May 21, 2014
Authored by: Kathy Sherby
On occasion, a case arises that causes wonder and amazement that children would complain that mom is receiving funds from a trust that either should be distributed to them or should be preserved for them. The Missouri case, O’Riley v. U.S. Bank, N.A., is just such a case.
The Trust was created on the death of Donald O’Riley in 1982 for the benefit of his wife, Arlene, and their two sons, Terrance and Gerald. In 2010, the sons filed this action against the Trustee for breach of its duty of impartiality in refusing to make distributions to them and favoring their mother, instead. The trial court entered judgment for the Trustee that it had not breached its duty of impartiality and the appellate court affirmed.
Relevant provisions of the Trust include the following:
• The Trustee is to distribute “so much or all of the income” to Arlene as the Trustee deems “advisable to provide for her care, support, maintenance and welfare”.
• Arlene is designated as the primary beneficiary.
• Any income not needed by Arlene could be distributed to the sons as the Trustee, “in its absolute discretion, deems advisable to provide for their respective care, support, maintenance, education and welfare.”
• “in exercising the foregoing discretion, the Trustee . . . shall have the right, in its absolute discretion, to exclude any or all of them at any time and from time to time and to make unequal distributions among them.”
• The Trustee has the power to invade the principal if the Trustee determines “in its sole judgment, that the aggregate of the income and principal payable under the trusts and the funds available from all other sources [are] insufficient to provide adequately for their care, support, maintenance, education, comfort and medical or other attention or emergency.”
• The grantor’s intention that “the power of invasion herein conferred shall be exercised liberally by the Trustee and that the interests of himself and his wife be preferred to the interests of other beneficiaries, and the Trustee’s decision as to the propriety and amount of any payment shall be final and binding upon all beneficiaries hereunder” was set out in the trust.
• On Arlene’s death, the Trust will be distributed to the sons.
During the administration of the Trust, the Trustee made the following distribution decisions:
• The Trustee, at Arlene’s annual request, distributed all of the income to Arlene from 1982 until it ceased serving as Trustee in 2007.
• Although Terrance requested distributions several times, the Trustee only made one distribution to him, in 1989.
• Gerald made no requests for distributions.
• In 1987, Arlene made a request for a principal encroachment to reimburse her for expenses she paid for her sons, including college expenses, auto insurance, and divorce related expenses, but the Trustee denied these requests.
First, the Court found that, if the Trust “supplies a standard by which the reasonableness of the trustee’s judgment can be tested,” the standard the Court should apply is a test of reasonableness, absent language such as “absolute” and “uncontrolled.” And even with such extensive language, if an ascertainable standard is provided, the actions of the Trustee will be judged on the basis of “good faith”, or abuse of discretion.
In this case, notwithstanding the broad language used by Donald in describing the authority of the Trustee, the Court made the following observations/statements:
• The language used “provided objective external standards with which to judge the reasonableness of the Trustee’s actions.”
• The Court lumped the language together into a “support” standard, and then asked whether the Trustee acted “beyond the bounds of reasonable judgment”.
• Arlene was designated in the Trust as the “preferred beneficiary.”
• Even with a support standard, it is not reasonable to only provide the beneficiary with the bare minimum essentials of living, but rather, the Trustee should use the Trust to provide the beneficiary with the standard of living to which the beneficiary was accustomed, such as providing for vacations and charitable and family giving.
• The word “welfare” connotes an intent to provide funds beyond a “purely support-related standard.”
With this background, the Court then reviewed the evidence, including:
• The process followed by the Trustee in reviewing Arlene’s needs,
• What Arlene expended her funds for (such as a lake house, a boat, trips and charitable donations),
• The fact that her income was less than what it was prior to Donald’s death and her expenses were greater.
While the Court found the Trustee did not breach its duty, it’s important to note that, in essence, the Court reviewed everything that the Trustee did in exercising its discretion, and inserted its judgment for that of the Trustee in determining that the Trustee’s distribution decisions were not beyond the bounds of reasonable judgment, the ultimate standard applied by the Court despite the broad language in the Trust conferring on the Trustee sole and absolute discretion that was to be “final and binding upon all beneficiaries hereunder.”
In addition to the beneficiaries’ claims that the Trustee violated its duty of impartiality, they also made claims that the Trustee failed to provide accountings and did not properly invest the trust assets. These claims are discussed in more detail on our sister blog, bryancavefiduciarylitigation.com