Common Everyday Disputes
Among Beneficiaries, Trustees,
and Co-Trustees
by
Carol A. Cantrell
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Common Disputes
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Discretionary distributions under HEMS
Ambiguous trust provisions
Unsigned trust agreements
Nonjudicial settlement agreements
Divorce of the co-trustees
Liability of co-trustees
Release of one co-trustee, but not another
Reimbursement of attorney fees from the trust
Failure to exercise the power to adjust
Allocating expenses between income and principal
Declaratory Judgment Act
• The Declaratory Judgment Act allows a trustee or a
beneficiary to ask the court to decide any question
arising in the administration of the trust, including
construction or validity of the instrument or to direct
the trustee to do, or abstain from doing, any act in its
fiduciary capacity. Tex. Civ. Prac. & Rem. Code §
37.005.
• A trustee may not seek a declaratory judgment to
determine its potential liability for a tort. Abor v.
Black, 695 S.W.2d 564, 566-567 (Tex. 1985).
• Breach of fiduciary duty is a tort.
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Declaratory Judgment Act (cont.)
• Stern v. Marshall, 2015 Tex. App. LEXIS 7222
– Trustees’ counterclaim for a declaratory
judgment against the beneficiary in a will
contest was upheld because the trustee did not
ask the court to determine its tort liability, but
merely asked the court to determine the
parties’ rights to assets.
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Declaratory Judgment Act (cont.)
• Declaratory judgment action requires a
“justiciable controversy.”
• There was no “justiciable controversy” where a
beneficiary sued to compel the trustee to make a
distribution where the trustee had sole discretion
to make distributions in the best interest of the
beneficiary. Courts do not get involved in such
decisions absent fraud, misconduct, or abuse of
discretion. Di Portanova v. Monroe, 229 S.W.3d
324 (Tex. App.―Houston [1st Dist.] 2006).
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In Terrorem Clauses
• In terrorem clauses are intended to discourage
beneficiaries under a will or trust from filing
vexation litigation that would thwart the intent
of the grantor.
• In terrorem clauses are strictly construed to
avoid forfeiture of an inheritance when
possible. Ard v. Hudson, 2015 Tex. App.
LEXIS 8727; In Re Estate of Boylan, 2015
Tex. App. LEXIS 1427.
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In Terrorem Clauses (cont.)
• In terrorem clauses do not prevent a
beneficiary from suing the trustee for breach of
fiduciary duty or bringing a declaratory
judgment action. Tex. Estates Code § 254.005
(2015 amendment).
• Presumably, a beneficiary could file a petition
to adjust principal to income under the power
to adjust without violating a no contest clause
in the trust. However, the court will not change
the trustee’s decision unless it found an abuse
of discretion. Tex. Prop. Code § 116.006.
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Judicial Modifications
• On the petition of a trustee or a beneficiary, a
court may order that the terms of a trust be
modified or the trust terminated if, because of
circumstances not known to or anticipated by
the settlor, it will further the purposes of the
trust, prevent waste, or achieve the settlor’s tax
objectives, and is not inconsistent with a
material purpose of the trust. Tex. Prop. Code
§ 112.054.
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Judicial Modifications (cont.)
• The threshold inquiry, then, is what is the purpose of
the trust and whether the modification helps achieve
that purpose. Modifications that do not achieve its
purpose are not permitted.
• In Hubberd Testamentary Trust, the beneficiary
challenged the mediator’s standing to file a petition
to modify the trust in accordance with the terms of
the parties’ mediated settlement agreement. The
appeal court held that the mediator had standing as
an agent of the beneficiaries. In Re Hubberd
Testamentary Trust, 432 S.W.3d 358 (Tex.
App.―San Antonio 2014).
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Nonjudicial Family Settlement
Agreements
• Settlement agreements may be enforced under
contract law.
• Query whether family settlement agreements
to modify an irrevocable trust are enforceable
as a contract.
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Liability of Co-Trustees
• A trustee who does not join in an action of a cotrustee is not liable to the beneficiary for the cotrustee’s action unless he does not exercise
reasonable care to prevent a serious breach or
compel the co-trustee to redress it. Tex. Prop.
Code § 116.006.
• A beneficiary may release one co-trustee, but not
the other. Tex. Prop. Code § 114.005.
• There is no case law on whether a trustee can file
a claim for contribution against a co-trustee. Tex.
Civ. Prac. & Rem. Code § 33.016.
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Tortious Interference with Fiduciary
Duty
• Texas does not recognize a cause of action for
tortious interference with fiduciary duty. Taylor v.
Allstate Ins. Co., 356 S.W.3d 92, 100 (Tex. App. –
Houston [1st Dist.] 2011, pet. denied).
• Because of the special duties and relationship
involved, a fiduciary must exercise unfettered
control and discretion over his or her
performance. This necessarily precludes another
from exercising control over the fiduciary’s
performance to the degree necessary to justify the
imposition of vicarious liability. Id.
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Power to Adjust
• Trustees may adjust between income and
principal to rebalance it more impartially if the
trustee is investing for total return and is
required to make a distribution by reference to
income. Tex. Prop. Code § 116.005.
• A court may not order a trustee to change an
adjustment between income and principal
absent an abuse of discretion. Tex. Prop. Code
§ 116.006
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UPIA Power to Adjust
• An Oklahoma appeal court found that J.P. Morgan
Chase breached its fiduciary duty by exercising
the power to adjust in favor of the income
beneficiary, who was also a co-trustee, where the
investment strategy already favored the income
beneficiary, it did not verify her requests for more
income, and it did not ask her to release her power
to adjust as co-trustee. Matter of Burford, No.
PT-2006-013 (Okla. Dist. Ct. Oct. 9, 2012).
• Significantly, Oklahoma is one of the few states
that did not adopt UPIA’s provision preventing
judicial control over the trustee’s power to adjust.
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UPIA Power to Adjust (cont.)
• But see Estate of Morse, where a New York
Surrogate court held that the adjustment was an
appropriate exercise of the trustee’s power. The
remainder beneficiaries failed to show any abuse
of discretion, bias or arbitrary action, and Section
11-2.3A of New York’s Estates, Powers & Trusts
Act provides that “[a] court shall not change a
fiduciary’s decision to exercise or not exercise an
adjustment power unless it determines that the
decision was an abuse of the fiduciary’s
discretion.” Estate of Morse, Index No. 83862
(N.Y. Sur. Ct. Dutchess Cty. 2006).
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Power to Adjust (cont.)
• “The determination of whether an adjustment
between principal and income distributions is
necessary often will require a review of data
related to trust investment and returns at the close
of the year…[the UPIA] language clearly
indicates that the power to adjust may be
exercised correctively, after the trustee has an
opportunity to review trust data and trustee
investment decisions for the immediately
preceding year.” Matter of Orpheus Trust, 179
P.3d 562 (Nev. 2008).
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Allocation of Expenses
• Trustee shall allocate one-half of the trustee’s
regular compensation and investment advisory
fees to income, unless the trustee determines
that a different portion, none, or all of the
compensation should be allocated to income,
consistent with his fiduciary duties. Tex. Prop.
Code § 116.201 (2013 amendment).
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Attorneys’ Fees
• The cost of judicial proceedings that involve
both income and remainder interests is
allocated one-half each to income and principal.
Tex. Prop. Code § 116.201(2).
• A trustee may reimburse itself from the trust for
expenses incurred while administering and
protecting the trust. Tex. Prop. Code § 114.062.
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Attorney Fees (cont.)
• A trustee is entitled to reimbursement for expenses
incurred defending himself even if found guilty of
ordinary negligence or mismanagement, but not for
the intentional commission of a wrongful act. In the
Guardianship of Hollis, 2014 Tex. App. LEXIS
12038.
• The fiduciary who seeks reimbursement for its legal
fees bears the burden to show that it was acting
reasonably and in good faith when it engaged in the
conduct underlying the proceedings. Moody
Foundation v. Estate of Moody, 1999 Tex. App.
LEXIS 8597.
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Attorney Fees (cont.)
• In any proceeding under the Texas Trust Code,
a court may make such an award of costs and
reasonable and necessary attorney fees as may
seem equitable and just. Tex. Prop. Code §
114.064.
• To determine whether an award is equitable
and just, requires consideration of, among
other factors, the size of the expenditure
relative to the size of the estate. Lesikar v.
Moon, 2014 Tex. App. LEXIS 10041.
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Delegation of Investment and
Management Functions
• A trustee who delegates investment and
management functions must exercise reasonable
skill and care in selecting the agent, establishing
the scope and terms of the engagement, and must
periodically review and monitor the agent’s
performance. Tex. Prop. Code § 117.011.
• An Ohio appeal court found that a trustee need
not be heavily involved in the agent’s duties as
long as he periodically reads the investment
reports and does not “fall asleep at the wheel.” In
this case, a large part of the losses were due to a
widespread market correction. O’Neill v. O’Neill,
169 Ohio App. 3d 852 (2006).
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Delegation (cont.)
• In contrast, a California appeal court found a
trustee grossly negligent for failing to monitor the
manager of a trust-owned LLC where the trustee
should have removed the manager, but sad idly by
while the manager sold the LLC’s major asset to a
financially unsound buyer, granted multiple
extensions on missed loan payments, and loaned
him additional sums of money for a building
project, all of which should have raised red flags
for a reasonably prudent fiduciary. Hughes v.
Klein, 2015 Cal. App. Unpub. LEXIS 2279.
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Delegation (cont.)
• In deciding whether to delegate, the trustee
must balance the costs against the benefits.
The trustee must protect the trust from
“double-dipping.” If the trustee’s regular
compensation includes a fee for investment
management, the trustee should lower its fee
when delegating the investment function to an
outside manager. cmt. Tex. Prop. Code §
117.011.
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Arbitration Clauses in Trust
Agreements
• Arbitration is a hearing in which one or more
arbitrators, acting by majority, hear evidence and
argument on a dispute between the parties and render a
judgment.
• Where a settlor specified that “despite anything herein
to the contrary,” arbitration will be “the sole and
exclusive remedy” for “any dispute of any kind
involving this Trust or any of the parties or persons
connected herewith (e.g. beneficiaries, Trustees)…” the
court must compel arbitration. Rachel v. Reitz, 403
S.W.3d 840 (Tex. 2013).
Sample Trust Arbitration Clause
• Arbitration of Disputes. If a dispute arises
between or among any of the beneficiaries
hereunder and the Trustee, or any combination
thereof, such dispute shall be resolved by
submitting the dispute to binding arbitration. It is
the Settlor's desire that all disputes between such
parties be resolved amicably and without the
necessity of litigation.
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Pros and Cons of Trust Arbitration
• Pros
▪ Reduces waste of the trust assets by legal
fees
▪ Speeds up resolution of the issue
▪ Encourages compromise among the parties
• Cons
▪ Arbitration awards have the same effect as a
Texas Supreme Court judgment.
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