For how long estate planners have been using interconnections between trusts and family entities as estate planning techniques, only recently have appellate courts outside of New York started to tackle these issues in reported decisions. In In re Estate of Stuchlik (as modified, in part,here), the Supreme Court of Nebraska addressed – but did not answer – a question left open by the Supreme Court of Georgia in Rollins v. Rollins: what’s the appropriate standard of care when a trust holds a controlling interest in a family entity?
Edward J. Stuchlik, Jr. and his wife, Margaret, had a pretty common estate plan. They formed a limited partnership into which they conveyed all the farm real estate they owned. Originally, Stuchlik and Margaret were the general partners and owners of 100 percent of the partnership interests. Later on, they gifted equal limited partnership interests to their three sons: John, Edward, and Kenneth. When Stuchlik died, his will provided that substantially all of his assets should be transferred to a family trust, the income and assets of which were to be expended as needed to support Margaret with the remainder to Kenneth, John, and Edward. Margaret and Kenneth were named as co-trustees of the family trust. Thus, at the time of the dispute, the partnership was owned by John (22.1888% limited partnership interest), Edward (22.1888% limited partnership interest), Kenneth (22.1888% limited partnership interest), Margaret (1% general partnership interest and 16.7168% limited partnership interest), and Margaret and Kenneth as co-trustees of the family trust (16.7168% interest, including the 1% general partnership interest originally held by Stuchlik).
After Stuchlik’s death, disputes arose between Stuchlik’s family members concerning the trust, the estate, and activities in the partnership, and John sought to remove Margaret as personal representative of Stuchlik’s estate and to have Margaret and Kenneth removed as co-trustees of the family trust. The county court denied these removal requests and, among other things, ruled that it could not consider the activities in the partnership because those were outside the court’s limited probate jurisdiction. The Nebraska Supreme Court reversed and remanded for the limited purpose of reviewing Margaret’s and Kenneth’s activities in regard to the partnership as evidence of any potential breach of fiduciary duties as co-trustees because their activities as general partners of the partnership related to their fitness as co-trustees.
The Nebraska Supreme Court held that when an entity is held by a trust and where a controlling share of that entity is exercised by a trustee against the best interests of any trust beneficiary, it is a breach of the duty of loyalty. Specifically, the Nebraska Uniform Trust Code provides that “[i]n voting shares of stock or in exercising powers of control over similar interests in other forms of enterprise, the trustee shall act in the best interests of the beneficiaries. . . .” This apparently extends to partnership interests. Thus, assuming that John’s allegations were true, under Nebraska’s definitions of a trustee’s fiduciary duties, Margaret and Kenneth may have breached their fiduciary duties to John as a beneficiary of the trust through their management of the partnership.
Of course a trustee owes trust beneficiaries a duty of loyalty, but does the capacity in which Margaret and Kenneth took the alleged wrongful actions make a difference? The Georgia Court of Appeals certainly thinks it makes a difference. All the more reason that trustees who control family entities should consider how to differentiate the capacity in which they are acting when taking an entity-level or trustee-level action.