Kentuckian John G. Stoll was, among other things, a well-regarded philanthropist and the former owner of the Lexington Herald Newspaper. When he died in 1959, he left behind a significant fortune, and dozens of heirs. By 2013, approximately 55 years after Mr. Stoll’s death, the two trusts he settled for his heirs were valued at over $100 million, and had 151 beneficiaries.
A recent dispute concerning the administration of those two trusts highlights the importance and benefits of engaging a competent and proactive institutional trustee. In the case of J.P. Morgan Chase Bank, which serves as trustee over Mr. Stoll’s two trusts, it charted a difficult and admirable course in an uncertain legal landscape, to advance the interests of a large number of beneficiaries – despite lingering but unfounded objections from a single beneficiary who attempted to stand in the way.
In James Beardmore v J. P. Morgan Chase Bank (opinion not final), the Kentucky Court of Appeals approved a modification Mr. Stoll’s trusts by adding “directed trust” provisions and approving the transfer of the trust's administration to Delaware.
The first of Mr. Stoll’s two trusts arose under his 1932 Trust Agreement, and the second under his Will which took effect at his death in 1958. Following the death of Mr. Stoll’s wife, the two Trusts had identical dispositive provisions, providing for Mr. Stoll’s children and their descendants until 21 years after the death of Mr. Stoll’s children and issue living at the time of his death. By the time this case was filed by J.P. Morgan Chase Bank in Fayette County (Lexington), there were already 28 income beneficiaries and 133 living contingent beneficiaries.
The Trustee filed a suit to reform them and thereby formalize and expand the role of a “Family Trust Committee.” The intent and effect of the modified role of the Family Trust Committee was to direct the Trustee on all trust decisions, thereby making it a “directed trust.” The Trustee contended that modification was warranted because Mr. Stoll had not anticipated trust administration through a directed trust, or the various investment strategies associated therewith, because they did not exist when he was alive. The Trustee posited, and an overwhelming majority of beneficiaries agreed, that Mr. Stoll would have incorporated these features into his trusts had they been available during his lifetime, because it was in-keeping with his intent to maximize the income to the beneficiaries by whatever legal means necessary. To that end, the Trustee also sought the transfer of the Trusts to Delaware, in order to save state income taxes.
While 143 of the total 151 income and contingent beneficiaries signed consents to these modifications, eight did not. One of them objected in Court to the modifications, arguing that the decedent had never intended the family to have control of the investments of the trust through the Family Trust Committee. Directed trusts are frequently created or administered in Delaware, where there are very strong trust laws enabling the directed trusts to function with limited liability and reduced fees for the Trustee.
The Court approved the modified and expanded role of the Family Trust Committee under a Kentucky statute, which protects the bank from liability where there is a committee to direct the Trustee’s actions. KRS 286.3-275. The Court also embraced the Trustee’s reliance on the equitable deviation doctrine, allowing the Court to modify the provisions of the Trusts if the modification will further the purposes of the Trusts under circumstances not anticipated by the Settlor. While the case was brought two days before the effective date of the Uniform Trust Code, the Court also cited a provision of the UTC allowing trust modification on the same grounds. KRS 386B.4-120(1). The Court agreed that Mr. Stoll could not have anticipated trust administration through directed trusts and various investment strategies, because they did not exist when he was alive.
The court also approved the transfer of the administration of the Trusts to Delaware, in order to save state income taxes for the family. The Court noted the Uniform Trust Code provision and its predecessor obligating the Trustee to administer the Trust in a place appropriate to its purposes, its administration and the interests of its beneficiaries. KRS 386B.1-060(2). Even though the Trust was established under Kentucky law and 63 of the total beneficiaries lived in Kentucky, the Court found that the state income tax savings (estimated at approximately $100,000 per year), which would accrue to the family upon becoming a Delaware Trust, justified the change of place of administration.
The Court also wrestled with some difficult jurisdictional issues, as to whether the District Court or the Circuit Court had jurisdiction to hear the case. Since the enactment of the Uniform Trust Code in Kentucky in 2014, jurisdictional disputes of this sort have plagued several significant trust litigation matters – including one decided by the Kentucky Court of Appeals in mid-2016 involving notable real estate holdings in Louisville. See Coe, et al. v. Shaw, et al., No. 2016-CA-000405-OA (Ky. App. May 10, 2016).
In the Beardmore case, the Trustee had originally filed its action in District Court, under the statute then in effect for non-adversarial probate proceedings. KRS 24A.120. Then, when the beneficiaries raised objections to the proposed trust modification and transfer, the Trustee filed an original, new action in Circuit Court, on the basis that the District Court lost jurisdiction when the beneficiaries contested the proposed trust modification and transfer. This second action was filed two days before the effective date of the enactment of the Uniform Trust Code in Kentucky, which would, according to opinion, have conferred exclusive jurisdiction on the District Court.
There was a transitional rule under the UTC that such pre-existing cases would be heard and handled under pre-existing trust law if applying the new UTC provisions would substantially interfere with the effective conduct of the judicial proceedings, or prejudice the rights of the parties. The Appeals Court affirmed the ruling of the Circuit Court that it retained jurisdiction, even after the effective date of the UTC in Kentucky. The Appeals Court found that the record supported the Circuit Court’s findings of jurisdiction, and noted that moving the matter back to District Court would result in significantly more delay and expense to the Trusts, including the need to re-serve or re-notice all of the 151 beneficiaries. Based on the lower court’s determination of its own jurisdiction, the Appeals Court affirmed on that issue.
As the Beardmore case demonstrates, administering a high-value trust over the decades with numerous family members and divergent interests can be remarkably complex. This is particularly true in a changing legal landscape, but it is the prudent trustee who helps beneficiaries take advantage of new legal and tax-saving opportunities. Likewise, meaningful reform of the jurisdictional provisions within the Kentucky Uniform Trust Code could also minimize uncertainty and expense in trust disputes of this sort.