clearly articulated in some in connection with the redemption of constituting a breach of trust jurisdictions than others.

5 At one end stock in a family business that both committed by his predecessor and he of the spectrum we have, for example, men held in trust for their respective improperly permits it to continue; or Massachusetts and Louisiana with a children. (b) neglects to take proper steps to very strict approach: Successor compel the predecessor to deliver the trustees have a duty to investigate and The beneficiaries brought suit in 2006. trust property to him; or (c) neglects to correct a predecessor Trustee 's breach objecting to redemptions of the family take proper steps to redress a breach of fiduciary duty. At the other end of business stock that had occurred back of trust committed by the the spectrum lie states like Illinois and in 1972 and 1984.

6 Relevant to the Kevin Matz & Associates PLLC 1. 2010 Kevin Matz. All Rights Reserved. issue of whether the beneficiaries' doings of predecessor trustees and that a safety net is established with claims were time-barred or instead that successors are not liable for any respect to accountings, investments, were tolled due to a conflict of interest act or failure to act by tax filings and other administrative on the part of the Successor Trustee , Pennsylvania law also adopts this matters. the Massachusetts high court observed: When taking over the Administrative Stage administration of a trust, the Successor Despite the diverse landscape, there should obtain an accounting from or are some general, practical steps Successor trustees can: review the records of the predecessor Successor trustees should take.

7 Trustee . The [ Successor ] Trustee Review and Disclose Institute a ordinarily has the associated Estate Planning Stage systematic review of the prior trust responsibility of taking reasonable accountings, income tax returns and steps to uncover and redress any Drafters of trust documents should relevant estate and gift tax returns breach of duty committed by a consider. with a view toward the future of the predecessor fiduciary. If a Successor trust. Any problems found in the Trustee fails to take reasonable steps Exculpatory language Utilize course of such review could be to fulfill his duty in those regards, he is exculpatory language or add it in the addressed by the exiting and entering liable for his own breach.

8 4 Successor Trustee appointment Trustee jointly in the spirit of 8. instrument. There may be public corrective action and collaboration. The Massachusetts cases are policy limitations under applicable Beneficiaries should be made fully noteworthy in that the state has a state law on one's ability to limit aware of the problems and proposed tradition of attorneys acting as Successor Trustee Liability through solutions along the way. Beneficiaries fiduciaries with their law partners exculpatory provisions. For example, are generally less likely to sue a acting as alternates and successors. under New York law, Successor predecessor or pressure a current This affirmative duty to redress prior executors and testamentary trustees Trustee to sue if they feel fully breaches under Massachusetts law is may not be exonerated from Liability informed and respected in the trust often anathema given the discomfort for failure to exercise reasonable administration process.

9 9. many attorneys feel about care, diligence and prudence. questioning, much less taking action Obtain indemnification agree- against, a professional colleague. Therefore, note carefully that the ments It may be possible for the extent to which exculpatory language Successor Trustee to enter into an Louisiana law is similar to can be effective will vary with the indemnification agreement with the Massachusetts on this score. In the jurisdiction and depend upon whether appointing party with respect to the 1989 case of Matter of Donald E. the appointment is to serve as a Successor 's obligation to obtain Bradford Trust, a Louisiana appeals testamentary Trustee under a will, or as redress against the predecessor court held the Successor trustees liable a Successor Trustee under an inter vivos Trustee .

10 Public policy limitations on to the beneficiaries for failing to take trust. exoneration provisions under action to redress their predecessor's applicable state law could limit the In that case, a series of Note, too, that exculpatory clauses extent of the relief available. But attorney trustees had diverted funds are generally construed narrowly by such agreements could provide some to, or for the settlor's benefit. Such lax the courts. Even if exculpatory additional comfort to the Successor and informal administration led to the clauses are clearly drafted in the trust fiduciary, somewhat like a fiduciary Successor trustees' Liability and the instrument, courts may impose a Liability insurance policy.