The Journal of The DuPage County Bar Association

Back Issues > Vol. 23 (2010-11)

The Related Trustee: Old Lessons Learned from New Case Law
by Neil Goltermann

The use of trusts in estate planning is becoming more and more common and with good reason.  There are numerous advantages that may lead someone to select a trust for his or her primary estate planning vehicle.  In making such a choice, one of the most important decisions the grantor must make[1] is who will serve as trustee and successor trustee.  Grantors think of family members, especially their children, professional advisors such as accountants, financial planners or attorneys, and, institutional trust departments as possible candidates.

Recently, I was asked by a client to serve as the trustee of trusts for her daughters if something happened to her.  This hasn’t happened very often.  It was, of course, very flattering.

My first, fleeting thoughts went to one possible future: with me as a wizened, sage counselor providing advice to the trust beneficiaries.  My client would have passed away if I was serving as trustee and her daughters would likely be mature adults.  However, if asked, would I be able to adequately explain to them that their mother would have wanted them to have a more practicable mode of transportation than a candy apple red convertible sports car?

I gratefully declined.  A good general rule is to not get involved as trustee for clients’ trusts.  When asked, I usually ask the client if it wouldn’t be better for their family to still be able  to retain me as their attorney.  This usually puts us back on the hunt for acceptable trustees.  It is not an easy task, identifying a trustee.  But sometimes clients don’t understand the difficulty involved in serving as a trustee: that it can be a thankless job holding off successor beneficiaries, usually family members, who want distributions yesterday, some who think they know best what their deceased family member wanted and feel free to share their knowledge with anyone and everyone in the family.  The issues and difficulty in identifying individuals to serve as trustee are highlighted in several recent reported cases from our appellate and federal courts.

The Attorney as Trustee. In Janowiak v. Tiesi,[2] the family attorney was trustee of an irrevocable trust the family patriarch had established to hold the stock of the family business.[3]

In Janowiak the plaintiff claimed the defendant, the attorney, in his role as trustee of an irrevocable family trust, breached fiduciary duties by failing to disclose material information and securing a release of fiduciary duties from plaintiff.  The irrevocable trust held the stock of a family owned and run business.  The plaintiff was an employee of the company, along with his brother and father, and a beneficiary of the trust.  The defendant was the father’s estate and the tax planning attorney who had agreed to serve as the trustee.[4]

The claims revolved around allegations of a plan by the father and brother to defraud plaintiff of his interest in the family business by making it look like the company was not performing well.  They also did not provide the plaintiff with information about the company.  However, they did offer to purchase the plaintiff’s interest in the company.[5]

Before selling his stock the plaintiff went to the trustee asking for relevant records of the company, including its financial performance.  The trustee refused, telling the plaintiff his father’s permission would be needed.  The next thing the trustee did was resign because of a conflict of interest since he was the father’s attorney.  In so doing, the trustee also asked the plaintiff to sign a document that made the plaintiff the successor trustee and released the trustee from liability.[6]

The plaintiff’s lawsuit was dismissed by the trial court.  The trustee asserted, among other arguments, that he was released from liability to the plaintiff.  The appellate court, however, reversed noting there were many issues of fact that required remand back to the trial court.[7]

The appellate court found there were material issues of fact, which if proven, would likely defeat the trustee’s reliance on the release, including allegations that the trustee’s silence and concealment of the scheme defrauded plaintiff, and further that the trustee’s concealment induced plaintiff to later sign the release.[8]

The appellate court also observed that a release between a trustee and a beneficiary, just as all transactions arising out of the fiduciary relationship, is subject to close scrutiny.  Further, the court found that important factors in reviewing whether a release is fair include (1) was there a free and frank disclosure of all the relevant information by the trustee; (2) was the consideration adequate, and (3) was there competent and independent advice before completing the transaction.[9]

The appellate court did not treat kindly the trustee’s argument that the plaintiff was negligent because he did not search for information on his own.  The court called this a “bold assertion” and found there was no authority that a “trust beneficiary has a duty to disregard his own trustee’s representations and ferret out information for himself.”[10]  The court further noted, “the fact that plaintiff had access to corporate records due to his position as a shareholder does not diminish plaintiff’s rightful reliance on the representations made by defendant as his trustee, especially with the attendant high fiduciary duties owed to plaintiff.”[11]

The Friendly Uncle as Trustee.  In Woolard v. Woolard[12], the plaintiff was the only beneficiary of a trust his father established for him when he was a baby.[13]  The defendant, plaintiff’s uncle, was chosen by his brother to administer the trust.  Plaintiff's father eventually funded the trust with over $800,000.  The value of the trust was approximately $18,000 when plaintiff's father died.  Between 1990 and 2001 the uncle distributed more than $850,000 to plaintiff's father.[14]

As trustee, the uncle had the sole discretion to pay income or principal (i) for the benefit of the beneficiary; (ii) directly to the beneficiary; (iii) to the legally appointed guardian of the beneficiary; or, (iv) to a custodian under the Uniform Gifts to Minors Act.[15]  The uncle asserted that the distributions were made to plaintiff’s father, that the trust agreement allowed discretion to distribute trust funds to plaintiff’s father, and further, the Illinois Trusts and Trustees Act allowed authority to distribute funds to plaintiff’s father as an adult relative of the minor beneficiary.

The Seventh Circuit found several problems with the uncle’s arguments: the uncle did not keep records of the purposes for the funds distribution to plaintiff’s father; the uncle never requested or received any receipts from plaintiff's father indicating how the funds were used for the benefit of plaintiff; the trust agreement specifically did not allow the father to receive distributions; and the trust agreement’s specific exclusion of the father could not be overcome by the Trust and Trustees Act which could allow for such a distribution.[16]

Lastly, the uncle argued that it was logical and appropriate to have trust assets given to the plaintiff’s father, since the father is the person with the legal duty to support plaintiff.  The Seventh Circuit dispatched this argument with its usual alacrity by stating, ‘[t]his argument does not require serious discussion.”[17]  The court did add, though, that the uncle, as trustee, could not “avoid his specifically enumerated duties and limitations under the Trust Agreement by pointing to the common law duty of parents to support their children.  Similarly, it does not matter whether Defendant believed the money was benefitting Plaintiff and furthering the intent of the settlor; the Trust Agreement simply did not allow distributions to Plaintiff’s father.”[18]

In addressing the adequacy of the uncle’s record keeping the Seventh Circuit honed in on the trustee’s obligation to provide adequate records to trust beneficiaries, generally, and to the plaintiff’s uncle in this case,[19] observing that beneficiaries are entitled to learn from the trustee the property in and out of the trustee’s hands, disbursements, receipts and disbursements in cash, sources of cash, identity of payees.  Thus, as the Illinois Trust and Trustees Act states, “[e]very trustee at least annually shall furnish to the beneficiaries ... a current account showing the receipts, disbursements and inventory of the trust estate.”[20]

The Brother and Business Partner as Executor and Trustee. Prignano v. Prignano involves a breach of fiduciary and breach of oral contract (oral buy-sell agreement) that reflects the potential problems inherent when family members become over-reliant on handling the business and probate issues when one of them dies.  George died owning several businesses with his brother Louis.[21]  Louis was named the executor of George’s estate.  Louis was also the trustee of the testamentary trust created in George’s will for the children of his second marriage.[22]  George and Louis had purchased life insurance through their businesses.  Even though it is apparent the reason for the life insurance was to fund a buy-sell agreement the brothers did not have a formal written agreement.  Shortly after George’s death and after he was appointed executor Louis told George’s widow the insurance proceeds were to be used so that the wives did not become involved in the business.[23]   George’s widow also thought she had an agreement with George to exchange her husband’s interest in the businesses for the insurance proceeds.[24]

Louis settled the insurance claim, received the proceeds, and never told his brother’s widow the proceeds were collected, did not list the insurance as an asset, and, filed a final accounting that showed he received one-half of all the shares.[25]  It wasn’t until two years later that George’s widow learned the insurance proceeds had been received, leading to the lawsuit.  The trial court found Louis breached an oral buy-sell agreement with his brother, breached an oral agreement with his brother’s widow to purchase shares in exchange for the payment using the insurance proceeds.[26]

The appellate court agreed with the trial court that Louis owed fiduciary duties to his brother’s widow and children as the executor and as the trustee of the children’s trust.[27]  Even without the agreement with his brother, the court observed Louis breached his fiduciary duty as executor to carry out the provisions of the will, distributing ownership interests in the businesses through the residuary clause.[28]  In addition, since they were owners of the business Louis owed them a fiduciary duty as a corporate officer of the “highest degree of honesty and good faith…prohibiting enhancement of [his] personal interests.”[29]  Louis also tried to avoid liability for his actions by asserting the widow waived her right to seek recovery of the insurance proceeds because there was no objection to the final inventory or closing of the estate.[30]  The appellate court noted that George’s will was not the widow’s only source of legal rights against Louis, because of the breach of fiduciary duty and oral contract.  However the appellate court also determined the widow could not have intentionally relinquished her rights because Louis did not report the proceeds in the final inventory and never told her the proceeds had been collected.[31]

Conclusion.  Janowiak, Woolard and Prignano are variations on a theme, representative of the ongoing troubles involved when choosing someone to serve as trustee.  Traits of a good trustee include being knowledgeable and aware, and perhaps, a bit selfless.  Trustees should also have a sense of commitment for doing the right thing.

Conflicts abound.  A sibling may be a great business partner.  However, that same sibling, who perhaps has a right to purchase a portion of the grantor’s business from an estate or trust, likely shouldn’t serve as the trustee.  At the least, if the sibling seems to be the best choice to serve as trustee,  a co-trustee should be considered where that sibling will have an interest in one of the trust assets and have several “legal hats” giving rise to duties that could pose legal and moral dilemmas for anyone serving in such roles.  The grantor and his or her advisors need to be very discerning when choosing trustees.  The grantor’s actions can help put a trustee in the right situation, thus providing impetus for the plans to be implemented and goals reached.

Communication is important.  The beneficiaries should know what to expect and what is planned, including who is named as trustee.  The trustee should know what the grantor’s plans and expectations are for the trust assets.  These are things that can occur during a grantor’s lifetime.  When the time comes to serve as trustee, when the grantor is no longer around to explain things and lay out the rules, the trustee needs to continue communicating with the beneficiaries about trust developments and any changing circumstances.  The trustee should also let the beneficiaries know how best to communicate with him or her during the regular work day, as well as in any emergency situation.  Further, remembering Woolard, the trustee needs to be a consummate record keeper.

[1] There are numerous terms used to describe the person who is making a trust: settlor, trustmaker, grantor, trustor.  All generally are descriptive.  This article will refer to that person as the grantor.

[2] Janowiak v. Tiesi, 402 Ill.App.3d 997, 932 N.E.2d 569 (1st Dist. 2010).

[3] Delving into the ethical issues of an attorney choosing to serve as a trustee is not the function of this article, but they are apparent from the review of the facts, circumstances and ruling of the appellate court.  We’ll leave the ethical issues aside since they deserve an article unto itself, if not a treatise or two.

[4]  Janowiak v. Tiesi, 402 Ill.App.3d 997, 932 N.E.2d 569, 574 (1st Dist. 2010).

[5]  Janowiak v. Tiesi, 402 Ill.App.3d 997, 932 N.E.2d 569, 574 (1st Dist. 2010).

[6]  Janowiak v. Tiesi, 402 Ill.App.3d 997, 932 N.E.2d 569, 574 (1st Dist. 2010).

[7]  Janowiak v. Tiesi, 402 Ill.App.3d 997, 932 N.E.2d 569, 578 (1st Dist. 2010).

[8]  Janowiak v. Tiesi, 402 Ill.App.3d 997, 932 N.E.2d 569, 579 (1st Dist. 2010).

[9]  Janowiak v. Tiesi, 402 Ill.App.3d 997, 932 N.E.2d 569, 580 (1st Dist. 2010).

[10]  Janowiak v. Tiesi, 402 Ill.App.3d 997, 932 N.E.2d 569, 583 (1st Dist. 2010).

[11] Janowiak v. Tiesi, 402 Ill.App.3d 997, 932 N.E.2d 569, 584 (1st Dist. 2010).

[12] Woolard v. Woolard, 547 F.3d 755 (7th Cir. 2008).

[13]  Woolard v. Woolard, 547 F.3d 755, 757 (7th Cir. 2008).

[14]  Woolard v. Woolard, 547 F.3d 755, 757 (7th Cir. 2008).

[15]  Woolard v. Woolard, 547 F.3d 755, 758 (7th Cir. 2008).

[16]  Woolard v. Woolard, 547 F.3d 755, 759 (7th Cir. 2008), citing 760 ILCS 5/3(1) (“A person establishing a trust may specify in the instrument the rights, powers, duties, limitations and immunities applicable to the trustee, beneficiary and others and those provisions where not otherwise contrary to law shall control, notwithstanding this Act.  The provisions of this Act apply to the trust to the extent that they are not inconsistent with the provisions of the instrument.”)

[17] Woolard v. Woolard, 547 F.3d 755, 760 (7th Cir. 2008)

[18] Woolard v. Woolard, 547 F.3d 755, 760 (7th Cir. 2008)

[19]  The only records the trustee had were monthly brokerage statements from the sole brokerage account used by the Trust, which kept a log of all transfers in and out of the trust.

[20] Woolard v. Woolard, 547 F.3d 755, 760 (7th Cir. 2008), citing 760 ILCS 5/11(a).

[21] Prignano v. Prignano, __ Ill.App.3d __, 934 N.E.2d 89, 95 (2nd Dist. 2010).

[22] Prignano v. Prignano, __ Ill.App.3d __, 934 N.E.2d 89, 100 (2nd Dist. 2010).

[23] Prignano v. Prignano, __ Ill.App.3d __, 934 N.E.2d 89, 97 (2nd Dist. 2010).

[24] Prignano v. Prignano, __ Ill.App.3d __, 934 N.E.2d 89, 97 (2nd Dist. 2010).

[25] Prignano v. Prignano, __ Ill.App.3d __, 934 N.E.2d 89, 89 (2nd Dist. 2010).

[26] Prignano v. Prignano, __ Ill.App.3d __, 934 N.E.2d 89, 99 (2nd Dist. 2010).

[27] Prignano v. Prignano, __ Ill.App.3d __, 934 N.E.2d 89, 99-102 (2nd Dist. 2010).

[28] Prignano v. Prignano, __ Ill.App.3d __, 934 N.E.2d 89, 102 (2nd Dist. 2010).

[29] Prignano v. Prignano, __ Ill.App.3d __, 934 N.E.2d 89, 101 (2nd Dist. 2010), citing Hagshenas v. Gaylord, 199 Ill. App. 3d 60, 71, 557 N.E.2d 316 (2nd Dist. 1990).

[30]  Prignano v. Prignano, __ Ill.App.3d __, 934 N.E.2d 89, 107 (2nd Dist. 2010)

[31] Prignano v. Prignano, __ Ill.App.3d __, 934 N.E.2d 89, 107 (2nd Dist. 2010), citing  Siwek v. White, 388 Ill.App.3d 152, 157-58, 905 N.E.2d 278 (1st Dist. 2009).

Neil Goltermann is an attorney with Momkus McCluskey, LLC in Lisle, Illinois and the Chairman of the DCBA Estate Planning Committee. He concentrates his practice in estate planning, trust administration and probate. He earned his B.A. from DePauw University in 1977 and his J.D. from DePaul University College of Law in 1980.

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