The concept of a statute of limitations is easy to understand: a lawsuit has to be commenced within so many years after the complained of act occurred or pursuit of the lawsuit may be forever barred. Where it gets tricky are the exceptions to this rule. For example, if the wrongdoer concealed the wrongful act or the wrongful act occurred in some way that made it highly unlikely that the aggrieved person would know about it, then the statute of limitations should not start running until the injured person knows or through reasonable diligence should have known about the wrongful act. This “tolling” of the statute of limitations is typically referred to as the discovery rule: the statute of limitations doesn’t start running until a plaintiff knew or reasonably should have known of the alleged wrongful act.
Not all states apply the discovery rule, and not all states apply it to every cause of action. However, many jurisdictions apply the discovery rule to fiduciary related actions. As an example, the equitable discovery rule was applied in Utah to a lawsuit regarding a trust.
More specifically, a beneficiary of an Irrevocable Trust, Analisa, was unaware she was a beneficiary of this trust. Bowen v. Bowen, 264 P.3d 233 (Utah Ct. App. 2011). Subsequently, the trustee of the Irrevocable Trust sought an order from the court allowing the Irrevocable Trust to be amended to remove Analisa as beneficiary of the Irrevocable Trust. Though the trustee provided notice via three separate publications of the requested trust modification, this information was never put in the record at the trial court level.
In Utah, a four-year statute of limitations applies to most trust disputes. Under appropriate circumstances, however, the discovery rule applies, and it applied to Analisa’s trust lawsuit.
While it’s true that Analisa’s claim accrued when the amendment to the Trust was executed, the evidence before the court showed that Analisa lacked constructive or actual notice of the Trust until many years later, and thus, the statute of limitations did not start running until it was determined she had constructive notice.
In order to guard against the discovery rule, some trustees may consider providing notice and information to beneficiaries even if it is not required by the underlying trust instrument or statute. Depending on the jurisdiction, best practice may be at a minimum, unless otherwise prohibited, to inform the trust beneficiaries of the existence of the trust. As a trustee, it is important to make every effort to keep the beneficiaries’ addresses current so actual notice can be provided and documented.
This addresses the problem in Bowen of not providing a beneficiary notice of the existence of a trust, but may not suffice to start the clock running on claims for breach of fiduciary duty. As trustee it is also important to keep beneficiaries apprised of the trust administration by sending regular written reports (i.e., account statements). Some states, like Colorado, actually reward trustees for doing so by shortening the statute of limitations if a beneficiary receives a “final account or other statement fully disclosing the matter…” Colo. Rev. Stat. § 15-16-307.
The trustee, must employ undivided loyalty to the beneficiaries concerning all matters related to their trust and will be held accountable if he or she acts adverse or contrary to the interest of this relationship. As we learned from the Bowen court, a trustee may not be able to rely on the statute of limitations to defend their actions, unless they can prove what type of notice was provided to a beneficiary and when the beneficiary received that notice. With the financial conflicts facing individuals and families today and the aging of the general population, more trust beneficiaries and family members are becoming concerned with the fiduciary duties of the trustees of their individual trusts. Thus, best practice may be to provide more information than is required by the underlying trust instrument.