Time to get into the weeds on the scope of a trustee‘s powers.  There are basically two sources of power for a trustee – the trust instrument and state law.  Where those two intersect, overlap, conflict, or diverge is where you will likely find the bulk of fiduciary litigation about trustee powers.

In Rendall v. Black, the Court of Appeals of Kentucky dug into both the trust instrument and Kentucky trust law to reverse a local circuit court’s ruling that declared a 1994 deed void ab initio based upon the language of a trust agreement.  In doing so, the appellate court got to differentiate between the trustee’s power to distribute income versus the trustee’s power to sell off the corpus of the trust.  And we saw a brief – and curious – appearance of the trust pursuit rule.

When J.D. Hays died, his wife, Martha, got one-half of his 50 percent interest in a tract of land in Knott County, Kentucky.  Martha placed her then-75 percent interest in the Knott property in trust.  When Martha died, pursuant to the trust agreement, separate, individual trusts were created for the benefit of each of her surviving children.

With respect to the trust income, Martha intended to “grant a liberal degree of fiduciary discretion to the Trustees to make income and corpus available to the beneficiaries for reasonable purposes, it not being intended to grant any beneficiary a power to withdraw or appoint assets.”  With respect to the Knott property that comprised almost all of the trust corpus, Martha granted the trustees all but total authority to alienate the Knott property.

The survivor trusts were to continue until the death of the respective children of Martha.  Upon the death of each of Martha’s children, “his or her separate trust shall end and the remaining balance thereof . . . shall be distributed in fee simple, per stirpes and free of trust to the then living issue of” that deceased child.  The survivor trust for one of Martha’s children, Kathlyn Riddle, was a little different.  Rather than distribution per stirpes to Kathlyn’s then-living issue, upon Kathlyn’s death the remainder of her survivor trust would get distributed to Martha’s then-living issue.  In other words, the remainder of Kathlyn’s trust would be distributed to Kathlyn’s siblings instead of her only child, Daniel.

Martha did, however, grant Kathlyn a limited testamentary power of appointment regarding the trust remainder which could include Daniel.  Kathlyn executed a will, but did not exercise her limited power of appointment.

After Kathlyn died, Johnny Cornett, the successor trustee of Martha’s trust, executed a deed conveying the Knott property to Martha’s surviving children and Kathlyn’s estate for consideration of $1.00.  Daniel believed that he inherited a portion of the Knott property through Kathlyn’s estate, which acquired it from the trust pursuant to that deed.

Kathlyn’s surviving siblings and the heirs of her deceased siblings claimed the deed conveying the Knott property was void and that the trustee should have distributed Kathlyn’s survivor trust assets in equal shares to Kathlyn’s siblings rather than to her estate.  Of their arguments, the important one for our purposes is their argument that the trust didn’t permit the trustees to distribute the corpus to the estate of a deceased beneficiary.  Or, put differently, that the trustee lacked the authority to sell the property.

The trial court agreed that the deed was void, but the appellate court disagreed.  Here’s why:

As an initial matter, it’s hornbook law that even where a trustee lacked authority to sell real property, his or her conveyance of trust property operates to vest legal title in the grantee.

Also, Martha’s trust instrument really set the groundwork for what the trustee could and couldn’t do.  The trustee couldn’t distribute trust income to the estate of a deceased beneficiary and the estate of a deceased beneficiary could not be a beneficiary of the trust.  But, that’s not what happened here.  Under the trust instrument, the trustee did have the power to sell or otherwise dispose of the trust corpus.  While the trustee was prohibited from selling the property during Martha’s lifetime, he had free rein to sell it after her death.  That was the transaction here – it wasn’t a distribution of corpus, it was a sale for the amount of $1.00.  The court was prohibited from looking beyond the four corners of the deed for why the transaction occurred – it was required to take it on its face, which evinces a simple sale of property.  Nothing in the deed indicated that it was intended as a distribution of assets.  Therefore, the deed was valid.

We said that the trust pursuit rule made an appearance, and it did.  The trust pursuit rule applies under Kentucky law only where there is an allegation that the trustee converted real property.  There was no such claim here and, therefore, equity would not compel restitution to the trust beneficiaries.  The somewhat interesting twist is that while other jurisdictions have applied the trust pursuit rule to real property, Kentucky apparently limits its application to personal property since an action for conversion in Kentucky lies only with respect to personal property and real estate is not subject to conversion.