May 16, 2012
Authored by: Luke Lantta
When settling a fiduciary litigation case, it’s a fairly common practice to agree to the creation of a reserve fund from which to pay various estate or trust related expenses that will be incurred in the future. Recent litigation out of Florida reminds us that when creating a reserve fund, you will want to be specific about what expenses can be paid from the reserve.
RESERVES: The parties agree that the sum of $150,000 shall be held in reserve, in trust, in an interest bearing Money Market account by [the trustee], pending receipt of a closing letter from the IRS approving the 706 Tax Return filed by the Trust/Estate. . . . Upon receipt of said closing letter, the funds remaining after payment of taxes, interest and expenses, shall be paid 1/3 each to: [each beneficiary]. The parties shall be responsible for any estate tax, and interest thereon, which may be due, in the same proportions as set forth in paragraph 1A-D, above. [One named beneficiary] shall be liable for any income tax on any income that she has received prior to the execution of the agreement.
After the receipt of the federal estate tax closing letter, the trustee paid expenses out of the reserve, including attorney’s fees billed both before and after the parties entered into the settlement agreement. The trustee then distributed the balance equally to the beneficiaries and collapsed the trust.
Two of the beneficiaries filed a petition for accounting and motion to enforce the settlement agreement claiming that the trustee improperly used reserve funds to pay attorney’s fees incurred both shortly before and after the parties entered into the agreement. They claimed that the agreement prohibited such deductions.
The trustee claimed that nothing in the agreement limited the use of the reserve to matters concerning the 706 Tax Return or prevented payment of lawful expenses (i.e., attorney’s fees) incurred from general administration of the trust.
While the trial court ordered an accounting, it had not yet determined which party’s interpretation of the reserve fund paragraph was correct. In any event, the parties probably could have been clearer as to the specific expenses on which funds held in reserve could be spent.