Removal Of A Trustee Under Arkansas Law

My previous blog post generally discussed principles associated with the removal of executors or personal representatives of an estate.  This post is similar except that it analyzes this issue in the context of trusts rather than estates.  Every trustee of a trust, and every beneficiary of a trust, should be aware of these principles as well.  

To remedy a breach of trust under the Arkansas Trust Code, the Court may:

(1) compel the trustee to perform the trustee’s duties;

(2) enjoin the trustee from committing a breach of trust;

(3) compel the trustee to redress a breach of trust by paying money, restoring property, or other means;

(4) order a trustee to account;

(5) appoint a special fiduciary to take possession of the trust property and administer the trust;

(6) suspend the trustee;

(7) remove the trustee as provided in § 28-73-706;

(8) reduce or deny compensation to the trustee;

(9) subject to §28-73-1012, void an act of the trustee, impose a lien or a constructive trust on property, or trace trust property wrongfully disposed of and recover the property or its proceeds, or

(10) order any other appropriate relief. 

See Ark. Code Ann. § 28-73-1001(b).

Also, section 706 of the Trust Code further elaborates on the removal of an trustee:

(a) the settlor, a co-trustee, or a beneficiary may request the court to remove a trustee, or a trustee may be removed by the court on its own initiative.

(b) A court may remove a trustee if:

(1) the trustee has committed a serious breach of trust;

(2) lack of cooperation among co-trustees substantially impairs the administration of the trust;

(3) because of unfitness, unwillingness, or persistent failure of the trustee to administer the trust effectively, the court determines that removal of the trustee best serves the interests of the beneficiaries;

(4) there has been a substantial change of circumstances or removal is requested by all of the qualified beneficiaries, the court finds the removal of the trustee best serves the interests of all of the beneficiaries and is not inconsistent with a material purpose of the trust, and suitable co-trustee or successor trustee is available.

See Ark. Code Ann. § 28-73-706(a) and (b) (emphasis added).

So, as one can tell the grounds for removal of a trustee are very broad.  Accordingly, similar to estates, those administering trusts in the State of Arkansas must take their duties seriously so as to avoid placing themselves in a situation in which their actions and inactions could be questioned.  Similarly, beneficiaries of a trust should be vigilant in monitoring the conduct of the trustee to ensure that they are properly doing their job.  In the appropriate case, Arkansas courts have not hesitated to remove trustees where the facts and circumstances warrant it. 

American Bar Association Releases "Legal Guide For The Seriously Ill: Seven Key Steps To Get Your Affairs In Order"

Estate, trust and probate litigation often involves allegations that elderly adults' estate planning desires were not carried out after their deaths (either by someone's intentional acts or negligence), or that those elderly adults were taken advantage of and their estate planning desires were thwarted while they were still living (albeit without their knowledge or consent).  With respect to the latter scenario, sometimes the claims are true, and sometimes they aren't.  Issues of (in)competency, illness, undue influence, and fraud are often raised in these types of proceedings.   Each case is different and we have certainly represented those doing the accusing as well as those being accused. 

But one common theme that I have noticed in virtually all of these cases is that no matter how much estate planning that the elderly person actually did, in virtually every situation they probably could have done a bit more.  It might not have ultimately made a difference with respect to whether or not litigation would have resulted, but where more planning is undertaken that can frequently result in a lesser likelihood of later conflict. 

With this in mind, thanks to a tip on the Wills, Trusts & Estates Blog, the American Bar Association has apparently just released the "Legal Guide For The Seriously Ill: Seven Key Steps To Get Your Affairs In Order."  I've given the document an overview and  would heartily recommend it to anyone dealing with such circumstances (or anyone with a loved one who is dealing with this situation).

UPDATED: Practical Help For Estate Administrators (Executors) & Trust Administrators (Trustees)

One of my very first posts on this blog generally discussed the legal duties of trustees under Arkansas law.  While that post summarized some of the more abstact legal principles at issue, a much more common question posed to me and other attorneys at dinner parties and elsewhere is what are the practical duties of trustees (and, similarly, the practical duties of estate executors, a.k.a. personal representatives). 

With this in mind, a couple of days before Christmas while doing some last-minute book shopping at Barnes & Noble for some friends, I happened to come across one of the best little books that I have seen on the subject.   Specifically, I was somewhat surprised to discover that "Estate & Trust Administration For Dummies" is a great resource for lay persons charged with the responsibility of serving as trustee for a trust or executor for an estate.  Even though I am historically the not-so-proud purchaser of multiple "Dummies" books on various mundane topics which I am too embarrassed to detail here, I must admit that I did not expect much substance when I first cracked open this text on the sparsely-populated "Law" aisle at B&N.  However, much to my surprise there was a tremendous amount of solid, easily understandable information there that---if utilized---should help any trustee or executor more ably and easily perform their duties and reduce the likelihood of future estate, trust or probate litigation. 

So, if you're a current or future fiduciary and have a bookstore gift card that you need to burn through, consider heading over to the probably-vacant leather chairs next to the Law section at B&N and checking out this book.  Considering the expense of this type of litigation, it might be the best 15 bucks that you'll ever spend. 

In closing, thanks for checking out the "Wealth Wars" blog over the first 3-4 months of its existence.  I wish you a happy and prosperous 2010.     

UPDATE:  The Arkansas Bar Association's website also has a free publication that may come in handy as well:  Handbook For Personal Representatives In Arkansas.  It is more of a very broad overview than anything else, but is still helpful since it is Arkansas-specific. 

UPDATED: Sentencing Time In The Ultimate Wealth War: The Astor Family Fortune

As we are in the midst of the holiday season and families all around the world are coming together to enjoy each other's company for a few fun-filled days (or in some cases a couple of miserable hours), it can be a little disheartening to read about (much less write about) another wealth war in the news.  However, this one is pretty spicy, has a celebrity aspect to it (Barbara Walters and Henry Kissinger were witnesses at the underlying trial), and even has some criminal twists and turns. 

Specifically, msnbc.com had an article today which contains one of the more extreme examples of an estate and trust battle.  I was vaguely familiar with Brooke Astor, or rather her last name due to her philanthropy, but became much more interested after hearing and reading of the unfortunate last few years of her life in which she was apparently taken advantage of by her only child.  Mrs. Astor's third husband, Vincent Astor, was a descendant of John Jacob Astor, whose fortune was accumulated in fur trading and real estate.  Mr. Astor was one of the first multimillionaires, and Mrs. Astor ultimately gave away almost $200 million to institutions and was given a Presidential Medal of Freedom for her generosity.  She passed away in 2007 with many more tens of millions in her portfolio. 

According to the msnbc.com article, Anthony Marshall, Mrs. Astor's son, apparently led a successful, well-regarded life until one of his own sons, Phillip Marshall, exposed his father's apparent abuse of his mother (Phillip's grandmother) and her wealth in the course of a 2006 civil suit.  The stealing of her fortune was evidently so bad that the 85 year old Marshall actually was convicted of crimes a couple of months ago after a 5 month long trial and now faces sentencing next week, along with an estate lawyer who was likewise convicted of shenanigans associated with Mrs. Astor's fortune.  The case is rather intriguing given the fact that celebrities such as Whoopi Goldberg and Al Roker have come to his defense and pleaded for leniency from the sentencing judge.  Only time will tell whether he actually receives it, as there were tales told at trial of Papa Marshall engaging in gamesmanship with respect to Mrs. Astor's will so as to benefit him over her favorite charities, stealing her artwork, and giving himself a million dollar raise for his efforts in managing her wealth. 

As a lawyer who has previously worked on many white collar criminal defense matters, I speak from some experience in stating that white collar crime is pretty rarely prosecuted.  The public seems to be more taken aback by crimes of drugs, sex, and violence, and therefore the politicians and the strapped resources of governmental officials are largely dedicated to prosecuting those types of crimes.  White collar crimes are also typically complex, document-intensive, and often go uncovered much less unprosecuted. 

The Astor/Marshall case, however, is one instance in which the facts and circumstances can occasionally be so bad that they warrant more than a civil suit and instead the intervention of criminal investigators.  I do not know why, for instance, stealing $100,000 from a relative by altering some documents is any less of a prosecutable crime than stealing a carton of cigarettes from a convenience store, but for some reason it seems like the latter is much more likely to receive the attention of the law enforcement authorities.  In any event, the Astor/Marshall case contains lessons for lawyers and wealthy individuals alike in ensuring that the estate planning and trust administration processes are as free of hanky-panky as possible. 

UPDATED:  According to msnbc.com, Phillip Marshall was sentenced to 1-3 years in prison, although he may be able to stay out of prison on bail pending appeal.  According to the New York Times, Mr. Marshall's lawyer apparently received the same sentence.

Avoiding Estate, Trust & Probate Litigation

Since one of my areas of practice is estate, trust & probate litigation, it is obviously not in my economic self-interest to counsel against getting involved in this type of litigation in the first place.  However, first and foremost is a lawyer's duty to his or her client, which while sometimes involves filing or defending a lawsuit can also mean trying to avoid that lawsuit altogether.  After all, Abraham Lincoln once advised:  "Discourage litigation. Persuade your neighbors to compromise whenever you can. Point out to them how the nominal winner is often a real loser---in fees, expenses and waste of time."  That is still generally solid advice, although sometimes the fight just cannot be avoided.

That said, U.S. News published a good little article over the Thanksgiving holiday entitled "8 Tips To Avoid Nasty Estate Surprises" which provides some good pointers for avoiding estate, trust & probate litigation.  In summary:

1.  Pick aa reputable, experienced lawyer who has not performed any work for any of the other beneficiaries.  Basically, you want an attorney who knows what they are doing in this area, who does not have a conflict of interest, and who will be representing your interests (only). 

2.  Pick an administrator who can get along with the family, maybe even a professional fiduciary (like a bank trust department) if no one else could practically fill this role.  This is a biggie---oftentimes when one beneficiary is chosen to act as executor or trustee it can cause consternation with respect to the other beneficiaries. 

3.  Talk about your intentions with family members before any will or trust is drafted, in order to preclude surprises and fights after death and making everyone aware of your plans and desires.  Open, honest communication can go a long way toward heading off battles over the family fortune. 

4.  Consider your state's laws and create trusts if necessary to bypass probate if it is particularly burdensome under applicable state law.  Again, our law firm engages in estate, trust & probate litigation---not estate planning---however we can refer you to some reputable attorneys in this area if needed.

5.  Update the will or trust often so that challenges are less likely.  One of the best ways to avoid litigation is to occasionally update your documents---under facts and circumstances (lots of objective, detached witnesses, etc.) demonstrating the absence of fraud and undue influence from others---so that it can be demonstrated you were polishing your estate and trust objectives up until the end your life.

6.  Be sure to title your assets properly so that the assets pass through or outside of probate as you originally intended.  Too many folks spend a lot of money creating fancy trusts and then never do the relatively simple work of actually transferring assets into the trust. 

7.  Think about including a no-contest clause tied to testamentary gifts of a degree sufficient to discourage legal disputes.  To help avoid post-death disputes it is worth possibly including a penalty clause that essentially poses a risk of losing their piece of the pie for any beneficiary who challenges the instrument  in question after your death. 

8.  Consider allowing some discretion with respect to distribution of assets so that beneficiaries can agree to a distribution that best meets their own needs and desires.  There is no one-size-fits-all strategy and of course none of us have a crystal ball, so sometimes providing for some flexibility is often a good practical solution. 

While not a fool-proof plan to avoid estate, trust & probate litigation, the foregoing reflects some good first steps to staying out of the courts with respect to the family fortune.  As we are in the heart of the Thanksgiving and Christmas seasons, I extend my best wishes to you with hopes for a fuss-free next few weeks.

Legendary College Football Coach's Son Sues Stepmom Over Trust Obligations

We're in the heart of the 2009 college football season and the Arkansas Razorbacks are having a better year than last year under second-year Coach Bobby Petrino (thank goodness), although losing against the Florida Gators a couple of weeks ago still stings.  Transfer Ryan Mallett had a fantastic game yesterday against the South Carolina Gamecocks, and it is interesting that his former coach at Michigan, Rich Rodriguez, is having a fairly mediocre year in his second year leading the Wolverines. 

This serves as a nice little segue into my latest blog post about a story involving legendary Michigan Coach Bo Schembechler.  Before passing away in 2006, according to the university's website he coached the Wolverines for 21 seasons and had a winning percentage of .796 overall and .850 in the Big Ten Conference.  Although he was never able to win a national championship while at Michigan, he took the Wolverines to 17 bowl games and won 13 conference titles. 

Given his success as a college football coach, and given the money that head football coaches make at major Division I universities, there is no doubt that Coach Schembechler accumulated some substantial assets over the years.  It appears that there is now a family dispute with respect to those assets, as a recent article discusses how Schembechler's son has sued his stepmother (his father's third wife) in Ohio federal court over her alleged failure to provide quarterly statements about the trust under which he is evidently a beneficiary. 

This is one of the most common types of disputes in trust litigation, because one of the very reasons that people form trusts is because of confidentiality concerns, and yet at the same time the beneficiaries of that trust desire and to some extent are entitled to certain information about the trust (depending upon each state's laws).  It will be interesting to see whether this particular conflict evolves into a larger dispute over trust administration and assets or is resolved quickly once the accounting issue is straightened out.

Modern Recordkeeping Fraught With Potential For Abuse When Individuals Die

An interesting article on msnbc.com from a few days ago sheds light on how modern day estate planning probably needs to catch up with the practicalities of modern day life.  Specifically, the article's author discusses how, years ago, when an individual died the survivors typically conducted a search of the house, papers, safety deposit box, etc. in order to determine and collect information and records regarding the assets and liabilities of the estate.  However, these days much of that type of information is not stored in "hard copy" form but rather on a computer, typically protected by a password and known only to the person who just passed away.  One never knows when they will breathe their last breath, of course, and often the decedent never shares their password with another family member, friend, or trusted legal or financial advisor.

As a lawyer who does not engage in estate planning but instead represents clients in estate, trust and probate litigation matters, I believe that the increasing use of digital record keeping is fraught with potential abuse.  Specifically, while most fiduciaries are honest and trustworthy, I have worked on many lawsuits in which shady estate and trust administrators are alleged to have destroyed, concealed, or otherwise failed to produce documents to beneficiaries.  When such records are never even printed out but rather are kept only in digital form, the beneficiaries' discovery of such matters can seemingly be made even more difficult if not impossible.  After all, in some ways it can be easier to manipulate digital data than a hard copy.  So, while computers can no doubt increase the efficiency and accuracy of diligent decedents and honest estate and trust administrators, it basically comes down (as it always does) to a universal truth---people who are inclined to cheat can probably find a way to do it.   

Statute Of Limitations For Breach Of Trust Suits Against Trustees

A couple of the most frequent questions in estate, trust, and probate litigation are:

(from trust beneficiaries)  "How long do I have to sue a trustee for breach of trust?", and

(from trustees or potential trustees)  "How long must I be concerned about potentially being sued for an alleged breach of trust?"

The Arkansas Trust Code (at Ark. Code Ann. Sec. 28-73-1005) addresses this issue and generally provides for two possible limitations of action:  (1) a shorter period when the trustee discloses the existence of a claim; and (2) a longer period if the trustee does not make a disclosure.

Basically, if the trustee discloses sufficient information to put the beneficiary on notice that they may have a potential claim, the beneficiary has one year after the date of the disclosure in which to bring suit.  Absent such a disclosure, the beneficiary has five years after the first to occur of: 

(1) the removal, resignation, or death of the trustee;

(2) the termination of the beneficiary's interest; or

(3) the termination of the trust

 in which to commence a claim against the trustee for the breach.

One question that does not appear answered by this statute (or any cases which so far have interpreted the statute) is whether the statute of limitation for breach of trust can be "tolled," or suspended, in situations where the trustee has engaged in fraudulent concealment.  If there has been concealment, Arkansas courts have generally held in other contexts that the statute of limitations does not begin to run until the person having the cause of action discovers the fraud or should have discovered it by the exercise of reasonable diligence. 

Eventually the Arkansas Court of Appeals or Arkansas Supreme Court will, once and for all, specifically decide whether or not the doctrine of fraudulent concealment also applies to the statute of limitations set forth in the Arkansas Trust Code.   Perhaps in doing so they can shed light on what statute of limitations, if any, applies to breaches of trust that are not governed by the Arkansas Trust Code (which only came into effect on September 1, 2005). 

No Breach Of Fiduciary Duty In Unique Trust Lawsuit

The Arkansas Court of Appeals recently ruled in an interesting case that a trustee's encumbrance of trust property did not, under the specific circumstances involved in the dispute, constitute a violation of the trustee's fiduciary duties.  Ordinarily such actions are looked down upon, but this case is an instance in which the unique facts involved apparently warranted a slight departure from the general rule.  

Specifically, on September 9, 2009, the Arkansas Court of Appeals issued its decision in the case of Hanna v. Hanna, #CA08-1256, which was an appeal from Washington County Circuit Court.  The ex-wife had sued her ex-husband for self-dealing, breach of fiduciary duty, and mismanagement of assets in their children's trusts.  The ex-wife had received a $16 million divorce settlement, and the ex-husbanddirected his chief financial officer to form a plan to gather the money (the couple had owned a successful candle company and several other entities) . 

Long story short, the ex-husband obtained loans to raise the funds and also used company assets as collateral for loans to company officers totaling $3 million.  The ex-wife brought the above-described claims against the ex-husband, and he defended arguing that he had not known it was wrong and that he had done it in the best interest of the children.  In doing so the ex-husband offered evidence that it was to the company's advantage that he settle, which he could only do by pledging company assets, and that the bank would not have funded the loan absent using company assets as collateral. 

Ultimately the trial court declined to award damages to the trusts or set aside the loan transactions, but did order the ex-husband to remove company assets as collateral for the officers' loans totaling $3 million.  The Arkansas Court of Appeals affirmed the trial court's decision, holding that this was not a situation in which a trustee was using trust assets solely to pay for his divorce settlement, nor was it an instance in which the trustee's actions failed to benefit the trusts.  The Court instead ruled that the parties to the lawsuit, the companies, and the trusts were all intertwined, and that the ex-husband's actions to carry out the divorce settlement in effect protected them all.  The Court did make clear, however, that its ruling was "confined to the particular circumstances of this case and should not be read to permit a trustee to encumber trust property in the absence of extraordinary circumstances."

General Duties Of A Trustee Under Arkansas Law

Clients and potential clients---whether a beneficiary of a trust or perhaps even the trustee of a trust---often ask about the duties of a trustee under Arkansas law.  This is a very broad question and cannot be done justice in a single Blog post.  

However, in general (unless the trust specifically overrides the general requirement) a trustee is charged with:

---A Duty To Obey The Grantor (while the trust is still revocable the duties of the trustee are owed to the grantor, and the trustee may generally follow a direction of the grantor even if it is still contrary to the trust's terms)

---A Duty Of Administration (to administer the trust in good faith, according to the trust's terms and purposes and the interests of the beneficiaries);

---A Duty Of Loyalty (perhaps the most important duty, which includes putting the interests of the beneficiaries above the interest of the trustee or any third party);

---A Duty Of Impartiality (whenever the trust has two or more beneficiaries, to act with impartiality with regard to the investment, management, and distribution of the trust property);

---A Duty Of Prudent Administration (regardless of whether the trustee receives compensation, to administer the trust as a prudent person would in light of the purposes, terms, requirements, and other circumstances of the trust);

---A Duty To Control And Care For Trust Property (to collect and insure trust property, pay debts and hire caretakers if necessary, keep adequate records, keep trust property separate from the trustee's own property, enforce claims of the trust, defend claims against the trust, not allow beneficiaries to use trust property unless otherwise allowed, etc.);

---A Duty To Report (to provide information about the trust in general, the trustee, the trust's existence, the trustee's compensation, the assets and liabilities, etc.; keep in mind that this duty may only come into effect once the grantor of a revocable trust is deceased or deemed incompetent);

---A Duty Of Confidentiality (trustees have been charged with the responsibility to keep trust matters, including the terms of the trust, the nature of the trust's assets, and the identity of beneficiaries, confidential unless waived by the terms of the trust or required by law);

---A Duty To Administer The Trust In An Appropriate Place (while the trustee can move a trust's primary place of administration, the trustee is under a continuing duty to administer the trust in a location that is appropriate in light of the trust's purposes, administration, and interests of the beneficiaries); and

---A Duty To Use Reasonable Care To Prevent Cotrustees From Breaching The Trust, And To Obtain Redress If A Breach Is Committed (this basically means just what it says---if the first trustee has a cotrustee [second trustee] and that second trustee is violating their fiduciary duties, the first trustee has an obligation to take reasonable action to prevent further harm).

A trustee's duties have been stated in different ways, but the foregoing is a fair summary of the trustee's primary obligations under Arkansas law.  Again, the terms of the trust itself can override some of these duties, which is why it is extremely important to read and understand the actual language of the trust instrument.  All of these issues will be examined in more depth in later Blog posts.