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Trust Litigation: Navigating Defenses of Fiduciaries and Claims of Beneficiaries and Third Parties

Bringing or Defending Against Trust Contests, Trust Construction Issues, and Challenges to Trustee’s Actions

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THURSDAY, OCTOBER 25, 2012

Presenting a live 90-minute webinar with interactive Q&A

Mary A. Akkerman, Partner, Lindquist & Vennum, Sioux Falls, S.D.

• J. Brian Thomas, Attorney, Burdette & Rice, Dallas

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Trust Litigation: Navigating Defenses of Fiduciaries and Claims of Beneficiaries and Third Parties

Mary A. Akkerman

(605) 978-5204 makkerman@lindquist.com

• I. Contest Grounds

A. Case Selection Tips B. Incompetence C. Undue Influence D. Fraud or Mistake of Fact E. Revocation F. Inadequate Formalities G. Construction Actions (Petitioning the Court for Instructions) H. Other

6

Case Selection Tips

• What type of trusts may be subject to disputes?

– Testamentary trusts are considered will substitutes and are generally subject to attack on a similar basis as a will would

• be. Non-testamentary trusts are generally subject to attack
• n the same basis as a contract would be. In some instances,

the decedent has executed a will, trust, and other documents which are contractual and/or testamentary in nature that may be subject to dispute. Trust disputes can arise during a trustor’s lifetime, during any periods of incompetency, or after the trustor’s death, depending upon the type of trust. It is important when approached to take on a trust dispute case to obtain a copy of the trust and any accompanying documents to determine what type of trust is being disputed and the reasons for the dispute.

7

Case Selection Tips

• What if my potential client cannot get a copy of the trust documents?

– Generally, any interested party is entitled to a copy of trusts or other estate planning documents when the trustor dies or when the trust becomes court

• supervised. Depending upon state law, beneficiaries with a remainder or

contingent interest may not be entitled to notice in some situations. “Interested party” is typically defined by statute, for example:

SDCL29A-1-201(23) defines “Interested person” as “heirs, devisees, children, spouses, creditors, beneficiaries, and any others having a property right in or claim against a trust estate or the estate of a decedent, minor, or protected person. It also includes persons having priority for appointment as personal representative, and other fiduciaries representing interested persons. The meaning as it relates to particular persons may vary from time to time and must be determined according to the particular purposes of, and matter involved in, any proceeding.”

8

Case Selection Tips

• Do I need to look at medical records of the decedent?

– It is usually beneficial to review medical records of a decedent if your clients are alleging lack of testamentary capacity or lack of capacity to contract. Your potential client may have authority to obtain copies of the decedent’s medical records if your client has priority under state law or is considered a “personal representative” under state law pursuant to HIPAA regulations. In cases where the decedent had all

• f his or her assets in a trust and no probate is necessary, no personal

representative will be appointed under state law, but a trustee of the trust will instead by the acting fiduciary and should have the ability to obtain the records. However, if your clients are challenging the trust, the trustee may be the adverse party and may not be willing to release medical records unless litigation is

• commenced. In situations where the decedent has left a surviving spouse,

that person will generally have priority under state law. Or, if there is no surviving spouse, adult children can typically obtain medical records. Once litigation is commenced, it is sometimes possible to subpoena medical records without the use of a HIPAA authorization. Or, if all else fails, an

• rder may be requested from the presiding judge.

9

Case Selection Tips

• Who may challenge a trust?

– The right to challenge a trust vary from jurisdiction to

• jurisdiction. The following relationships may give rise to

the right to contest a trust:

1) Interested persons; 2) Spouse of trustor; 3) Beneficiaries under a prior instrument; 4) Federal or state government; 5) Named fiduciary under a prior trust or will; 6) Creditors of the trustor or, in some cases, a beneficiary.

28 COA2d 99 § 28.

10

Case Selection Tips

• What if there is a “no contest” clause in the trust?

– Whether no contest clauses are enforceable is a matter

• f state law. Some states will uphold these clauses, but

many states will only enforce them if the contestant has no good faith basis upon which to challenge the trust. No contest clauses (sometimes called ad terroremclauses) in wills are unenforceable in South Dakota by statute if the party bringing the contest has probable cause to do so. SDCL29A-3-905; 29A-2-517. This is not the case with no contest clauses in trusts except in the case of fraud, duress, revocation, lack of contractual capacity, undue influence, mistake, forgery,

• r irregularity in the execution of the trust. SDCL 55-1-

46.

11

Case Selection Tips

What is the proper jurisdiction?

• Once a trust is under court supervision in a particular jurisdiction, that jurisdiction will retain authority over the

trust unless the court orders that trust situs be moved to another jurisdiction. For trusts not under court supervision, the proper jurisdiction is generally where the trustee’s office is located. In the case of multiple trustees, it is usually the jurisdiction where the trust’s books and records are kept. This may not necessarily be the home state of the trustor or any of the beneficiaries. SDCL § 55-3-39 outlines the requirement for trust jurisdiction in the state of South Dakota:

• When state law or jurisdiction provision valid, effective and conclusive. A general law or a state jurisdiction

provision stating that the laws of this state govern is valid, effective, and conclusive for the trust if all of the following are true:

(1) Some or all of the trust assets are deposited in this state or physical evidence of such assets is held in this state and the trust is being administered by a qualified person; in this subdivision, deposited in this state, includes being held in a checking account, time deposit, certificate of deposit, brokerage account, trust company fiduciary account, or other similar account or deposit that is located in this state including South Dakota investments; (2) A trustee is a qualified person who is designated as a trustee under the governing instrument, a successor trusteeship,

• r designated by a court having jurisdiction over the trust; and

(3) The administration, for example, physically maintaining trust records in this state and preparing or arranging for the preparation of, on an exclusive basis or a nonexclusive basis, an income tax return that must be filed by the trust,

• ccurs wholly or partly in this state.

The State of South Dakota and its courts have jurisdiction over a trust created in a foreign jurisdiction if the administration

• f the trust meets the three requirements set forth in this section.
• Nothing in this section may be construed to be the exclusive means of providing a valid effective and conclusive

state jurisdiction provision.

• If proper jurisdiction lies in more than one state (or venue), generally the first state (or venue) to take jurisdiction
• ver the matter will retain jurisdiction. Trusts often include a choice of law provision. The state law named in that

provision may be different than the state where jurisdiction lies. In those cases, the state assuming jurisdiction will apply the choice of law state’s substantive law to the trust and will apply the forum state’s procedural laws.

12

• B. Incompetence
• Testamentary Capacity versus Capacity to Contract

– To create a trust, a trustor must have the requisite mental capacity. To create a revocable or testamentary trust, the trustor must have the capacity to make a will. To create an irrevocable trust, the trustor must have capacity during lifetime to transfer the property free of trust. See generally Restatement (Third) of Trusts § 11; Restatement (Second) of Trusts §§ 18-22 (1959); and Restatement (Third) of Property: Wills and Other Donative Transfers § 8.1.

• To attack a testamentary instrument (such as a will or testamentary trust), it

must be shown that the testator or trustor did not have testamentary capacity to execute the document. To attack other types of trusts, deeds, bills or sale or

• ther transfers, it must be shown that the contracting party did not have

capacity to contract. To create a trust by transferring property, a person must have the same capacity he would have to transfer or convey property free of

• trust. Restatement (Second) of Trusts §19 (1959). Capacity to contract typically

requires a higher level of competence than testamentary capacity. SDCL 53-2- 1 requires “sound mind” in order for a person to possess capacity to contract.

• Further, “capacity to contract for the sale of real property is somewhat

different than the test for testamentary capacity.” In re Evans’ Estate, 238 N.W.2d 677, 683 (S.D. 1976). The party executing the deed must have sufficient mental capacity to understand the action taken and to comprehend the nature and character of the transaction. Id.

13

Testamentary Capacity

• When a trust is challenged for a

number of reasons, the threshold issue is often whether the trustor had capacity to create the trust. If not, the trust will be invalidated and

• ther issues, such as undue

influence, need not be considered.

14

Testamentary Capacity

• The elements of testamentary capacity may

vary slightly from state-to-state but generally entail the following:

• A testamentary instrument will be invalidated

due to a lack of testamentary capacity if, at the time of execution, the testator did not understand the:

1) Nature and extent of his or her property; 2) Natural objects of his or her bounty; and 3) Nature and scope of the testamentary act.

15

Testamentary Capacity

• Some states will look at the testator’s mental capacity at the moment of

execution, but other states will look at a reasonable time before and after the moment of execution as well. In South Dakota, in order to establish that a decedent lacked the testamentary capacity necessary to make a will, one must establish that the decedent was not of sound mind at the time the will (or the changes made thereto) was drafted and signed. Baun v. Estate of Kramlich, 2003 SD 89, ¶ 22 (citing SDCL29A-3-501). “One has a sound mind, for the purposes of making a will, if, without prompting, he is able to comprehend:

1) [T]he nature and extent of his property, 2) [T]he persons who are the natural objects of his bounty, and 3) [T]he disposition he desires to make of such property.”

• Id. “Testamentary capacity is not determined by any single moment in time,

but must be considered as to the condition of the testator's mind a reasonable length of time before and after the will is executed.” In re Estate of Long, 1998 SD 15, ¶ 21, 575 N.W.2d 254, 257-58 (emphasis added.)

16

Testamentary Capacity

• Even where the trustor may have had severely diminished capacity

before and after the execution of the trust, testamentary capacity may be established by showing that the document was executed during a “lucid” moment. Estate of Schlueter, 994 P.2d 937 (Wyo. 2000). Expert medical testimony is often used to establish testamentary capacity or lack thereof, but it is not strictly required. 28 COA2d 99 § 27.

• There is a strong presumption in favor of testamentary capacity,

and the courts are

• reluctant to hold that a trustor was not competent to execute a

trust or will. However, as discussed below, a trustor’s diminished mental condition is often a factor in proving undue influence even where the trustor is held to have testamentary capacity.

17

Who defends the trust?

• The trustee has a duty to defend the trust and to administer it

in accordance with its terms. This duty is set forth in the Uniform Trust Code as adopted by various states and also appears in the Restatement of Trusts. The beneficiaries may be adverse parties as well, and any beneficiary whose interests will be extinguished or reduced by a successful challenge will undoubtedly seek to defend the trust as well. In some instances individual beneficiaries hire their own counsel, but if they do not, the trustee represents all beneficiaries’ interests. Typically, the state attorney general is an interested party with respect to charitable trust procedure and may defend the trust if charitable interests are involved.

18

• C. Undue Influence
• To show undue influence, a challenging party must prove that the

influencing party destroyed the trustor’s free will and substituted that of the influencing party’s. Whereas lack of testamentary capacity presumes that the testator was not competent to create a trust or will, undue influence necessarily presumes that the testator or trustor had some level

• f competence but that his or her free will was overtaken by the

influencing party. Thus, it is common to plead both lack of testamentary capacity and undue influence, in the alternative. If the court finds testamentary capacity, the challenging party may still prove undue

• influence. If undue influence is proven, the trust may be invalidated in its

entirety, or, in some cases, it may be invalidated only as to the portion of the estate benefitting the influencing party.

19

Undue Influence

• A testamentary instrument or trust may be invalidated if it is proven to be the

result of undue influence. 27 COA2d 469. A prima facie case of undue influence can be proved if all of the following elements are shown:

1) The trustor is susceptible to influence; 2) The influencing party has the disposition to exert undue influence: 3) The influencing party has the opportunity to exert undue influence; and 4) The resulting trust shows undue influence.

• Id. A presumption of undue influence is established if the following are

present:

1) A confidential or fiduciary relationship between the influencer and the trustor; 2) Active participation by the influencer in the preparation of the estate plan; and 3) The influencer received a substantial or undue benefit under the estate plan.

20

Presumption of Undue Influence

• “When this presumption arises, the burden shifts to

the beneficiary to show he took no unfair advantage

• f the decedent.” Dokken, 2000 SD at ¶ 28 (citing

Unke, 1998 SD at ¶ 13). “A ‘confidential relationship exists whenever a decedent has placed trust and confidence in the integrity and fidelity of another.’ ” In re Estate of Duebendorfer, 2006 SD 79, ¶ 27 (quoting Unke, 1998 SD at ¶ 16). Put differently, “a confidential relationship is generally synonymous with a fiduciary relationship.” Buxcel v. First Fidelity Bank, 1999 SD 126, ¶ 14.

21

Presumption of Undue Influence

• Where there is a presumption of undue

influence, the proponent of the trust must show that the influencer “exercised “the utmost good faith” and refrained “from obtaining any advantage at the expense of the confiding party.” Matter of Estate of Smith, 520 N.W.2d 80, 83 (S.D. 1994). Any transactions between the fiduciary and trustor must qualify as “fair and above board,” and the influence must not “unduly profit” from his actions. Smith, 520 N.W.2d at 85.

22

Susceptibility

• “[A] aged and infirm person with impaired mental

faculties would be more susceptible to influence than a mentally alert younger person in good health.” In re Shabley’s Estate, 85 S.D. 692, 698, 189 N.W.2d 460, 463 (1971). Further, “evidence of physical and mental weakness is always material upon the question of undue influence . . . .‘Undue influence is associated with testamentary capacity, since the amount of influence necessary to affect the testator varies according to the strength of his mind.’” Id. (quoting Johnson v. Shaver, 41 S.D. 585, 172 N.W. 696 (1919)).

23

• D. Fraud or Mistake of Fact
• Proving fraud or mistake of fact involves general contract

principals which are generally set forth by state statute. In South Dakota, proving fraud involves the following:

– In order to establish a claim of fraud in the execution of a testamentary instrument, one must prove the following three elements:

1) The beneficiary/defendant willfully made false statements of fact to the testator; 2) Such statements were made in bad faith or with the intent to deceive the testator; and 3) Such statements did deceive the testator and induced him to make a will he would not otherwise have made.

• Matter of Weickum’s Estate, 317 N.W.2d 142, 146 (SD

1982).

24

Mistake of Fact

• In order to establish that a contract, such as a trust,
• r a will is the result of a mistake of fact, a party

must prove that:

– The mistake of fact is not caused by the neglect of a legal duty on the part of the person making the mistake; and either

A. Is the result of an unconscious ignorance or forgetfulness

• f a fact, past or present, material to the contract; or

B. Is the result of a belief in the present existence of a thing material to the contract which does not exist, or in the past existence of such a thing which has not existed.

SDCL § 53-4-9.

25

E. Revocation

• Obviously, revocation is not an issue with respect to irrevocable
• trusts. However, many trustors reserve the right to revoke trusts

during the trustor’s lifetime. The trust instrument itself will govern the procedure by which a trustor may revoke a trust. Generally, the trustor will be required to deliver a written revocation to the

• trustee. If the trustee is able to produce a revocation that meets

with the requirements of the trust instrument, any party wishing to challenge the revocation will need to prove that the revocation was not executed in accordance with the terms of the trust or that the trustor was not competent to execute the revocation.

• Some states allow a conservator to change a protected person’s

estate plan pursuant to court order. See Uniform Guardianship and Protective Proceedings Act Sec. 411; Minn. Stat. § 524.5-411. Accordingly, incapacity of a trustor does not necessarily prevent the trustor from revoking, executing or revising a trust if the trustor’s conservator acts on the trustor’s behalf pursuant to court order.

26

• F. Inadequate Formalities
• Inter-vivos trusts generally require less formality to

properly execute than wills do. The precise requirements vary from state-to-state. However, testamentary trusts are typically contained in wills and function as will substitutes and must be executed in accordance with the formalities required of wills. Uniform Trust Code § 403. Wills are typically required by state law to be witnessed by two witnesses and signed by the testator. Although it is good practice to obtain two disinterested witnesses, having an interested party serve as a witness does not necessarily invalidate the trust or will, depending, of course, upon state

• law. See California Probate Code Section 6112 (a), (b).

Some jurisdictions allow holographic wills if written entirely in the testator’s own hand. See SDCL § 29A-2-502.

27

• G. Construction Actions (Petitioning the

Court for Instructions)

• Most states have statues allowing any interested party to petition

the court to construe terms of the trust. These actions may be brought as declaratory judgments, or they may be brought as part

• f a petition seeking additional relief.

– SDCL § 21-24-5. Determination of rights under trust or decedent’s estate Any

person interested as or through a personal representative, trustee, conservator, or other fiduciary, creditor, devisee, legatee, heir, next of kin, or cestuique trust in the administration of a trust, or of the estate of a decedent, minor, protected person, or insolvent, may have a declaration of rights or legal relations in respect thereto: 1) To ascertain any class of creditors, devisees, legatees, heirs, next of kin, or others; 2) To direct the personal representatives or trustees to do or abstain from doing any particular act in their fiduciary capacity; 3) To determine any question arising in the administration of the estate

• r trust, including questions of construction of wills and other

writings.

28

• H. Other
• In cases where there is tension among interested parties or where

the terms of the trust are not clear, the trustee or beneficiaries may wish to petition the court for an order requesting any of the following:

1) Permission to sell or retain certain assets; 2) Permission to remove and replace a trustee; 3) Permission to resign as trustee; 4) Allowance of accounts (discussed below); 5) Permission to merge or split trusts; 6) Permission to move a trust from one jurisdiction to another; 7) Permission to reform or modify terms of the trust; 8) Permission to terminate the trust; 9) Permission to make certain distributions;

29

• H. Other (cont.)

10) Permission to pay certain expenses of the trust, including trustee’s fees; 11) Court approval of a settlement among interested parties; 12) Removing a fiduciary for cause (discussed below); 13) Surcharging a fiduciary (discussed below); 14) Permission to make loans or advancements to a beneficiary; 15) Permission to purchase certain assets; 16) Sealing of the court file for privacy (available by statute in South Dakota; may be requested at judge’s discretion in other states) 17) Any other trust administration items that need court approval, depending upon the terms of the trust.

These remedies vary from state-to-state. For one state’s list of remedies available by statute, see Minn. Stat. § 501B.16.

30

Burdette & Rice, PLLC

Probate | Trusts | Estates | Guardianships

www.dallasprobateattorneys.com

Brian Thomas

Brian@dallasprobateattorneys.com

Burdette & Rice, PLLC 6750 Hillcrest Plaza Drive, Suite 204 Dallas, Texas 75230

• Ph. (972) 991-7700
• Fx. (972) 991-8654

31

Trust Litigation: Navigating Defenses of Fiduciaries and Claims of Beneficiaries and Third Parties

Presented by Strafford Publications, Inc. – October 25, 2012

32

Focus of Trust Litigation

Challenge made to... Common focus of litigation is... Trust Validity

• Circumstances surrounding execution
• Mental ability of the Settlor
• Acts of those around the Settlor

Trust Construction

• Trust document language
• Circumstantial evidence on showing of

“ambiguity”

• Supplementation of trust terms by

statute or court Trustee’s Actions

• Fiduciary obligations and duties
• Acts of self-interest
• Potential removal and replacement

33

Problems with the Trustee: A Common Example

Homer and Marge Simpson write a revocable trust plan, with distributions to survivor and then to children at survivor’s death. It is funded with their entire estate. Lisa is nominated to serve as successor trustee in the event that the surviving spouse no longer can. The relationship between Bart and Lisa has deteriorated significantly since Homer’s death. When Marge was diagnosed with Alzheimer’s, and Lisa began acting as trustee, things between the children got worse.

34

Layman’s Terms

What are some of the “Bart concerns” that we’ve heard?

 Lisa won’t let me see the Trust instrument.  Lisa is mismanaging (or not managing) the assets.  Lisa won’t tell me what’s going on with the money.  Lisa is residing in trust property without paying rent.  Lisa let Maggie drive Homer’s car, and she wrecked it.  Lisa says that I borrowed money from Dad and is withholding a part of my distribution.  Lisa and I think that the Trust says different things.  Homer never thought things would get this bad. This Trust needs to change.  Lisa can’t handle this job – I think we need a bank.

35

Laywer’s Terms - Claims Against Trustees

What are the legal concepts that we tie to “Bart concerns?”  Breach

• Duty of Reasonable Care
• Duty of Loyalty
• Duty to Account
• Duty of Full Disclosure
• Duty of Impartiality

 Self-Dealing  Modification

36

Layman’s Terms

What are some of the “Lisa defenses” that we’ve heard?

 I disclose to Bart everything that the Trust instrument tells me to – and not a word more.  I’m not the one managing the assets – I’ve delegated that responsibility.  I live in trust property without paying rent because I’m not compensated to serve as Trustee.  Bart borrowed money from Dad and I’m withholding a part of his distribution to pay it back. Here’s the loan document.  I let Maggie drive the car because I have discretion to permit it.  Bart and I think that the Trust says different things.  Since Bart knew and didn’t disagree, he can’t complain. Right?

37

Laywer’s Terms – Defenses by Trustees

What are the legal concepts that we tie to “Lisa’s defenses?”  Reasonableness  Delegation  Fairness of self-dealing transactions  Discretion  Estopped beneficiary

38

Core Litigation Concepts

Claims

• 1. Breach of fiduciary duty (Duty / Breach / Cause / Harm)
• a. Particular emphasis on the duty of full disclosure
• 2. Self-dealing

Defenses

• 1. Exercise of discretion
• 2. Reasonable delegation

Remedies

• 1. Accountings
• 2. Declaratory actions
• 3. Removal and the award of attorneys’ fees

39

Fiduciary Duties Defined (Texas)

General Duty of Trustees

The Trustee shall administer the trust in good faith according to its terms and this subtitle. In the absence of contrary terms in the trust instrument or contrary provisions of this subtitle, in administering the trust the Trustee shall perform all duties imposed on trustees by the common law.

• Tex. Prop. Code §113.051

40

Fiduciary Duties Defined (Texas)

What the General Duty Tells Us:

“...according to its terms...” The Trust instrument is always the first source. “...absence of contrary terms...”  The governing statute is the next stop. “...by the common law...”  Not every obligation of Trustees is statutory.

41

What Duties are we Talking About?

The Big Ones

• 1. Any duty created by the trust instrument
• 2. Duty of Reasonable Care
• 3. Duty of Loyalty
• 4. Duty of Impartiality
• 5. Duty of Full Disclosure

42

Duty of Reasonable Care

The fundamental duties of a trustee include the use of the skill and prudence which an ordinary capable and careful person will use in the conduct of his own affairs. Scott & Ascher on Trusts

43

Duty of Loyalty

One of the most fundamental duties of the trustee is that he must display throughout the administration of the trust complete loyalty to the interests of the beneficiary, and must exclude all selfish interest and all consideration of the interests of third persons.

Scott & Ascher on Trusts

44

Duty of Impartiality

When there are two or more beneficiaries of a trust, the trustee is under a duty to deal impartially with them.

Scott & Ascher on Trusts

45

Duty of Full Disclosure

A trustee must inform the beneficiary of all the material facts in connection with the non-routine transaction which significantly affects the trust estate and the interest of the beneficiary prior to the transaction taking place.

Allard v. Pacific National Bank, 663 P.2d 104 (Wash. 1983). Allard would eventually be overruled by codification of the Trustee’s duty to account because of the “uncertainties” created by the common law duty.

46

The Duty to Disclose

Is it a Duty or a Weapon?

• Keeps the Trustee honest
• Probably lines up with the Settlor’s intentions
• Does it really create work? OR Isn’t this guy

supposed to be keeping records anyway?

• Open to abuse by disgruntled beneficiaries
• May drive up cost of trust administration and

disgruntle other beneficiaries

• Can be strategically used to avoid formal

discovery procedures

47

The Duty to Disclose

Is it affirmative or is it passive?

• Must a Trustee proactively disclose facts

to beneficiaries? OR

• Can the Trustee wait until a request or

demand is made to disclose?

48

The Duty to Disclose (Texas)

1. Huie v. DeShazo, 922 S.W.2d 920 (Tex. 1996.) 2. Montgomery v. Kennedy, 669 S.W.2d 309 (Tex. 1984).

The Texas duty to disclose:

• Exists despite acrimony between a Trustee and a

beneficiary;

• Exists notwithstanding litigation between a Trustee

and a beneficiary (independent of discovery);

• Is not the equivalent of a statutory accounting; and
• Exists whether a beneficiary asks for trust

information or not.

49

The Duty to Disclose (Texas)

A Statutory Accounting Doesn’t Always Cut It

• All trust property that has come to the Trustee’s knowledge or

into the Trustee’s possession and that has not been previously listed or inventoried as property of the trust;

• A complete account of receipts, disbursements, and other

transactions regarding the trust property for the period covered by the accounting, including their source and nature, with receipts of principal and income shown separately;

• A listing of all property being administered, with an adequate

description of each asset;

• The cash balance on hand and the name and location of the

depository where the balance is kept; and

• All known liabilities owed by the trust.
• Tex. Prop. Code §113.152

50

The Duty to Disclose (Texas)

What Other Information Could I Get Under the Duty?

• Back-up information and supporting documentation for

everything that the statutory accounting should illustrate Example: Sale of land by Trustee

• Terms of the sale
• Reason(s) for selling the land
• Basis of selling price
• Any relationship shared between Trustee and buyer

51

Self-Dealing

Absent contrary Trust language or court approval, Trustees get to wear but only one hat. Self-dealing implicates the duty of loyalty. Texas Settlors can relieve their Trustee of the prohibition against self-dealing to the extent that their actions do not constitute gross negligence, bad faith, or fraud.

52

Self-Dealing – What Does it Look Like?

• Trustee buying trust

property

• Trustee leasing trust

property to himself

• Trustee buying

claims against interests in trust property

• Corporate trustee

buying its own stock

• Same Trustee

buying and selling between trusts

• Corporate Trustee

depositing cash within itself

• Trustee of a

business competing against that business

53

Practice Tip – Claims Against the Trustee

• Make a demand for an accounting as early

and as often as permitted under the trust instrument and/or statute

• If pursuing breach under disclosure duty,

locate your “material fact”

• Transaction-specific
• Check the pattern jury charges and test your

theory of the case – is your client truly aggrieved, or are they merely upset?

54

Pattern Jury Charge (Tex. 2010)

Under the pattern jury charges, the questions to the jury regarding fiduciary breach ask whether:

• The transaction was fair and equitable to the principal;
• The fiduciary made reasonable use of the confidence

the principal placed in him;

• The fiduciary acted in good faith and honesty toward

the principal;

• The fiduciary placed the interest of the principal before

his own; and

• The fiduciary fully and fairly disclosed all important

information to the the principal concerning the transaction.

55

Trustee Defenses

• Express authority in the trust instrument
• Reasonable (and documented) exercise of discretion

where discretion is permitted

• Reasonable (and permissible) delegation
• Including reasonable care afforded to supervising the

work delegated by the Trustee to another

• Consent / Estoppel

56

Practice Notes for Defending Fiduciaries

• Respond to reasonable requests for information
• Advise non-litigant beneficiaries of the anticipated expense
• f litigation – the enemy of my enemy is my friend.
• Consider declaratory judgment in order to better define the

fiduciary’s obligations

• BUT, consider the expense of initiating such action, and

the possibility of counterclaims by the beneficiaries that you must serve and join

• Look for opportunities to shift the costs – consider

attorneys’ fees as an effective deterrent

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Trust Litigation: Defenses of Fiduciaries and Claims of Beneficiaries Burdette & Rice, PLLC

Probate | Trusts | Estates | Guardianships

www.dallasprobateattorneys.com

Brian Thomas

Brian@dallasprobateattorneys.com

Burdette & Rice, PLLC 6750 Hillcrest Plaza Drive, Suite 204 Dallas, Texas 75230

• Ph. (972) 991-7700
• Fx. (972) 991-8654

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