Until recently, the matter of removing a trustee of a trust was largely a matter for Courts applying common law based on prior Court decisions. Since 2000, however, a number of states, including Kentucky, have adopted the Uniform Trust Code (“UTC”), which includes an elaborate trustee removal provision. However, two recent cases illustrate that application of the UTC to attempted trustee removals is not necessarily straightforward, and often involves the interplay of multiple UTC provisions.
In re Trust of Hildebrandt, 2017 WL 128836 (Kan. Ct. App. 2017) involved a trust agreement that appointed the drafting attorney as the successor trustee. If the drafting attorney failed to serve, his law firm was next named as the successor trustee. The current trust beneficiary petitioned the Court to have his niece appointed as successor trustee, and all remainder beneficiaries of the trust consented to the appointment of the niece as successor trustee. The law firm challenged their removal (the drafting attorney having died previously). The Court decided the matter of whether the successor trustee appointment was effective under the UTC provision governing modification of trusts by the consent of all of the qualified beneficiaries.
Under that provision of the UTC, a noncharitable irrevocable trust may be modified upon consent of all qualified beneficiaries if the Court concludes modification is not inconsistent with a material purpose of the trust. Interestingly, the Court did not cite or apply UTC Section 706, which permits removal of a trustee if removal is requested by all qualified beneficiaries and the Court finds (a) that trustee removal serves the best interest of all beneficiaries, and (b) removal is not inconsistent with a material purpose of the trust. Nevertheless, the opinion focused largely on whether the appointment of the lawyer, and then his law firm, as successor trustee constituted a material purpose of the trust. There was no provision in the trust limiting the successor trustees to independent trustees, nor any explanation of the selection of the lawyer and then his law firm. The Court found that a material purpose must be based on the showing of particular concern or objective on the part of the settlor, and is not something readily to be inferred. The Court therefore found that the appointment of the lawyer and law firm were not material purposes, and the beneficiaries could modify the trust to name the niece as successor trustee.
The law firm’s secondary argument was that the change of successor trustee violated a no-contest provision in the trust. That clause prohibited any beneficiary from contesting the trust, objecting to any provision of the trust, or interfering with the administration of the trust. The Court concluded that a change of trustee by Court Order did not constitute interference with the trust in violation of the clause.
In another case, In Re Conservatorship of Marcia G. Abbott, 295 Neb. 510 (2017), the remainder beneficiaries of two trusts sought the Court’s removal of the trustee of each trust. Both trusts had been established under a joint revocable living trust created by a husband and wife. At the husband’s death, the assets were divided between a Survivor’s Trust (revocable by the surviving spouse), and an irrevocable Family Trust that the surviving spouse could not revoke. When the surviving spouse had a stroke, one of the couple’s children assumed the role of successor trustee of both trusts. The son facilitated several money transfers between different financial accounts associated with the two trusts, commingling their assets. An expert testified that the transfers were a violation of the trust terms, which did not permit commingling of the assets of each trust. Also, the expert testified that there were gift tax consequences resulting from the transfer of assets from the Survivor’s Trust to the irrevocable Family Trust. In addition, the son who was serving as trustee repeatedly threatened to equalize himself for additional inheritances which his siblings had received earlier from an aunt, who had left the son-trustee less than his siblings.
The son-trustee’s primary defense was that he could not be removed as trustee of the revocable Survivor’s Trust because under an express UTC provision, the trustee only owed a duty to the settlor of a revocable trust during the settlor’s lifetime. The Court rejected his argument, finding that the UTC allows any beneficiary to request the Court to remove a trustee, including beneficiaries with a present or a future beneficial interest. The trial court also found that the son-trustee had breached his duties to administer the Trust in good faith, with impartiality and loyalty to the beneficiaries, and failed in his duty to inform and report to the beneficiaries. Based on all of these breaches, the Court removed the son as trustee of both the revocable Survivor’s Trust and the Family Trust.
These cases demonstrate how complex and potentially interrelated the various provisions of the UTC may be. Any trust administrative action, including removal of a trustee, is often more complicated than it appears at first blush, due to the potential applicability of multiple UTC provisions.