Resolving Trustee Deadlocks | Resolving Trustee Disputes
“Resolving Trustee Deadlocks,” that’s the subject of today’s ACTEC Trust and Estate Talk.
This is Travis Hayes, ACTEC Fellow from Naples, Florida. Today we will be discussing what happens when trustees can’t agree, and you run into a deadlock. To give us more information on this topic, you will be hearing today from ACTEC Fellows, Mary Downie of Chicago, Illinois, and John Moran of West Palm Beach, Florida. Welcome to John and Mary.
Thank you, Travis. Good to see you here. This is an issue that we think is one that’s both practical and necessary for anybody who deals with administration or litigation issues. You might say it’s easy to say we only have one trustee but people put multiple trustees in and when that happens, people don’t always agree. Look, as a threshold issue I think we want to tell you that we start with the UTC; we start with the restatement. It’s kind of, the majority rule is that trustees who are unable to reach a unanimous decision can act by a majority decision but, you know, that’s got a little bit of tweak based on which state you are in. Tell us more about that, Mary.
Absolutely. And, it’s not only what state you are in but what your trust instrument says, of course. If your trust instrument covers these topics, you have to go with what the trust instrument says. If it doesn’t, the states have default rules. For trustee action, most states, as John said, have majority rule. If you have three trustees, two can act and outvote the third. There is unanimous consent required in some states by default, including California. If you have a situation where you have multiple trustees and they are in disagreement, and you have been outvoted, for example, what do you do? Are you just outvoted and that’s it? Or are there obligations?
Step 1 is, call an ACTEC Fellow.
Exactly. And step 2 is to take a look at what the dissent requirements may or may not be for your state. There are formal dissent requirements for a number of states, including Florida, for example, New York, Ohio and Texas. There are a number of states that require a formal dissent by a dissenting trustee. There are no formal dissent requirements in some states and, of course, dissent is not applicable if unanimity is required for trustees to act. Consider the location of the state and the relevant statutes, and the trust instrument when you are looking at that. Another thing you have to consider is if you have dissented, is that enough? If you have just lodged a formal dissent, is that really enough? Again, that varies based on the default rule or the trust instrument. Do you have to take steps to redress a breach of trust by a co-trustee?
Well, what is a breach of trust in this context?
That’s a very good question, and it depends again on the state. Some of the states say that you have to act to prevent a material breach of trust. Some of the states say you have to act to prevent a serious breach of trust. A couple of states say just a breach of trust. And what does that mean? What do you have to do to redress or prevent a breach?
I bet you the answer is, it depends.
I think you are right. And, I think the answer is obviously first, you would need to tell your co-trustee that you believe they are engaging in a breach of trust, and perhaps a discussion can help. You might need to lodge a written objection saying that you see a breach of trust and you are acting to prevent it. And you might have to petition the court.
Augh. Once you are in that situation, you are already off the train tracks. But one of the things that you can do is back up to the beginning here. When you are sitting down, doing the planning, consider, do I really need multiple trustees? I mean obviously, on the pro side, different trustees bring complementary skill sets. There can be checks and balances. There can be delegation but, you know, everybody, everything is puppies and roses until people disagree. As soon as there is a disagreement, even on something minor, all of the benefits you got from, you know, having folks helping each other goes out the window. Things become inefficient; there is miscommunication and there is increased expense because people are going to have to seek counsel, and two trustees that don’t see eye to eye probably aren’t going to have the same lawyer.
You mentioned court intervention. You know, you are right. You can go to court and a lot of folks will say, “Hey, that’s what we do when trustees disagree.” There is a whole list of things, a menu of things that can happen once you go to court. If the trustees don’t agree, the court can say, “Here is what the decision is.” Or, the court could appoint an additional trustee to break the deadlock or the trustee could say, “I am not going to go with what these feuding trustees say.” You know, “I am going to appoint a trustee ad litem; he is going to make the decision or she is going to make the decision.” But there is actually kind of a fourth option here as well, which is all hell breaks loose. You have got a mess. You go to the judge and you come up with, who knows what’s going on and be careful what you wish for. I call it the “ad litems gone wild.” Sometimes you think it’s a great idea to bring somebody else in and, you know, it may not be what you are expecting. But, that’s for me, with a perspective of dealing with contested administration and litigation. You have a very interesting viewpoint on this being with a big trust company and you have the corporate fiduciary tag, which I think is interesting.
Yes. It’s interesting because I spent a number of years in private practice before I became a corporate fiduciary. I have worked with a couple of corporate fiduciaries, and things that you don’t think of in private practice impact — when you have multiple trustees — impact the process. Just the logistics. If you have multiple trustees, do you have a delegation? Is there a time lag just to get a basic decision made and move forward because you have to have multiple people signing off on it?
There is also a rigor around the decision process and documentation. Something that an individual trustee might do quickly, a corporate trustee has a process around it to make sure that the decision is being done in a way that makes sense. There are issues from a corporate trustee’s perspective, in terms of operationalizing decisions. If you are asked to determine someone’s competency, or whether someone is addicted, that’s something that logistically is difficult for a corporate trustee to make that decision. It is easy to act on a decision that someone is incompetent but harder for the corporate trustee to make that decision because there is not daily interaction with someone who may or may not be addicted.
It sounds like just appointing a corporate trustee and to break the deadlock isn’t going to be the panacea that folks might think it is.
Perhaps not. And I think what people should do is consider, what’s the goal, and why are you looking at corporate trustees, or not corporate trustees, multiple trustees? Some people want multiple trustees because they feel they have to treat all of their children fairly. And is that the reason to do it, or do you want to pick the right skill sets for the trustee or trustees that you have chosen? And if you choose, multiple trustees, identifying roles, setting forth mechanisms, and hopefully thinking ahead about what issues might create a deadlock and trying to plan for that.
I think I will leave it with this. If you are going to put multiple trustees in, think about it very carefully on the front-end because it may sound great, but there are all kinds of unintended consequences that could follow. It has been a pleasure, Mary.
Thank you. Great, John.
Very informative. Thank you to John and Mary for giving us more information on resolving trustee deadlocks.
This podcast was produced by The American College of Trust and Estate Counsel, ACTEC. Listeners, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal or tax advice from their own counsel. The material in this podcast is for information purposes only and is not intended to and should not be treated as legal advice or tax advice. The views expressed are those of speakers as of the date noted and not necessarily those of ACTEC or any speaker’s employer or firm. The information, opinions, and recommendations presented in this Podcast are for general information only and any reliance on the information provided in this Podcast is done at your own risk. The entire contents and design of this Podcast, are the property of ACTEC, or used by ACTEC with permission, and are protected under U.S. and international copyright and trademark laws. Except as otherwise provided herein, users of this Podcast may save and use information contained in the Podcast only for personal or other non-commercial, educational purposes. No other use, including, without limitation, reproduction, retransmission or editing, of this Podcast may be made without the prior written permission of The American College of Trust and Estate Counsel.
If you have ideas for a future ACTEC Trust & Estate Talk topic, please contact us at ACTECpodcast@ACTEC.org.
© 2018 – 2020 The American College of Trust and Estate Counsel. All rights reserved.
Latest ACTEC Trust and Estate Talk Podcasts
A review of the dangers of borrowing from a charitable endowment fund during the 2020 pandemic and financial crisis.
What is ante-mortem probate? How does it differ from premortem probate and is it the ultimate will contest prevention technique?