WHAT EVERY TRUSTEE SHOULD KNOW - · PDF fileWHAT EVERY TRUSTEE SHOULD KNOW MARY C. BURDETTE, Dallas Calloway Norris Burdette & Weber State Bar of Texas 25TH ANNUAL ESTATE PLANNING

WHAT EVERY TRUSTEE SHOULD KNOW

MARY C. BURDETTE, Dallas Calloway Norris Burdette & Weber

State Bar of Texas 25TH ANNUAL

ESTATE PLANNING & PROBATE DRAFTING October 9-10, 2014

Dallas

CHAPTER 4

MARY C. BURDETTECalloway, Norris, Burdette & Weber, PLLC

3811 Turtle Creek Boulevard, Suite 400Dallas, Texas 75219

214-521-1520 214-521-2201 Faxwww.cnbwlaw.com

email:[email protected]

AREAS OF PRACTICE

Probate, Trust and Fiduciary Litigation; Estate Administration; Guardianships, including ContestedGuardianships; and Wills and Trusts

EDUCATION

Juris Doctor Degree, cum laude, from Southern Methodist University School of Law 1982; Phi DeltaPhi scholastic honorary fraternity; Order of the Coif; Notes and Comments Editor, SouthwesternLaw Review

Bachelor of Science Degree in Accounting, summa cum laude, from the University of Texas atDallas 1978

PROFESSIONAL HISTORY

Admitted to the State Bar of Texas by the Supreme Court of Texas, November 1982

Calloway, Norris, Burdette & Weber, PLLC, Partner from 1994 to present

Thompson & Knight, Tax and Estate Section, 1982-1994 (Shareholder from 1987)

Board Certified Estate Planning and Probate Law - Texas Board of Legal Specialization

Board Certified Tax Law - Texas Board of Legal Specialization

Certified Public Accountant

Chair of Probate, Estates & Trust Section, Dallas Bar Association 2003-2004

Council Member, Real Estate Probate & Trust Law Section, State Bar of Texas 2004-2008

Fellow, American College of Trust and Estate Counsel

Member, Texas Board of Legal Specialization Estate Planning and Probate Law Legal AssistantExam Commission (1999-2004)

Certified by the State Bar of Texas Under Probate Code Section 646 to serve as an Ad Litem inGuardianship Proceedings

Named “Texas Super Lawyer” by Texas Monthly magazine since 2002

Listed in “The Best Lawyers in America” since 2001

Frequent speaker on matters involving probate, trusts, fiduciary law, guardianships and probatelitigation. List of speeches/articles is attached.

Member, Dallas Bar Association, Probate, Trusts & Estates Section

Member, State Bar of Texas, Real Estate, Probate & Trust Law Section

AV Rated by Martindale-Hubbell Bar Register of Preeminent Women Lawyers, 2012

MARY C. BURDETTE’S ARTICLES AND SPEECHES

Fiduciary Duties Within Fiduciary Duties, presented at the State Bar of Texas, Advanced EstatePlanning and Probate Seminar in 2012.

Handbook for the Fiduciary, Advising and Counseling Trustees, presented at The University ofTexas School of Law, Estate Planning, Guardianship and Elder Law Conference in 2012.

Enforcing Beneficiaries’ Rights, presented at: • The Tarrant County Probate Bar Association, Probate Litigation Seminar in 2010• The State Bar of Texas, Advanced Estate Planning and Probate Course in 2010. • The Probate Section of the Collin County Bar Association in 2011.

Keeping Your Plans From Getting Waylaid in Administration, Panel presentation at the State Barof Texas, Annual Advanced Estate Planning Strategies Course in San Diego, CA in 2011.

What Did You Mean By That? Trust Language and Application by Trustees, presented at the StateBar of Texas, Advanced Estate Planning and Probate Course in 2011.

Handbook for the Fiduciary Advising and Counseling Executors and Trustees, presented at theTexas Society of Certified Public Accountants, Advanced Estate Planning Conference in 2011.

Fiduciary Duties Within Fiduciary Duties: Trusts Owning Stock in a Closely-Held Corporation,presented to the State Bar of Texas, Fiduciary Litigation: Beyond the Basics Seminar in 2011.

Do’s and Don’ts for Fiduciaries, presented to the Fort Worth Estate Planning Council in 2009.

Attorney Liability Issues in Estate Planning and Probate, State Bar of Texas Fiduciary LitigationSeminar in 2008.

Death After Divorce, presented at the State Bar of Texas Advanced Estate Planning and ProbateCourse in 2008.

Handbook for the Fiduciary Advising and Counseling Executors and Trustees, presented at theTexas Bankers Association, Wealth Management and Trust Division, Estate Administration Seminar2008.

Handbook for the Fiduciary Advising and Counseling Executors and Trustees, Houston BarAssociation, Probate, Trusts and Estates Section Wills and Probate Institute - Fundamentals, in 2008.

Executor’s Handbook, presented at the Houston Bar Association Probate, Trusts & Estates Section,2007 Wills and Probate Institute - Fundamentals in 2007.

Fiduciary Issues, Panel presentation at the Advance Estate Planning Strategies Course, State Bar ofTexas, in Albuquerque, New Mexico in 2007.

Dealing With the Runaway Executor, Panel presentation with Mike Cenatiempo and Al Golden atthe State Bar of Texas, Advanced Estate Planning and Probate Course in 2006.

Dependent Administrations, presented at the Paralegal Division of the State Bar of Texas, TexasAdvanced Paralegal Seminar in 2006.

Pitfalls of the Not So “Simple” Probate, presented to the Docket Call Probate Seminar in SanAntonio, Texas in 2005.

Fiduciary Issues in Probate and Trust Matters, Handbook for the Fiduciary, Advising andCounseling Executors and Trustees, presented at the Houston Bar Association, Wills and ProbateInstitute 2005.

Standing Issues in Probate Litigation or No “Meddlesome Intruders” Allowed, presented at the Advanced Estate Planning and Probate Seminar in 2005.

Avoiding Probate Litigation, presented to the Dallas Bar Association Legal Assistants Section in2005.

Defending the Fiduciary’s Lawyer, Panel presentation to the Tarrant County Probate LitigationSeminar in 2005.

Handbook for the Fiduciary, Advising and Counseling Executors and Trustees, presented at the Advanced Drafting: Estate Planning & Probate Course in 2005.

Daubert - the Impact on Estate and Fiduciary Litigation, presented with Judge Steve M. King,Probate Court Number One, Tarrant County, Texas, at the State Bar of Texas, Advanced EstatePlanning and Probate Course in 2004.

Joint Tenancy with Right of Survivorship Accounts, Dallas Bar Association Headnotes Article, July2004.

Avoiding Probate Litigation, presented at the Tarrant County Probate Bar Association Third AnnualProbate Litigation Seminar in 2004.

Pitfalls of the Not So “Simple” Probate, presented at The Center For American and InternationalLaw, 43 Annual Program on Wills, Trusts and Estate Planning in 2004.rd

Evidentiary Issues in Probate and Fiduciary Litigation, presented at the Tarrant County Probate BarAssociation Probate Litigation Seminar in 2003.

Handbook for the Fiduciary Advising and Counseling Executors and Trustees, presented to theTravis County Bar Association in 2003.

Fiduciary Issues Regarding Financial Powers of Attorney, presented to the Tarrant County ProbateBar Association in 2002.

Experts in Probate, The Search for the Right Stuff, presented with Judge Steve M. King, ProbateCourt Number One, Tarrant County, Texas, at the Tarrant County Probate Bar Association, ProbateLitigation Seminar in 2002.

What Every Trustee Should Know Chapter 4

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TABLE OF CONTENTS

I. DUTIES AND RESPONSIBILITIES OF TRUSTEES .......................................................................................... 1 A. Sources of Authority ....................................................................................................................................... 1

1. Trust Instrument ...................................................................................................................................... 1 2. Texas Trust Code ..................................................................................................................................... 2 3. Texas Common Law ................................................................................................................................ 2 4. Other Potential Sources ........................................................................................................................... 2

B. Fiduciary Duties .............................................................................................................................................. 2 1. Defined. ................................................................................................................................................... 2 2. Categories. ............................................................................................................................................... 2 3. Limitations on Fiduciary Duties .............................................................................................................. 5

II. TRUST ADMINISTRATION ................................................................................................................................. 7 A. Distributions .................................................................................................................................................... 7

1. Trustee=s Duty to Make Distributions ...................................................................................................... 7 2. Standards ................................................................................................................................................. 7

B. Delegation of Duties ...................................................................................................................................... 17 1. Duty Not To Delegate. ........................................................................................................................... 17 2. Delegation Between Co-Trustees. ......................................................................................................... 17 3. Ability to Delegate Investment Decisions ............................................................................................. 17

C. Duties Concerning Investments ..................................................................................................................... 17 1. Uniform Prudent Investor Act. .............................................................................................................. 17 2. Standard of Care. ................................................................................................................................... 18 3. Diversification ....................................................................................................................................... 18 4. Duties at Inception of Trusteeship ....................................................................................................... 18

D. Trust Owning Closely-Held Business ........................................................................................................... 18 1. Diversification Issues ............................................................................................................................ 18 2. When Trustee is also Officer/Director - Standard of Care Issues .......................................................... 19

III. TRUST RECORDS AND ACCOUNTINGS ........................................................................................................ 21 A. Record Keeping ............................................................................................................................................. 21 B. Texas Trust Code Accounting ....................................................................................................................... 22 C. Trust Accounting Alternatives ...................................................................................................................... 22

IV. COMPENSATION................................................................................................................................................ 23 A. Compensation ................................................................................................................................................ 23 B. Reimbursement of Expenses ......................................................................................................................... 23 C. Exoneration for Torts .................................................................................................................................... 23

V. RESIGNATION AND REMOVAL OF TRUSTEES ........................................................................................... 23 A. Resignation .................................................................................................................................................... 23 B. Removal......................................................................................................................................................... 24

1. Judicial Proceeding ................................................................................................................................ 24 2. Removal Power in Trust Instrument ...................................................................................................... 24

C. Discharge of Liability Upon Resignation ...................................................................................................... 24 1. Judicial Release ..................................................................................................................................... 24 2. Non-Judicial Release ............................................................................................................................. 25

VI. LITIGATION TOPICS ......................................................................................................................................... 25 A. Duty of Impartiality ....................................................................................................................................... 25 B. Judicial Review of Discretionary Decisions .................................................................................................. 25 C. Remedies For Breach of Fiduciary Duties .................................................................................................... 26

1. Comprehensive Statutory List of Remedies .......................................................................................... 26 2. Damages ................................................................................................................................................ 26 3. Constructive Trust ................................................................................................................................. 28 4. Special Fiduciary Remedies .................................................................................................................. 30


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D. Attorney=s Fees .............................................................................................................................................. 33 1. Statutory Basis ....................................................................................................................................... 33 2. Trust Terms ........................................................................................................................................... 33 3. Legal Fees Allocation Clause ................................................................................................................ 34

APPENDIX A ............................................................................................................................................................... 35


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WHAT EVERY TRUSTEE SHOULD KNOW I. DUTIES AND RESPONSIBILITIES OF

TRUSTEES A. Sources of Authority

There are three main sources of guidance and authority for a trustee, in the following order of priority: (1) the trust instrument, (2) the Texas Trust Code, and (3) the common law. (All references to the ATexas Trust Code@ are to the Texas Trust Code, which is codified in Article 9 of the Texas Property Code.) 1. Trust Instrument

The terms of a trust, as set forth in the governing instrument, generally govern. It is well settled in Texas that the first principle of trust construction is to honor the intent of the settlor. To determine the intent of the settlor, a court looks primarily to the text of the written instrument establishing the trust. Nowlin v. First National Bank, 908 S.W.2d 283, 286 (Tex. App. B Houston 1995). Texas Trust Code Section 111.0035(b) provides:

The terms of a trust prevail over any provision of this subtitle, except that the terms of a trust may not limit:

(1) the requirements imposed under Section

112.031; (2) the applicability of Section 114.007 to the

exculpation term of a trust; (3) the periods of limitation for commencing a

judicial proceeding regarding a trust; (4) a trustee=s duty:

(A) with regard to an irrevocable trust, to

respond to a demand for accounting made under Section 113.151 if the demand is from a beneficiary who, at the time of the demand:

(i) is entitled or permitted to receive

distributions from the trust; or (ii) would receive a distribution from

the trust if the trust terminated at the time of the demand;

(B) To act in good faith and in accordance

with the purposes of the trust; and

(5) The power of a court, in the interest of justice, to take action or exercise jurisdiction, including the power to:

(A) Modify or terminate a trust or take other action under Section 112.054;

(B) Remove a trustee under Section 113.082;

(C) Exercise jurisdiction under Section 115.001;

(D) Require, dispense with, modify, or terminate a trustee=s bond; or

(E) Adjust or deny a trustee=s compensation if the trustee commits a breach of trust.

See also TEX. TRUST CODE ' 111.002 (If the terms of this subtitle and the terms of a trust conflict, the terms of the trust control ....@); TEX. TRUST CODE ' 113.001 (AA power given to a trustee [under the Trust Code] does not apply to a trust to the extent that the instrument creating the trust ... conflicts with or limits the power.@); TEX. TRUST CODE ' 113.051 (The trustee shall administer the trust according to its terms and this subtitle. In the absence of any contrary terms in the trust instrument or contrary provisions of this subtitle, in administering the trust, the trustee shall perform all of the duties imposed on trustees by the common law.@ ); TEX. TRUST CODE ' 113.059(a) (A[A] Settlor by provision in an instrument creating, modifying, amending, or revoking the trust may relieve the trustee from a duty, liability, or restriction imposed by this subtitle.@ ); Beaty v. Bales, 677 S.W.2d 750, 754 (Tex. App.C San Antonio 1984) (A... the trustee=s powers are conferred by the instrument and neither the court nor the trustee can add or take away such power. The trust is entitled to that construction which the maker intended.@); Stewart v. Selder, 473 S.W.2d 3 (Tex. 1971) (a court interprets a trust in order to determine the settlor=s intent); Bleiden v. Greenspan, 742 S.W.2d 93, 96 (Tex. Ct. App.CBeaumont 1987) (citations omitted), rev=d on other grounds, 751 S.W.2d 858 (1988) (A[I]t is well settled and elementary that the supreme goal of construing a trust instrument or a testamentary instrument, is to determine the intent of the testator-trustor-settlor.@).

If the terms of the trust are ambiguous, then the court must resolve the ambiguity by looking to extrinsic evidence, including the facts and circumstances surrounding the formation of the trust instrument, the actions of the settlor and the trustee since the formation of the trust, and expressions of the settlor=s intent. Id. (uncontraverted affidavit of trustor is Aonly meaning that can be used if the court finds that the trust language is ambiguous@); Jochec v. Clayburne, 863 S.W.2d 516, 520 (Tex. App.CAustin 1993, pet. denied) (ambiguity resolved by looking to parol evidence of settlor=s intent); RESTATEMENT ' 4, Comment a; Scott on Trusts ' 164.1 (ASCOTT@) . And if the terms of the trust are unambiguous but extrinsic evidence reveals that they fail to express the intent of


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the Settlor in forming the Trust, then the Trust must be reformed in order to express the Settlor=s true intent. E.g., Brinker v. Wobaco Trust, 610 S.W.2d 160 (Tex. App.C Texarkana 1980) (parol evidence of settlor=s unilateral mistake requires reformation). 2. Texas Trust Code

Texas Trust Code Section 111.0035(a) provides that, except as provided by the terms of the trust instrument, the Trust Code governs: (1) the duties and powers of a trustee; (2) relations among trustee; and (3) the rights and interests of the beneficiaries. 3. Texas Common Law

The powers and duties of a trustee are also governed by common law to the extent the trust instrument does not validly provide otherwise, and the common law is not inconsistent with the provisions of the Texas Trust Code. Trust Code Section 113.051 provides that A[i]n the absence of any contrary terms in the trust instrument or contrary provisions of [the Texas Trust Code], in administering the trust, the trustee shall perform all of the duties imposed on trustees by the common law." See also TEX. PROPERTY CODE '111.005. 4. Other Potential Sources a. Restatement of Trusts

Texas has not adopted the Restatement of Trusts and they are not binding in Texas. Nevertheless, they still provide some guidance when construing and interpreting a trust. See RESTATEMENT (SECOND) OF

TRUSTS ' 1 et seq (1959); RESTATEMENT (THIRD) OF

TRUSTS '1 et seq (2003). But care should be taken first to determine whether the applicable provision of the Texas Trust Code conflicts with the Restatement=s position. If so, the Restatement should be completely disregarded.

Furthermore, as between the Restatement (Second) of Trusts and Restatement (Third) of Trusts, Texas courts have considered and cited the Restatement (Second) of Trusts in a number of decisions, but they have only cited the Restatement (Third) of Trusts three times. See Keisling v. Landrum, 218 S.W.3d 737 (Tex. App. B Fort Worth 2007, pet. denied); Marsh v. Frost National Bank, 129 S.W.2d 174 (Tex. App. B Corpus Christi 2004, writ denied); Bergman v. Bergman Davison Webster Charitable Trust, 2004 WL 24968 (Tex. App. B Amarillo 2004, no writ) (not designated for publication). Time will tell if or how Texas courts will view the Restatement (Third) of Trusts. b. Uniform Trust Code

Likewise, Texas has not adopted the Uniform Trust Code (in fact legislative history indicates certain

provisions of the Texas Trust Code were enacted to expressly disavow any attempts to apply certain provisions) and it has no precedential value. Nevertheless, it also provides some guidance when drafting, construing and administering trusts. Approved in 2000 by the National Conference of Commission on Uniform State Laws, the Uniform Trust Code is the first codification of trust law. As of 2005, the Uniform Trust Code, with some variations, has been adopted by approximately fifteen states: Arkansas, District of Columbia, Kansas, Maine, Missouri, Nebraska, New Hampshire, New Mexico, North Carolina, Oregon, South Carolina, Tennessee, Utah, Virginia and Wyoming. See Robert T. Danforth, Article Five of the UTC and the Future of Creditors= Rights in Trusts, 27 Cardozao L. Rev. 2551, 2554 (2006). And, several other states are in the process of considering its adoption. See Id. B. Fiduciary Duties 1. Defined.

Fiduciary duties are the highest duties known to the law. Nathan v Hudson, 376 S.W.2d 856, 860-61 (Tex. App.BDallas 1964, writ ref=d n.r.e.). Texas Courts hold trustees to a Avery high and very strict standard of conduct which equity demands.@ Slay v. Burnett=s Trust, 187 S.W.2d 377, 387-88 (Tex. 1945). A trustee consents to have his conduct Ameasured by the standards of the finer loyalties exacted by courts of equity. That is a sound rule and should not be whittled down by exceptions. Johnson v. Peckham, 132 Tex. 148, 120 S.W.2d 786 (Tex. 1938). See also Geeslin v. McElhenney, 788 S.W.2d 683, 685 (Tex. App.BAustin 1990, no writ); BOGERT '544. Justice Cardozo eloquently described the duties of a Afiduciary@ in the case of Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545-46 (1928):

Many forms of conduct permissible in a workaday world for those acting at arm=s length, are forbidden to those bound by fiduciary ties. A (fiduciary) is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the Adisintegrating erosion@ of particular exceptions. ... Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd. 2. Categories.

There are many ways to describe a trustee=s fiduciary duties, but generally, they fall into four main categories: (1) duty of loyalty, (2) duty of competence, (3) duty to reasonably exercise discretion, and (4) duty


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of full disclosure. For a comprehensive discussion of fiduciary duties, see J. Moore, LITIGATION INVOLVING

FIDUCIARIES: TRIAL HANDBOOK 2009, 33rd Annual Advanced Estate Planning and Probate Course. See also RESTATEMENT (SECOND) OF TRUSTS '176

(ARESTATEMENT@); BOGERT '582; SCOTT ON TRUSTS

'176 (ASCOTT@); Bandy v. First State Bank, 835 S.W.2d 609, 623 (Tex. 1992); Byrd v. Woodruff, 891 S.W.2d 689, 706 (Tex. App. B Dallas 1994, writ denied); Bruce v. Republic Nat=l Bank & Trust Co., 74 S.W.2d 461 (Tex. Civ. App. B El Paso 1934), aff=d, 105 S.W.2d 882 (Tex. 1937). The following is a discussion of specific duties owed by a trustee that have been well established under the common law and/or codified by the Texas Trust Code. a. Duty of Loyalty

The duty of loyalty is the hallmark of a fiduciary relationship. A trustee may not personally benefit from serving as trustee. The trustee must at all times place the interests of the beneficiary above his own. Slay v. Burnett Trust, 187 S.W.2d 377 (Tex. 1945). The trustee is not permitted to "place himself in a position where it would be for his own benefit to violate his duty to the beneficiaries." SCOTT '170; RESTATEMENT '170. A trustee who utilizes or takes trust property for his own benefit is considered to be Aself-dealing.@ Any self-dealing by a fiduciary will give rise to a Apresumption of unfairness,@ and the burden of proving the fairness of the transaction is placed on the fiduciary. Texas Bank and Trust Co. v. Moore, 595 S.W.2d 502 (Tex. 1980); Pace v. McEwen, 574 S.W.2d 792 (Tex. Civ. App.B San Antonio 1978, writ ref=d n.r.e.); Jochec v. Clayburne, 863 S.W.2d 516 (Tex. App.BAustin 1993, writ denied).

Texas Trust Code Section 117.007 expressly provides that a trustee shall invest and manage the trust assets solely in the interest of the beneficiaries.

Section 117.008 expressly requires a trustee to act impartially in investing and managing trust assets if the trust has two or more beneficiaries, taking into account any differing interests of the beneficiaries. See also SCOTT '183; RESTATEMENT '183. b. Duty of Competence

The Trustee has an affirmative duty to administer the trust. TEXAS TRUST CODE '' 113.006 and 113.051. The fundamental duties of a trustee include the use of the skill and prudence which an ordinary, capable and careful person would use in the conduct of his own affairs. Interfirst Bank Dallas, N.A. v. Risser, 739 S.W.2d 882, 888 (Tex. App. BTexarkana 1987, no writ). The duty of competence encompasses many Asub-duties,@ some of which are described below.

(1) Duty to Comply With Prudent Investor Rule Effective January 1, 2004, the Texas Trust Code

has adopted the Aprudent investor@ rule. Texas Trust Code '117.003 provides that a trustee owes a duty to the beneficiaries of the trust to comply with the prudent investment rule, unless altered by the provisions of the trust. The standard of care for the prudent investor is stated in Texas Trust Code '117.004 as follows:

A trustee shall invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.

A trustee=s investment decisions regarding individual assets must be evaluated in the context of the trust portfolio as a whole and as part of an overall strategy having risk and return objectives reasonably suited to the trust. See Section II.C. infra. (2) Duty Not to Delegate

The trustee is generally obligated to personally administer the trust and cannot delegate to others acts that the trustee should personally perform. See SCOTT '171; RESTATEMENT '171. There are exceptions to this rule. A trustee may employ attorneys, accountants, agents, including investment agents, and brokers reasonable necessary in the administration of the trust estate. TEXAS TRUST CODE '113.018. A trustee also may delegate investment decisions under certain circumstances. TEXAS TRUST CODE '117.001. (3) Duty to Keep and Render Accounts

A trustee is under a duty to the beneficiaries of a trust to keep full accounts of the trust estate that are clear and accurate. SCOTT ' 172; RESTATEMENT ' 172. A beneficiary may demand a written statement of accounts covering the trust's transactions. TEXAS

TRUST CODE '113.151.

(4) Duties at Inception of Trusteeship Within a reasonable time after receiving trust

assets, a trustee shall review the trust assets and implement decisions concerning the retention and disposition of assets, in order to bring the trust portfolio into compliance with the purposes, terms, distribution requirements and other circumstances of the trust, and the Texas Trust Code. TEXAS TRUST

CODE '117.006. (5) Duty to Exercise Reasonable Care and Skill

For matters other than investments, "a trustee is under a duty in administering the trust to exercise such


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care and skill as a man of ordinary prudence would exercise in dealing with his own property." SCOTT ' 174; RESTATEMENT ' 174. (6) Duty to Take and Retain Control of Trust Property

The trustee is under a duty to take all reasonable steps to obtain and control the trust property. See SCOTT '175; RESTATEMENT '175. (7) Duty to Preserve Trust Property

A trustee must use the same care and skill that a person of ordinary prudence would use to preserve trust property. See SCOTT '176; RESTATEMENT '176. (8) Duty to Enforce Claims

A trustee is under a duty to take reasonable actions to collect claims that are due to the trust estate. See SCOTT '177; RESTATEMENT '177. (9) Duty to Defend

The trustee is under a duty to do what is reason-able, under the circumstances, to defend actions by third parties against the trust estate. See SCOTT '178; RESTATEMENT '178.

(10) Duty Not to Co-Mingle Trust Funds

The trustee has a duty to keep trust property separate from other property, and to properly designate it as trust property. Not only is it the trustee's duty to keep the trust property separate from the trustee's own property, but also to keep that property separate from other trusts the trustee may administer. Joint investments may be proper, but each trust's interest must be kept separate. See SCOTT '179; RESTATEMENT '179. (11) Duty With Respect to Bank Deposits

Although a trustee may deposit funds in a bank, he is under a duty to use reasonable care in selecting the bank and to properly designate the deposit as a trust deposit. He may not subject the deposit to unreason-able restrictions on withdrawal or leave the property in non-interest bearing accounts for unduly long periods of time. See SCOTT '180; RESTATEMENT '180. See also Texas Trust Code Section 113.007, which authorizes the trustee to deposit trust funds that are "being held pending investment, distribution, or the payment of debts in a bank that is subject to super-vision by state or federal authorities." (12) Duty With Respect to Co-Trustees

Unless the trust provides otherwise, all trustees are under a duty to participate in the trust administration. Therefore, a trustee cannot properly delegate the acts required of the trustee to co-trustees. It is also the duty of a trustee to use reasonable care to

prevent other trustees from committing a breach of trust. SCOTT '184; RESTATEMENT '184.

Unless the instrument provides otherwise, Texas Trust Code Section 114.006 addresses when a co-trustee is liable for the acts of other co-trustees:

(a) A trustee who does not join in an action of a

cotrustee is not liable for the cotrustee's action, unless the trustee does not exercise reasonable care as provided by Subsection (b).

(b) Each trustee shall exercise reasonable care to:

(1) prevent a cotrustee from committing a serious breach of trust; and

(2) compel a cotrustee to redress a serious breach of trust.

(c) Subject to Subsection (b), a dissenting trustee

who joins in an action at the direction of the majority of the trustees and who has notified any cotrustee of the dissent in writing at or before the time of the action is not liable for the action.

See TEXAS TRUST CODE ' 114.006. c. Duty to Reasonably Exercise Discretion

All trustees must make discretionary decisions, including decisions regarding distributions, investments, principal and income allocations, and expenditures, to name a few. A trustee must exercise a discretionary power Areasonably@ and in the best interests of the beneficiaries. See Sassen v. Tanglegrove Townhouse Condo. Assoc., 877 S.W.2d 489 (Tex. App.BTexarkana 1994, writ denied). Furthermore, a trustee has a duty to reasonably exercise its discretion. This includes the trustee making informed decisions based primarily on the terms of the trusts and in a manner that carries out the settlor=s intent as set forth in the terms of the trust instrument. Unless the instrument is ambiguous, the settlor=s intent must be determined solely by the terms and provisions of the trust agreement.

There is no Aabsolute discretion.@ Regardless of the language used in a trust instrument, a trustee=s exercise of discretion in the performance of his duties is always subject to review by Texas courts under an Aabuse of discretion@ standard. Corpus Christi Bank and Trust v. Roberts, 597 S.W.2d 752, 754 (Tex. 1980). d. Duty of Full Disclosure

A fiduciary has an affirmative duty to make a full and accurate disclosure of all material facts. Montgomery v. Kennedy, 669 S.W. 2d 309 (Tex.


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1984); Kinszbach Tool Co. Inc. v. Corbett-Wallace Corp., 160 S.W.2d 509 (Tex. 1942). This includes a duty to keep beneficiaries reasonably informed concerning the trust=s administration and Athe material facts necessary for the beneficiaries to protect [their] interests.@ See the legislative history accompanying the 2007 repeal of Trust Code ' 113.060, which was enacted in 2005 to impose on trustees a statutory duty to keep beneficiaries reasonably informed concerning the trust=s administration and Athe material facts necessary for the beneficiaries to protect [their] interests.@ The legislative history states: AThe enactment of Section 113.060 was not intended to repeal any common-law duty to keep a beneficiary reasonably informed, and the repeal by this Act of Section 113.060 does not repeal any common-law duty to keep a beneficiary informed. The common-law duty to keep a beneficiary informed that existed immediately before January 1, 2006, is continued in effect.@ Section 22 of Acts 2007, 80th Leg., ch. 451. The rationale for this rule is described in SCOTT '173:

The trustee is under a duty to the beneficiaries to give them on their request at reasonable times complete and accurate information as to the administration of the trust. The beneficiaries are entitled to know what the trust property is and how the trustee has dealt with it. They are entitled to examine the trust property and the accounts and vouchers and other documents relating to the trust and its administration. Where a trustee is created for several beneficiaries, each of them is entitled to information as to the trust. Where the trust is created in favor of successive beneficiaries, a beneficiary who has a future interest under the trust, as well as a beneficiary who is presently entitled to receive income, is entitled to such information, whether his interest is vested or contingent.

A trustee has a fiduciary duty, upon demand by the beneficiary, to furnish the beneficiaries with a formal trust accounting; to inform a beneficiary of the nature and amount of the trust property, the trustee=s management actions, and the intent of the trustee regarding the future administration of the trust estate; and to allow the beneficiary to inspect the books and records of the trust. TEXAS TRUST CODE '113.151 & 113.152; Shannon v. First National Bank, 533 S.W.2d 389 (Tex. Civ. App.1976, writ ref=d, n.r.e.); SCOTT '173; RESTATEMENT '173.

The fiduciary duty of full disclosure operates before and after litigation has been filed and is in addition to any obligations of disclosure imposed by

the Adiscovery@ provisions of the Texas Rules of Civil Procedure. Huie v. DeShazo, 922 S.W.2d 920 (Tex. 1996); In re Peterson, 2004 WL 88872 (Tex. App. B Amarillo). 3. Limitations on Fiduciary Duties

Various approaches have been used to try to limit a trustee=s liability exposure, primarily to encourage a desired trustee to serve. a. Clauses Modifying or Eliminating Duties

One method of reducing trustee liability is to include a provision in the trust instrument modifying or eliminating one or more of the trustee=s duties. If the trustee is not subject to a particular fiduciary duty, he cannot breach it. Such provisions enlarge the powers of the trustee. By comparison, an exculpatory clause does not eliminate the fiduciary duty but reduces or eliminates the trustee=s liability for monetary damages for breaching a duty.

Most statutory and common law fiduciary duties may be modified or revoked by the settlor, but there are statutory and public policy limitations. See Texas Commerce Bank, N.A. v. Grizzle, 96 S.W.3d 240, 249 (Tex. 2002), and subsequently enacted TEXAS TRUST

CODE '114.007, prohibiting trustee exoneration for a breach of trust committed in bad faith, intentionally or with reckless indifference to the beneficiary. b. Exculpatory Clauses

A settlor may include an exculpatory clause in the trust instrument that purports to relieve a trustee from financial liability for breaching one or more of his fiduciary duties. See SCOTT '221.1. An exculpatory clause does not expand the trustee=s powers, but restricts his liabilities. Such a provision does not prevent the trustee from committing a breach of trust but relieves him to some extent from liability for the consequences of his actions. Thus, although an exculpatory clause may prevent a plaintiff from obtaining monetary damages from a trustee who has breached a fiduciary duty, such plaintiff still should be entitled to seek injunctive relief, receivership, removal, construction or instruction, an accounting, or denial or reduction of trustee compensation. In pursuing such causes of action, the plaintiff should be entitled to introduce evidence of the breach, even though the exculpatory clause may protect the trustee from a judgment against him for damages. (1) Permissible Exculpation

Subject to TEXAS TRUST CODE Section 114.007, exculpatory clauses are valid in Texas. See Neuhaus v. Richards, 846 S.W.2d 70 (Tex. App.BCorpus Christi 1992, jmt. set aside by agrmt., 871 S.W.2d. 182); Interfirst Bank Dallas v. Risser, 739 S.W.2d 882 (Tex.


6

App.BTexarkana 1987, no writ). However, exculpatory clauses are strictly construed against exculpation. Jewett v. Capital National Bank of Austin, 618 S.W.2d 109 (Tex. Civ. App.--Waco 1981, writ ref=d nre).

Under TEXAS TRUST CODE Section 114.007, an exculpatory clause contained in a trust instrument is unenforceable for a breach of trust committed in bad faith, intentionally or with reckless indifference to the interest of a beneficiary. Thus, exculpatory provisions are often made applicable only to the extent that the trustee does not violate a specific standards of conduct, such as bad faith, good faith, or gross negligence. An example of such a clause is:

This instrument shall always be construed in favor of the validity of any action or inaction by any trustee, and a trustee shall not be liable for any action or inaction except in the case of a breach of trust committed in bad faith, intentionally; or with reckless indifference to the interest of a beneficiary.

(2) Standards of Conduct Defined (a) Bad Faith.

Bad faith, in a trustee relationship, is properly defined to mean Aacting knowingly or intentionally adverse to the interest of the trust beneficiaries@ and with an Aimproper motive.@ See Interfirst Bank Dallas, N.A. v. Risser, 739 S.W.2d 882, 898 (Tex. App.CTexarkana 1987, no writ) (disapproved of on other grounds by Texas Commerce Bank, N.A. v. Grizzle, 96 S.W.3d 240, 249 (Tex. 2002)). A finding of bad faith requires some showing of an improper motive. See King v. Swanson, 291 S.W.2d 773, 775 (Tex. Civ. App.CEastland 1956, no writ). Further, improper motive is an essential element of bad faith. See Ford v. Aetna Insurance Company, 394 S.W.2d 693 (Tex. Civ. App.CCorpus Christi 1965, writ ref=d n.r.e.). (b) Good Faith

Texas recognizes a standard of good faith that combines subjective and objective tests. See Lee v. Lee, 47 S.W.2d 767, 795 (Tex. App.CHouston [14th Dist.] 2001, pet. denied). A fiduciary acts in good faith when he or she: (1) subjectively believes his or her defense is viable, and (2) acts reasonable in light of existing law. Id. (c) Gross Negligence

Gross negligence means more than momentary thoughtlessness, inadvertence, or error of judgment; it means such an entire want of care as to establish that the act or omission was the result of actual conscious indifference to the rights, safety, or welfare of the

person affected. See Transp. Ins. Co. v. Moriel, 879 S.W.2d 10, 20 (Tex. 1994)). An act or omission that is merely thoughtless, careless, or not inordinately risky cannot be grossly negligent. Id. at 22. Only if the defendant=s act or omission is unjustifiable and likely to cause serious harm can it be grossly negligent. Id. Although gross negligence does refer to a different character of conduct than ordinary negligence, a party=s conduct cannot be grossly negligent without being negligent. See Trevino v. Lightning Laydown, Inc., 782 S.W.2d 946, 949 (Tex. App.CAustin 1990, writ denied). Gross negligence involves proof of two elements:

i) Viewed objectively from the actor=s standpoint, the act or omission must involve an extreme degree of risk, considering the probability and magnitude of the potential harm to others. AExtreme risk@ is not a remote possibility of injury or even a high probability of minor harm, but rather the likelihood of serious injury to the plaintiff; and

ii) The actor must have actual, subjective awareness of the risk involved, but nevertheless proceed in conscious indifference to the rights, safety, or welfare of others. Ordinary negligence rises to the level of gross negligence when it can be shown that the defendant was aware of the danger but his acts or omissions demonstrated that he did not care to address it.

See TEX. CIV. & REM. CODE ANN. ' 41.001(11) (Vernon 1997 & Supp. 2009); Louisiana-Pacific Corp. v. Andrade, 19 S.W.3d 245, 246-47 (Tex. 1999). See Mobil Oil Corp. v. Ellender, 968 S.W.2d 917, 921 (Tex. 1998) (citing Moriel, 879 S.W.2d at 23 (Tex. 1994). (3) Advisability of Using Exculpatory Clauses

By providing an appropriate level of exculpation, a trustee is encouraged to accept the trust, even with foreseeably difficult beneficiaries, and also creates a disincentive to a beneficiary seeking to threaten a trustee into making a distribution. However, while exculpatory clauses may limit the liability of a trustee, they also limit the protection that the law provides to beneficiaries. These clauses should not be used routinely and without a clear understanding by the settlor of the financial ramifications to the beneficiaries if the trustee damages the trust by breaching a duty to which an exculpation clause applies.


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c. Burden of Proof at Trial Which party will have the burden to prove or

disprove a claim against a fiduciary in a lawsuit may impact the level of exoneration given to a trustee. The complainant has the burden at trial to prove a trustee breached the: (1) duty of competence; or (2) duty to reasonably exercise discretion. With regard to these duties, fiduciary law does not require absolute perfection in judgment. The trustee has the burden at trial to prove the trustee did not breach the: (1) duty of loyalty; or (2) duty of full disclosure. With regard to these duties, fiduciary law requires absolute perfection in loyalty and honesty. II. TRUST ADMINISTRATION A. Distributions 1. Trustee=s Duty to Make Distributions

The trustee has a duty to make distributions in accordance with the trust instrument and in good faith. TEXAS TRUST CODE '113.051. The trustee must understand and consider all terms of the trust that could affect distributions. It is crucial that the trustee Distributions may be mandatory or within the trustee=s discretion. This requires a detailed reading (and re-reading) of the entire trust instrument to understand the distribution provisions and all indications of the settlor=s intent related to distribution decisions. 2. Standards a. Mandatory Distributions

A mandatory distribution requires the distribution of income and/or principal in a manner that does not require the exercise of a trustee=s discretion. The most common mandatory distribution requires the distribution of all the trust=s income. For example, for a trust to qualify for the estate tax marital deduction, the trustee must be required to distribute all income to the surviving spouse. I.R.C. '2056(b)(7). Although a trustee does not have discretion whether or not to distribute income when the trust contains a mandatory income distribution requirement, the trustee may still be required to make discretionary decisions to determine the amount of such income. (1) Determining Trust Income

If a beneficiary is entitled to distributions of or solely from income, the income of the trust that is available for distribution during the applicable period must be determined. ATrust income@ is a unique creature of trust law. It is defined in Trust Code Section 116.002(4) as Amoney or property that a fiduciary receives as a current return from a principal asset.@ Trust income differs from financial accounting income and taxable income. Unlike financial income and taxable income, which may be based on accrual principles, trust income generally is computed on a

cash basis. Trust income is not the excess of cash receipts over cash disbursements. Trust income is:

(1) the excess of cash receipts that are properly characterized under the trust law and/or trust instrument as trust income (rather than trust principal),

(2) less cash disbursements properly charged against such income,

(3) reduced by distributions from income, and (4) adjusted for any proper transfers to or from

principal. Any remaining cash (or property) will constitute trust principal. Thus, cash held by a trust usually will be part Aincome cash@ and part Aprincipal cash.@ These combined amounts must reconcile with cash balances reflected in bank and financial account records. (a) Allocations of Principal and Income (UPAIA)

To determine trust accounting income, cash receipts and disbursements must be allocated between principal and income. These allocations are mandated by the trust and/or trust law, and failure to make them will likely result in improper distributions. The terms of the trust, and to the extent not addressed, Chapter 116 of the Texas Trust Code, the Uniform Principal and Income Act (AUPAIA@), as well as common law principles, govern allocations of receipts and disbursements between income and principal. The UPAIA (effective 1/1/04) provides comprehensive rules for allocating receipts and disbursements between principal and income. The UPAIA is a default statute. Thus, the trust controls, but if the trust instrument is silent, the UPAIA rules apply.

The chart attached to this paper as Appendix AA@ describes some of the default allocation rules provided by the UPAIA. For a detailed discussion of the UPAIA provisions, see Karish, Texas Trust Law Changes (2003); Cox, UPIA Twins, 2004 Annual Advanced Estate Planning and Probate Course.

Even if the trust instrument grants the trustee discretion in allocating receipts and disbursements, a trustee cannot exercise that discretion arbitrarily. In exercising its discretion to make allocations between income and principal, a trustee must act impartially and based on what is fair and reasonable to all of the beneficiaries, except to the extent that the terms of the trust or the will clearly manifest an intention that the fiduciary shall or may favor one or more of the beneficiaries. TEX. TRUST CODE '116.004(b). Thorman v. Carr, 408 S.W.2d 259 (Tex. Civ. App. B San Antonio 1966), aff=d per curiam, 412 S.W.2d 45 (1967). An allocation made in accordance with the provisions of the UPAIA will be presumed to be fair and reasonable to all beneficiaries. TEXAS TRUST


8

CODE '116.004(b). If neither the terms of the trust nor the Texas Trust Code provide a rule for allocating between principal and income, the item should be allocated to principal. TEXAS TRUST CODE

'116.004(a)(4). A trustee must be prepared to explain the basis for all allocations of principal and income to beneficiaries. (b) Power to Adjust

Texas Trust Code Section 116.005 authorizes a trustee to adjust between principal and income if the trustee is in compliance with the prudent investor rule, the trust provides for distributions to a beneficiary by reference to the trust=s Aincome@ and the trustee cannot otherwise administer the trust impartially, based on what is fair and reasonable to all of the beneficiaries. The power to adjust specifically includes the power to allocate all or part of a capital gain to trust income. This section lists nine factors that a trustee may consider in deciding whether or how to exercise the power to adjust and prohibits a trustee from making an adjustment under certain circumstances.

A court may not change a trustee=s decision to exercise or not exercise the power to adjust unless the court determines that the decision was an abuse of the trustee=s discretion. TEXAS TRUST CODE '116.006(a). If a court determines that a trustee has abused its discretion, the court may place the income and remainder beneficiaries in the positions that they would have occupied if the discretion had not been abused. TEXAS TRUST CODE '116.006(c). If the trustee reasonably believes that one or more beneficiaries will object to the exercise of a discretionary power, the trustee may petition the court to determine whether the proposed discretionary act will result in an abuse of the trustee=s discretion. TEXAS TRUST CODE '116.006(d). In such a suit, the trustee is directed to advance from the trust principal all costs incident to the judicial determination, including attorney=s fees of the trustee, any beneficiary who is a party and any guardian ad litem. At the conclusion of the proceeding, however, the court may award costs and attorney=s fees as the court deems to be Aequitable and just@ as provided in Trust Code '114.064, including awarding costs against the trust, a beneficiary and/or the trustee in its individual capacity if the court determines that the trustee=s exercise of the discretionary power would have resulted in an abuse of discretion or that the trustee did not have reasonable grounds for believing that a beneficiary would object. b. Discretionary Distributions Subject to an

Ascertainable Standard Discretionary distributions may be subject to an

ascertainable standard or may be purely discretionary. The most commonly used ascertainable standard for

making trust distributions is Ahealth, education, maintenance and support.@ With this type of standard, the trustee must exercise his discretion to determine the appropriate distributions to meet the health, education, support and maintenance needs of the beneficiary. The trustee also must protect the interests of the remainder beneficiaries. See Treas. Reg. '20.2041-1(c)(2)(AA power to consume, invade, or appropriate income or corpus, or both, for the benefit of the decedent which is limited by an ascertainable standard relating to the health, education, support, or maintenance of the decedent is, by reason of section 2041(b)(1)(A), not a general power of appointment. A power is limited by such a standard if the extent of the holder's duty to exercise and not to exercise the power is reasonably measurable in terms of his needs for health, education, or support (or any combination of them@); see also Treas. Reg. 1.674(b)-1(b)(5)(i)(AA clearly measurable standard under which the holder of a power is legally accountable is deemed a reasonably definite standard for this purpose. For instance, a power to distribute corpus for the education, support, maintenance, or health of the beneficiary; for his reasonable support and comfort; or to enable him to maintain his accustomed standard of living; or to meet an emergency, would be limited by a reasonably definite standard.@). This is commonly referred to as a HEMS standard. Treasury Regulation ' 20.2041-1(c)(2) provides the following examples of powers limited by an ascertainable standard: $ Support; $ Support in reasonable comfort; $ Maintenance in health and reasonable comfort; $ Support in his accustomed manner of living; $ Education, including college and professional

education; $ Health; and, $ Medical, dental, hospital and nursing expenses

and expenses of invalidism. An ascertainable or HEMS standard is often used when the settlor desires to include a more objective distribution standard. It is also used when the settlor is concerned about maintaining the trust principal for the reminder beneficiaries. Above all, its prevalence among drafters is driven by tax considerations. (1) Tax Planning Considerations

A HEMS standard is particularly important to avoid unintended tax consequences. This standard is considered to be an Aascertainable@ standard under the Internal Revenue Code and, thus, provides a permissible distribution standard that avoids granting the trustee a general power of appointment, along with the tax consequences of holding that power. See Id.


9

Even documents that name an independent trustee frequently use this standard to allow the possible future appointment of the settlor, settlor=s spouse, beneficiary or other sensitive person as trustee without undesirable tax consequences.

While a complete discussion of the HEMS standard is beyond the scope of this outline, the following provides an overview of some of the more common planning situations in which the use of an ascertainable standard is important. (a) Beneficiary as Trustee - Distributions to Self-

Avoid Estate Tax Inclusion and Avoid Gift on Lapse If a beneficiary of a trust holds a power, as trustee

or otherwise, to make distributions to himself or for his benefit, and the power is limited by an ascertainable standard relating to the beneficiary=s health, education, support, or maintenance, then the trust property will not be included in the gross estate of the beneficiary for federal estate tax purposes by reason of the beneficiary=s possession of such power, because such a limited power does not constitute a Ageneral power of appointment.@ I.R.C. '2041(b)(1)(A); Treas. Reg. '20.2041-1(c)(2). Also, the lapse or other release or exercise of such a power limited by such an ascertainable standard will not be a taxable gift for federal gift tax purposes by the beneficiary which held the power. I.R.C. '2514(c)(1); Treas. Reg. '25.2514-1(c)(2). (b) Beneficiary as Trustee - Avoids Loss of

Spendthrift Protection If a beneficiary of a trust, as trustee or otherwise,

holds a power to make distributions to himself or for his benefit, an issue can arise regarding the ability of the beneficiary=s creditors to satisfy claims against the beneficiary from the beneficiary=s interest in the trust. When, however, the trust has a spendthrift provisions and the beneficiary=s power is limited by an ascertainable standard relating to the beneficiary=s health, education, support, and/or maintenance, a creditor generally cannot attach the beneficiary=s interest on the basis that the beneficiary holds a distribution right or power. Tex. Prop. Code Ann. '112.035 (Vernon 1995 & Supp. 2010). But, to create a statutory Afix@ for this issue, effective September 1, 2009, Section 113.029 was enacted. Section 113.029(b) provides:

Subject to Subsection (d), and unless the terms of the trust expressly indicate that a requirement provided by this subsection does not apply:

(1) a person, other than a settlor, who is a beneficiary and trustee, trustee affiliate, or discretionary power holder of a trust that confers on the trustee a power to make discretionary distributions to or for the trustee=s, the trustee affiliate=s, or the discretionary power holder=s personal benefit may exercise the power only in accordance with an ascertainable standard relating to the trustee=s, the trustee affiliate=s, or the discretionary power holder=s individual health, education, support, or maintenance within the meaning of Section 2041(b)(1)(A) or 2514(c)(1), Internal Revenue Code of 1986; and

(2) a trustee may not exercise a power to make discretionary distributions to satisfy a legal obligation of support that the trustee personally owes another person.

TEXAS TRUST CODE '113.029(b).

Note, however, that Section 113.029(b) Adoes not apply to (1) a power held by the settlor=s spouse who is the trustee of a trust for which a marital deduction, as defined by Section 2056(b)(5) or 2523(e), Internal Revenue Code of 1986, was previously allowed; (2) any trust during any period that the trust may be revoked or amended by its settlor; or (3) a trust if contributions to the trust qualify for the annual exclusion under Section 2503(c), Internal Revenue Code of 1986.@ See Id.

Also, Section 112.035(d) was added to confirm that a settlor will not be considered a beneficiary solely because the trustee of an intentionally defective grantor trust can pay or reimburse income taxes. See TEX. PROP. CODE ANN. '113.035(d) (Vernon Supp. 2010); Tex. HB 564, 80th Leg. R.S. (2007). Note, Section 112.035 is one example where the Texas Trust Code has adopted provisions that conflict with the provisions of the Restatement (Third) of Trusts. As previously discussed, the Texas Trust Code provision will control. (c) Beneficiary as Trustee - Avoid Gift for

Distributions to Others Similarly, a trust beneficiary that holds a fiduciary

power during his or her lifetime to make distributions to or for the benefit of another beneficiary of the same trust, and the power is limited by an ascertainable standard relating to the other beneficiary=s health, education, support, or maintenance, will not be deemed to have made a taxable gift for federal gift tax purposes. Treas. Reg. '25.2511-1(g)(2). But, this same regulation states that Aif a trust instrument provides that the determination of the trustee shall be conclusive with respect to the exercise or non-exercise


10

of a power,@ then the power is not considered to be limited by the requisite standard.

Furthermore, even if such a power is subject to an ascertainable standard, property distributable to a person for whom the beneficiary/trustee has a legal obligation to support could be included in beneficiary/trustee=s gross estate for federal estate tax purposes, unless the trustee is prohibited from making any distributions to a beneficiary that would satisfy the trustee=s individual legal obligation to support such beneficiary. Treas. Reg. '20.2041-1(c)(1). (d) Settlor as Trustee - Avoid Estate Tax Inclusion

Several court cases and IRS rulings have held that if the settlor is the trustee or controls the trustee of a trust, then the trustee=s possession of a power to make distributions to or for the benefit of a beneficiary of the trust, if limited by an ascertainable standard relating to the beneficiary=s health, education, support, or maintenance, will not cause the trust property to be included in the gross estate of the settlor/trustee for federal estate tax purposes under I.R.C. Sections 2036 or 2038. Estate of Budd, 49 T.C. 468 (1968) acq. 1973-2 C.B. 1; Estate of Frew, 8 T.C. 1240 (1947); Rev. Rul. 73-143, 1973-1 C.B. 407; PLRs 200213013, 200123034, 200011055, 200011054, 199903025, 9527025. (e) Settlor or Settlor=s Spouse as Trustee - Income

Tax Relevance The power of any trustee, including the settlor, to

distribute corpus to or for a beneficiary or beneficiaries, limited by a Areasonably definite standard@ set forth in the trust instrument, will not cause the trust income to be taxed to the settlor for federal income tax purposes. I.R.C. '674(b)(5)(A). A Areasonably definite standard@ includes Aa power to distribute corpus for the education, support, maintenance, or health of the beneficiary.@ Treas. Reg. '1.674(b)-1(b)(5)(I). Yet, a reasonably definite standard which limits the power to distribute income to or for a beneficiary or beneficiaries, is not sufficient to prevent the trust income from being taxed to the settlor, if the settlor or settlor=s spouse is one of the trustees holding the power to distribute income. I.R.C. '674(b), (d). (2) ASupport@ and AMaintenance@

The terms support and maintenance are generally considered to be similar. In fact, under the Restatement (Third) of Trusts, these terms are considered synonymous. In State v. Rubion, the Texas Supreme Court notes that these terms evidence the creation of a support trust. 308 S.W.2d at 8.

When the distribution standard includes the terms support and maintenance, a trustee=s discretion is not

unbridled discretion. See Id. (citing First National Bank of Beaumont v. Howard, 229 S.W.2d 781, 785 (Tex. 1950): Anderson v. Menefee, 174 S.W. 904 (Tex. Civ. App. B Fort Worth, writ refused, writ ref=d); William F. Frathcer, Scott on Trusts, Vol. 2, '187, p. 986). Rather, the trustee=s discretion must be Areasonably exercised to accomplish the purposes of the trust according to the settlor=s intention and his exercise thereof is subject to judicial review and control@. Id (citing William F. Frathcer, Scott on Trusts, ''187, 187.1, 187.2, and 187.3; Kelly v. Womack, 268 S.W.2d 903, 907 (Tex. 1954); Powell v. Parks, 86 S.W.2d 725 (Tex. 1935); Davis v. Davis, 44 S.W.2d 447 (Tex. Civ. App. B Texarkana 1931, no writ).

This includes making an informed decision based on the trust terms and in order to carry out the settlor=s intent as expressed in the trust. If the trustee fails to do so, he will have breached his fiduciary duty. Paramount to the exercise of discretion is that the trustee must actually act to Aexercise@ his, her or its discretion. A trustee that establishes a process of determining the distributions to be made is less subject to challenge than a trustee distributing far less or far more with no process in place. Trustees that can present a well thought out and reasonable decision making process are often victorious, even if their decisions appear to contradict the language of a trust (Penix v. First National Bank of Paris, 260 S.W.2d at 63), or the clear intent of the settlor, (Coffee v. Rice, 408 S.W.2d 269 (Tex. 1966)). The trustee should maintain contemporaneously prepared documents identifying all information considered, copies of documents considered, and other steps involved in the investigation conducted by the trustee in making the decision. A corporate trustee should maintain proper files of the trust officer and trust committee records documenting the decision process and reflecting compliance with its procedural manual regarding distributions, as these records will likely be requested in any distribution dispute.

The Texas Supreme Court in Rubion recognized a number of factors that should be considered by a trustee exercising its discretion in a Asupport@ or Amaintenance@ trust. Rubion, 308 S.W.2d at 10. They include: $ The size of the trust estate; $ The beneficiary=s age, life expectancy, and

condition of life; $ The beneficiary=s present and future needs; $ The other resources available to the beneficiary=s

individual wealth; and $ The beneficiary=s present and future health, both

mental and physical.


11

Id. At 10-11; see also In re Gruber=s Will, 122 N.Y.S.2d 654, 657 (N.Y. Sur. 1953) (age and condition of beneficiary, amount of trust fund, and other factors); Hanford v. Clancy, 183 A. 271, 272 (N.H. 1936) (size of fund, present situation fo beneficiary, present and future needs, other resources, and future emergencies); Falsey=s Estate, Sur., 56 N.y.S.2d 556, 563 (N.Y. Sur. 1945). (age of beneficiary, physical and mental health of beneficiary, size of trust compared to beneficiary=s life expectancy).

There are common factors in all of these cases and the most relevant factors when a trustee is exercising its discretion are discussed below. (a) Bare Necessities

Support means more than the bare necessities of life. Hartford-Connecticut Trust Co. V. Eaton, 36 F.2d 710 (2d Cir. 1929). Rather, it generally includes the beneficiary=s ordinary living expenses. Ordinary living expenses may include Aregular mortgage payments, property taxes, suitable health insurance or care, existing programs of life and property insurance and continuation of accustomed patterns of vacation and charitable and family giving.@ Restatement (Third) of Trusts '50 cmt d (2003). (b) Educational Expenses

Support has also been held to include the educational expenses of the beneficiary=s dependants. See First National Bank of Beaumont v. Howard, 229 S.W.2d 781 (Tex. 1950). In First National Bank of Beaumont, the Texas Supreme Court held that the fact that the settlor had paid for his daughters= college education indicated that he considered the expense of a college education for a dependent a Anecessary@ expenditure. Id.; see also discussion of actions during lifetime supra. (c) Implied Standard of Living

The standard of living of the beneficiary is usually determined as of the time of the settlor=s death or when the trust became irrevocable. The implication that support is to be interpreted at the time is in keeping with interpreting the trust according to the settlor=s intent. (d) Trust Size

The interpretation of the terms of the trust requires a constant balancing of all relevant factors. The Restatement provides that the standard may be increased if either; (1) the beneficiary=s standard of living has increased, the increase is consistent with the trust=s productivity and the increase is not inconsistent with the productivity of the trust estate; or (2) considering the productivity of the trust failure to increase the beneficiary=s standard of living results in

favoring the remainder beneficiaries over the current beneficiaries. (e) Present Versus Future Needs

The needs of the beneficiary both present and future are to be considered by the trustee. But when the trust is potentially insufficient to provide for both needs, the trustee is faced with a difficult decision. Unfortunately, the few courts that have addressed this issue have not held consistently. For example, compare the decision of State v. Rubion, 308 S.W.2d at 4, with Penix v. First National Bank of Paris, 260 S.W.2d 63 (Tex. Civ. App. B Texarkana, writ ref=d)

In Rubion, the Texas Supreme Court ruled that the trustee had abused his discretion by refusing to invade the principal of the trust to make payments for the beneficiary=s care while she was in a state mental hospital. Rubion, 308 S.W.2d at 8. The trustee argued that he was within his discretion to withhold payments of principal because the corpus of the trust should be preserved for her support if she were ever discharged from the hospital, and further, that if the trust corpus were used to pay all of her medical care it would completely destroy the trust. Id. Disagreeing, the court held the trustee abused his discretion by withholding the entire principal and the trustee should have determined what amount could have been distributed while still preserving the long-term health of the trust. Id. at 9.

In Penix, the appellate court ruled that a trustee was within its discretion to withhold principal as well as income in the present, in order to meet the future needs of the beneficiary. See Penix, 260 S.W.2d at 67. The trustee argued successfully that the beneficiary was a 9-year old girl, that the income produced from the trust was well in excess of what was needed for her current support etc., and that any excess above the beneficiary=s current needs should be held in reserve for emergencies. Id. at 64-65. The court found that the trustee was within its discretion, relying heavily on the language granting the trustee the power to carry out the terms of the trust Afree from any supervision by the probate or other courts.@ The court discounted any significance of the ward Ashall@ within the grant. Id.

While Penix and Rubion appear to conflict with each other, they consistently adhere to the same rule. When exercising discretion in a support trust, a trustee should consider both the present and future needs of the beneficiary. (3) Education

Without limiting or expanding provisions, education is considered to include living expenses, tuition, fees, books and other cost of higher education and/or technical training. See Restatement (Third) of Trusts '50 cmt d(3) (2003).


12

(4) Health The term health typically includes distributions

for health as would be implied from a support standard alone. See Restatement (Third) of Trusts '50 cmt d(3) (2003). (5) Obtain and Provide Information

The trustee must obtain reliable information from a beneficiary in order to make informed, reasonable distribution decisions. The trustee should overtly solicit information from the beneficiary regarding his financial needs, wants, resources, and standard of living. Appropriate documentation will vary from case to case, but generally will include some or all of the following: $ Income and cash flow information; $ Financial statements; $ All trust instruments under which the beneficiary

has a right to receive or request a distribution; $ Income tax returns; $ Tuition and similar agreements relating to the

beneficiaries= education and maintenance; $ Receipts or invoices as to any amounts to be

reimbursed; $ Information regarding a beneficiaries employment

status and efforts to obtain employment; $ Status of the beneficiaries= housing, medical

insurance, and any other relevant information regarding support; and

$ Notification of any significant changes in any beneficiary=s housing, education, development or medical needs.

$ A history of assistance previously supplied by the settlor to the beneficiary also should be obtained.

While the preceding list is not intended to be exhaustive or required in all situations, it provides a general listing of the information that a trustee may periodically request to make a distribution decision. Perhaps one of the more difficult issues is the nature and amount of information that a trustee believes is necessary to support a distribution decision. Some trustees desire to obtain extensive information from the beneficiary to Apaper@ their file, however, this can lead to feelings of ill-will and invasion of privacy by the beneficiary. Other trustees go to the opposite extreme and request no information. This can lead to claims of breach of fiduciary duty against the trustee by other beneficiaries who may eventually request that the trustee justify his or her prior distributions. In acting, Athe trustee generally may rely on the beneficiary=s representations and on readily available, minimally intrusive information requested of the beneficiary.@ But when the trustee has reason to believe that the information is incomplete or inaccurate then the trustee

should request additional information. Information regarding distributions is a two-way

street. Just as a trustee may seek information to support a distribution, a beneficiary is entitled to information in order to request a distribution or justify a trustee=s decision whether to make a distribution. The Restatement (Third) of Trusts provides that among a trustee=s fiduciary duties is the (i) general duty to act, reasonably informed, with impartiality among the various beneficiaries and interests (Section 79), and (ii) duty to provide the beneficiaries with information concerning the trust and its administration (Section 82). This combination of duties entitles the beneficiaries (and also the court) not only to accounting information but also to relevant, general information concerning the bases upon which the trustee=s discretionary judgments have been or will be made. See RESTATEMENT 3d ' 50 cmt g. c. Unascertainable Standards

While an ascertainable standard is commonly used, it is not mandatory. A settlor can simply provide that distributions can be made in the trustee=s sole discretion. Alternatively, the settlor can use other standards on which distributions can be made. These are generally considered to be unascertainable as there is no objective manner by which to determine whether a distribution (requested or made) fits within the distribution standard of the instrument.

Unascertainable standards may be used when the settlor is less concerned about maintaining the trust principal for the remainder beneficiaries or when he or she wants the trustee to have more flexibility in making distributions. Due to the potential tax implications, these standards should be used with caution and only with an independent trustee. As discussed previously, when a beneficiary serves as trustee or possess certain powers relating to the trust, the use of an unascertainable standard can create tax and creditor issues.

The beneficiary of a pure discretionary trust may not compel the trustee to make trust distributions. See Burns v. Miller, Hiersche, Martens & Hayward, P.C., 948 S.W.2d 317 (Tex. App.CDallas, 1997, writ denied); RESTATEMENT '155, comments note e; and BOGERT '228. See also Ridgell v. Ridgell, 960 S.W.2d 144 (Tex. App.CCorpus Christi 1997, writ denied). In extreme circumstances, a beneficiary may be able to convince a court that a trustee=s refusal to exercise a pure discretionary distribution power is so unreasonable as to constitute a breach of trust or to justify removal.

While there is no clear definition of what terms will result in an unascertainable distribution standard, the following terms have been defined to create one:


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$ Comfort; $ Happiness; $ Benefit; and $ Welfare. See Treas. Reg. '20.2041-1(c)(2) (AA power to use property for the comfort, welfare, or happiness of the holder of the power is not limited by the requisite standard.@); see also Treas. Reg. 1.674(b)-1(b)(5)(i) (a power to distribute corpus for pleasure, desire, or happiness of beneficiary is not limited by a reasonably definite standard). (1) Comfort

A distribution standard that includes comfort as a basis has generally been held to create an unascertainable standard. Treas. Reg. '20.2041-1(c)(2); First Virginia Bank v. United States, 490 F.2d 532 (4th Cir. 1974) (AIn the absence of [state] law limiting [beneficiary=s] power to consume the proceeds from the sale of the stock to an ascertainable standard relating to her health, support, or maintenance, the value of the stock must be included in her gross estate. While the power to consume need not be limited to the bare necessities of life, the Regulations specifically state: A power to use the property for the comfort, welfare, or happiness of the holder of the power is not limited by the requisite standard@); but see Estate of Strauss, T.C. Memo 1995-248 (court held under Illinois law, Acomfort@ is ascertainable standard); Pyle v. United States, 766 F.2d 1141 (7th Cir. 1985) (government argued comfort ascertainable under state law); Rock Island Bank & Trust Co. V. Rhoads, 187 N.E. 139 (Ill. 1933) (comfort ascertainable under Illinois law as it refers to maintaining someone in station of life to which that person is accustomed and because station in life is known, standard is measured and hence ascertainable.)

In Texas, comfort is not limited by state law in a manner that would allow it to be considered an ascertainable standard. See Lehman v. United States, 448 F.2d 1318, (5th Cir. 1971). In Lehman, the court considered a Texas will that provided that the wife Ain the exercise of her own discretion, . . . consume for her own use, benefit, comfort, support, and maintenance, all or any part of the corpus of my estate or proceeds thereof whenever she, in her own discretion, deems the income, rents, and revenues thereof insufficient for her support, maintenance, comfort, and welfare.@ Id. The Fifth Circuit noted that Athe critical fact is that, regardless of the name attached to it, her interest was obviously coupled with plenary authority to convey, encumber or consume the property, and Texas courts have consistently accorded full force and effect to similar testamentary provisions.@ Id (citing Messer v. Johnson, 422 S.W.2d 908, 912 (Tex. 1968);

Commercial Bank, Unincorporated of Mason v. Satterwhite, 413 S.W.2d 905, 909 (Tex. 1967); Murphy v. Slaton, 273 S.W.2d 588 (Tex. 1954); Nye v. Bradford, 193 S.W.2d 165, 167 (Tex. 1946), Edds v. Mitchell, 184 S.W.2d 823, 825 (Texas 1945); McMurray v. Stanley, 6 S.W. 412, 415 (Tex. 1887)). Therefore, based on Texas law, the court held the inclusion of the ward comfort resulted in the wife possessing an Aunrestricted and discretionary right - at least in the absence of evidence of action fraud - to consume the property, governed only by her own personal assessment of her own personal need.@ See Id.

The Restatement also provides that it is consistently interpreted as broadening the standard and indicating that the trustee exercise its discretion more generously, See Restatement (Third) of Trusts '50 cmt d(3) (2003) (other standards and supplementary language). (2) Happiness

The word happiness has been found to create an unascertainable standard. Treas. Reg. '20.2041-1(c)(2). The Restatement provides that it is consistently interpreted as broadening the standard and indicating that the trustee exercise its discretion more generously. See Restatement (Third) of Trusts '50 cmt d(3) (2003) (other standards and supplementary language). (3) Welfare

A distribution standard that includes welfare has also been found to create an unascertainable standard. See Treas. Reg. '20.2041-1(c)(2); First Virginia Bank v. United States, 490 F.2d 532 (4th Cir. 1974) (AIn the absence of [state] law limiting [beneficiary=s] power to consume the proceeds from the sale of the stock to an ascertainable standard relating to her health, support, or maintenance, the value of the stock must be included in her gross estate. While the power to consume need not be limited to the bare necessities of life, the Regulations specifically state: AA power to use property for the comfort, welfare, or happiness of the holder of the power is not limited by the requisite standard@).

Likewise, the Restatement provides that it is consistently interpreted as broadening the standard and indicating that the trustee exercise its discretion more generously. See Restatement (Third) of Trusts '50 cmt d(3) (2003) (other standards and supplementary language).

(4) Benefit

Similarly, the inclusion of the word benefit in a distribution standard has been found to create an unascertainable standard. See Id. The Restatement


14

provides that it is consistently interpreted as broadening the standard and indicating that the trustee exercise its discretion more generously. See Restatement (Third) of Trusts '50 cmt d(3) (2003) (other standards and supplementary language).

d. No Absolute Discretion

Despite language in the trust instrument that the trustee has Asole and absolute discretion@ to determine distributions in accordance with a specified standard, there is no such thing as absolute discretion. This well-settled principle has now been codified in Texas Trust Code Section 113.029(a):

Notwithstanding the breadth of discretion granted to a trustee in the terms of the trust, including the use of terms such as Aabsolute,@ Asole,@ or Auncontrolled,@ the trustee shall exercise a discretionary power in good faith and in accordance with the terms and purposes of the trust and the interests of the beneficiaries.

e. Limitations on Distributions (1) Standard of Living

As discussed above, even without the inclusion of these terms, a distribution for support is to be made according to the beneficiary=s station in life. (2) Other Resources

When making discretionary distributions, a trustee should consider whether he or she is obligated to consider the beneficiary=s other resources. If the settlor has provided guidance in this area, the settlor=s intent will control. Also, as is reflected in the discussion below, all rules are tempered by the settlor=s intent as reflected in the overall purpose of the trust. (a) General Rule

If the trust document is silent, a trustee should generally consider other resources but has some discretion in determining the impact of the resources on the distributions to be made form the trust. The consideration of other resources, however, is a balancing of the intent of the settlor regarding the treatment of the beneficiary and the other purposes of the trust and, these considerations may change the general rule. See RESTATEMENT (Third) of Trusts '50 cmt e. (significance of beneficiary=s other resources). (b) Restatement Exceptions

The Restatement provide two exceptions to the general rule. i) Other Trusts Created By Same Settlor

When the settlor has created other trusts of which

the beneficiary receives distributions, then the trustee is to take into account the other distributions in making discretionary payments. See Id.

ii) Beneficiary Not Intended to Be Self Supporting

When the beneficiary is in a situation in which he or she is not intended to be self-supporting (such as enroled full-time in school), then the beneficiary=s other resources are generally not considered. See Id. (c) What Other Resources?

Other resources normally include the beneficiary=s other income but not principal available to the beneficiary. See Keisling v. Landrum, 218 S.W.3d 737 (Tex. App. B Fort Worth 2007, pet. denied). In the eisling decision, the appellate court held that a beneficiary was not required to exhaust all her assets, other than a house and car, in order to receive distributions from a trust that provided the trustee shall distribute trust income when the beneficiary=s Aown income and other financial resources from sources other than this trust are not sufficient@ to maintain her standard of living. See Id. At 740. In reaching its decision, the appellate court found that Aother financial resources@ is limited to Aincome and other periodic receipts, such as pension and other annuity payments and court-ordered support payments.@ Id. At 743 citing RESTATEMENT (Third) of Trusts '50 cmt e(2) (significance of beneficiary=s other resources).

Depending on the terms and purpose of the trust, the principal of the beneficiary may be relevant. Once again, the determination of what resources to consider includes (i) the settlor=s relationships both to the current beneficiary and the remainder beneficiaries, (ii) the liquidity of the beneficiary=s assets and (iii) the purposes of the trust both tax and non-tax. See RESTATEMENT (Third) of Trusts '50 cmt e(2) (what other resources are to be considered). (d) Affect on Ascertainable Standard

In determining whether a power is limited by an ascertainable standard, it is immaterial whether the beneficiary is required to exhaust his other income before the power can be exercised. See Treas. Reg. '20.2041-1(c)(2). f. Priority of Beneficiaries

A trustee should consider whether he or she is obligated to give preference to one or more beneficiaries prior to making a discretionary distribution. (1) Settlor=s Intent Controls

The settlor may express a specific intent to favor a beneficiary or class of beneficiaries over another. If so, the settlor=s intent will control. Some trusts will do


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so by expressly providing that it is the settlor=s intent to provide for a certain beneficiary even to the extent of exhausting the trust. Other trusts will implicitly favor a beneficiary or a class of beneficiaries. For example, language that authorizes the distribution of principal, without regard to preservation of principal for the remainderman, clearly expresses the intent of the settlor that the current beneficiary or beneficiaries are to be favored. See discussion infra. (2) Guidelines for Under Texas Trust Code When No

Expression of Intent The Texas Trust Code provides that a trustee must

act impartially when the trustee does not provide preference or priority as between the beneficiaries. Specifically, Section 116.004(b) provides as follows:

In exercising the power to adjust under Section 116.005(a) or a discretionary power of administration regarding a matter within the scope of this chapter, whether granted by the terms of the trust, a will, or this chapter, a fiduciary shall administer a trust or estate impartially, based on what is fair and reasonable to all of the beneficiaries, except to the extent that the terms of the trust of will clearly manifest or intention that the fiduciary shall or may favor one or more of the beneficiaries. A determination in accordance with this chapter is presumed to be fair and reasonable to all of the beneficiaries.

TEXAS TRUST CODE '116.004(b).

Furthermore, Section 117.006 provides as follows:

If a trust has two or more beneficiaries, the trustee shall act impartially in investing and managing the trust assets, taking into account any differing interests of the beneficiaries.

TEXAS TRUST CODE '117.006. (3) Guidelines Under Restatement When No

Expression of Intent If there is no stated priority, the Restatement

(Third) of Trusts suggests several inferences and constructional preferences as starting points. They include: $ Relationship to the settlor is relevant, leading in

the most common situations to an inference that the beneficiary at the top of a line of descendants is favored over his or her own issue, with the

settlor=s spouse also so favored whether or not an ancestor of the others (e.g. settlor=s issue by prior marriage).

$ Among multiple lines of descent (e.g., all of the settlor=s issue) there is an inference of priorities per stirpes, that is, that (i) the various lines are entitled to similar, impartial (... but not necessarily equal) treatment, with disparities to be justified on a principled basis consistent with the person(s) at the top (e.g. the settlor=s child or the children of a deceased child).

See RESTATEMENT (Third) of Trusts '50 cmt. F (multiple beneficiaries or groups as concurrent discretionary distributees).

Note, as discussed previously, Texas has not adopted the Restatements. Therefore, the instrument should be first construed under the Texas Trust Code, which provides for impartially. If, however, the trust is found to ambiguous, the Restatement guidelines may be considered by the court in construing the instrument. (a) Parents Obligation To Support Beneficiary

Under Texas law, a parent has a legal obligation to support his or her minor children. The Texas Family Code provides that such a duty of support includes the duty to provide a child with clothing, food, shelter, and medical and dental care. See TEX. FAMILY CODE ANN. '151.001 (Vernon 2002 & Supp. 2010) see also Daniels v. Allen, 811 S.W.2d 278 (Tex. Civ. App. B Tyler 1991, no writ) (parent has obligation to support his minor children and provide necessities). A parent=s obligation of support exists without the need for a court order. See In Interest of A.D.E., 880 S.W.2d 241 (Tex. Civ. App. B Corpus Christi 1994, no writ) (father has duty to support child, even when not ordered by trial court to make payments of support); Boriack v. Boriack, 541 S.W.2d 237 (Tex. Civ. App. B Corpus Christi 1976, dism=d) (mother, as well as a father, has duty to support her minor children).

This duty of support must be considered when making distributions from a trust. See Gray v. Bush, 430 S.W.2d 258 (Tex. Civ. App. B Fort Worth 1968, ref. n.r.e.) (in absence of financial necessity to do so, mother was not authorized to invade funds provided by trust that was separate estate of children and was created for purpose of prescribed support payments). Unfortunately, no Texas decision has provided clear guidance as to the extent to which a trustee must consider a parent=s obligation of support. But, the decision of Deweese v. Crawford provides some guidance in this area. 520 S.W.2d 522 (Tex. App. B Houston [14th Dist.] 1975, writ ref=d n.r.e.). In Deweese, the court considered a demand by the parents of minor children on a third party to distribute social


16

security benefits the third party was receiving as Atrustee@ for the minor children. The court noted that the parents are principally responsible for the minor children=s support and maintenance. Therefore, only when it was shown that the parents were unable to meet their obligation to properly support and maintain the children was the trustee required to distribute funds for their benefit. Until the parents established they were unable to provide the requisite support, the court held that the trustee could appropriately choose to accumulate the benefits.

In reaching its decision, the Deweese court noted that issues regarding distributions of social security benefits are governed by federal law. Therefore, while it is not certain that the court=s decision would have been the same if the case involved a traditional trust instead of a trust created to administer federal benefits, the analysis and results should be the same. Furthermore, the decision in Deweese is consistent with Texas courts historical hesitancy to interfere with the reasonable exercise of a trustee=s discretion. (b) Beneficiary=s Obligation To Support Family

Members Beneficiaries will often seek or use distributions

to support their family. This raises the issue of whether a trustee may take into account the needs of a beneficiary=s family, or his obligation of support when making distributions. Again, the intent of the settlor is paramount.

For example, in Cutrer, the guardian of the estate of a minor attempted to enforce a claim to an undivided interest in the corpus of three trusts. See Cutrer v. Cutrer, 345 S.W.2d 513, 518-19 (Tex. 1961). Construing the terms of the trusts, the court held it was clear that the trust did not contemplate the adopted child as a potential contingent beneficiary. Id. At 517-18. Clearly the Cutrer court saw no need to stretch the class of beneficiaries using unrelated Afamily@ definitions, but instead focused on the intent of the settlor and the terms of the trust.

Regardless of the settlor=s intent, a trustee of a support or discretionary trust may be required to make distributions for support of a beneficiary=s child when the beneficiary has been ordered to make child support payments. The extent of the payments depends on the type of trust: support versus discretionary.

A trustee of a support trust may be required to make distributions for the support of the beneficiary=s child. See TEX. FAMILY CODE ANN. '154.005 (Vernon 2002) (AThe court may order the trustees of a spendthrift or other trust to make disbursements for the support of a child to the extent the trustees are required to make payments to a beneficiary who is required to make child support payments as provided by this chapter.@). A trustee of a pure discretionary may only

be ordered to make child support payments for the benefit of the child from income but not principal. See Id. (AIf disbursement of the assets of the trust is discretionary, the court may order child support payments from the income of the trust but not from the principal.).

A condition to precedent to such an obligation is that the beneficiary has been ordered to pay child support. See Kolpack v. Torres, 829 S.W.2d 913 (Tex. Civ. App. B Corpus Christi 1992, writ denied); see also Matter of Marriage of Long, 542 S.W.2d 712 (Tex. Civ. App. B Texarkana 1976, no writ) (trial court, instead of ordering trustees to pay to wife a certain sum per month for benefit of child, should have first ordered trust beneficiary parent to make child support payment or payments, after which it could have then ordered trustees to make disbursements for support of child.). In Kolpack, the appellate court held that a trial court could not obligate a trustee of a discretionary trust to make disbursement of trust income directly to a beneficiary=s child until it first imposed that obligation on the beneficiary/parent. Id. at 916.

g. Other Relevant Factors

The RESTATEMENT (Third) of Trusts lists other factors that courts have considered when construing trust distribution standards. These include: $ Whether the remainder beneficiaries were to take

Athe principal@ or Awhatever principal remains@; $ The relationship between the settlor and one or

more of the beneficiaries including not only family relationships but the personal feelings about a beneficiary, and occasionally about the beneficiary=s spouse;

$ Whether the beneficiary is also a trustee; $ Whether the settlor made other provisions for the

beneficiary; $ Whether the settlor was aware of the beneficiary=s

other resources or of other circumstances; and, $ Whether a spendthrift restraint was imposed on

the beneficiary. The RESTATEMENT provided that these words can be given more significance than the realities of drafting warrant. The Third Restatement states that viewing the documents as a whole, the purpose of creating the trust and the role of the discretionary power is more instructive than any individual words. See RESTATEMENT (Third) of Trusts '50 cmt g (general observations on relevant factors in the interpretation of discretionary powers). h. Judicial Review

A court generally will not substitute its own discretion for that of a trustee. However, the court will


17

not permit a trustee to abuse his discretion. See Coffee v. William Marsh Rice University, 408 S.W.2d 269 (Tex. Civ. App. B Houston 1966); Brown v. Sherck, 393 S.W.2d 172 (Tex. Civ. App. B Corpus Christi, 1965, no writ); and Nations v. Ulmer, 122 S.W.2d 700 (Tex. Civ. App. B El Paso, 1938). A trustee=s discretion is not unbridled discretion. State v. Rubion, 308 S.W.2d 4 (Tex. 1957); First National Bank of Beaumont v. Howard, 229 S.W.2d 781, 785 (Tex. 1950); Anderson v. Menefee, 174 S.W. 904 (Tex. Civ. App. B Ft. Worth 1915, writ ref=d); SCOTT '187 p. 986.

A trustee will be found to have abused its discretion if the trustee acts outside the bounds of Areasonable judgment.@ SCOTT '187. Use of the terms Aabsolute,@ Auncontrolled,@ Asole@ and Aexclusive@ in granting discretion to a trustee does not completely absolve the fiduciary from acting reasonably. First National Bank v. Howard; Thorman v. Carr, 412 S.W.2d 45 (Tex. 1967).

It is an abuse of discretion for a trustee to fail to exercise judgment at all, no matter how broad the standard. SCOTT '187.3. The trustee=s discretion must be Areasonably exercised to accomplish the purposes of the trust according to the settlor=s intention and his exercise thereof is subject to judicial review and control.@ SCOTT , ''187, 187.1, 187.2, and 187.3; Kelly v. Womack, 268 S.W.2d 903, 907 (Tex. 1954); Powell v. Parks, 86 S.W.2d 725 (Tex. 1935); Davis v. Davis, 44 S.W.2d 447 (Tex. Civ. App. B Texarkana 1931, no writ). B. Delegation of Duties 1. Duty Not To Delegate.

The trustee=s duty of competence generally includes restrictions on delegating fiduciary duties. Except as allowed by law, the trustee is under an obligation to personally administer the trust and is under a duty not to delegate to others acts that the trustee should personally perform. See SCOTT ' 171 (Trustee is under a duty "not to delegate to others the administration of the trust or the performance of acts in the administration of the trust that the trustee ought personally to perform.") However, this does not mean that the trustee must personally perform every act that may be necessary or proper to administer the trust. Texas Trust Code Section 113.018 provides that a trustee "may employ attorneys, accountants, agents, and brokers reasonably necessary in the administration of the trust estate.@ A trustee cannot, however, hire agents or otherwise delegate authority to a third person to carry out the trustee's powers which require the exercise of discretion on the part of the trustee. King v. Tubb, 551 S.W.2d 436, ref. nre (Civ. App. 1977).

The Restatement of Trusts (Third), Section 171, provides that "a trustee has a duty personally to perform the responsibilities of the trusteeship except as

a prudent person might delegate those responsibilities to others. In deciding whether, to whom, and in what manner to delegate fiduciary authority in the administration of the trust, and thereafter in supervising agents, the trustee is under a duty to the beneficiaries to exercise fiduciary discretion and to act as a prudent person would act in similar circumstances.@ 2. Delegation Between Co-Trustees.

A trustee may delegate to a co-trustee the performance of a trustee's function unless prohibited by the trust. See TEXAS TRUST CODE ' 113.085(e). The delegation is presumed to be revocable unless otherwise stated. Therefore, when naming co-trustees, the settlor should keep in mind that one co-trustee may appoint another to function as an agent for those duties that may lawfully be delegated unless he or she expressly prohibits delegation as between co-trustees. TEXAS TRUST CODE ' 113.085(e); see also Bunn v. City of Laredo, 213 S.W. 320 (Tex. Civ. App.CSan Antonio 1919, no writ). For example, if only one of several co-trustees qualifies to act as an agent, a deed by that one alone will pass title to a purchaser under Texas law. If a settlor does not want to his or her trustees to have this power, the trust instrument should clearly provide otherwise. 3. Ability to Delegate Investment Decisions

Under Section117.011 of the Texas Trust Code, a trustee may delegate investment and management functions that a prudent trustee of comparable skills could properly delegate under the circumstances. The trustee must exercise reasonable care, skill and caution in selecting an agent, establishing the scope and terms of the delegation, consistent with the purposes and terms of the trust, and regularly monitor the agent=s performance. If these requirements are met, the trustee is not liable to the beneficiaries for the decisions or actions of the agent provided (1) the agent is not an affiliate of the trustee, (2) the delegation agreement does not require arbitration of disputes with the agent, and (3) the agreement does not purport to shorten any applicable statute of limitations. An agent owes a duty to the trust to exercise reasonable care to comply with the terms of the delegation, and by accepting the delegation, the agent submits to the jurisdiction of Texas courts. C. Duties Concerning Investments 1. Uniform Prudent Investor Act.

The Uniform Prudent Investor Act (AUPIA@) (effective 1/1/04) is contained in Chapter 117 of the Texas Trust Code. Section 117.003(a) provides that a trustee owes a duty to the beneficiaries of the trust to comply with the Aprudent investor rule,@ set forth in the


18

statute. However, the prudent investor rule is a default rule and may be expanded, restricted, eliminated or otherwise altered by the provisions of a trust. A trustee is not liable to a beneficiary if the trustee acted in reasonable reliance on the provisions of a trust. TEX. TRUST CODE ''117.003(b). 2. Standard of Care.

Under the prudent investor rule, a trustee must invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill and caution. TEX. TRUST CODE '117.004(a). A trustee=s investment and management decisions respecting individual assets are not evaluated in isolation, but in the context of the trust portfolio as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the trust. TEX. TRUST CODE '117.004(b). In making investment and management decisions, the trustee is required to consider the following:

a. General economic conditions; b. The possible effect of inflation or deflation; c. The expected tax consequences of investment

decisions or strategy; d. The role that each investment plays within the

overall trust portfolio; e. The expected total return from income and the

appreciation of capital; f. Other resources of the beneficiary; g. Needs for liquidity, income and preservation or

appreciation of capital; and h. An asset=s special relationship or special value,

if any, to the trust or a beneficiary. TEXAS TRUST CODE '117.004(c). A trustee may invest in any kind of property or type of investment consistent with the standard of the UPIA. TEXAS

TRUST CODE '117.004(e). A trustee who has special skills or expertise has a duty to use those special skills or expertise. TEXAS TRUST CODE '117.004(c). 3. Diversification

Section 117.005 of the Texas Trust Code mandates that a trustee diversify the investments. No guidance is provided regarding what is proper diversification. If the trustee Areasonably determines that, because of special circumstances, the purpose of the trust are better served without diversifying,@ then the trustee is not required to diversify. The Comments suggest some possible special circumstances could include tax considerations, ownership of a family business, and securities law issues.

4. Duties at Inception of Trusteeship Section 117.006 requires a trustee Awithin a

reasonable time after accepting a trusteeship or receiving trust assets,@ to Areview the trust assets and make and implement decisions concerning the retention and disposition of assets, in order to bring the trust portfolio into compliance with the purposes, terms, distribution requirements and other circumstances of the trust, and with the requirements of [the UPIA].@

Former Section 113.003, which allowed a trustee to retain property constituting initial trust corpus without regard to diversification, has been repealed. D. Trust Owning Closely-Held Business 1. Diversification Issues a. Trust Terms May Override Duty to Diversify

The UPIA provisions, including the duty to diversify, are default rules and may be altered or abrogated by the settlor. TEXAS TRUST CODE '117.003(b). A settlor may relieve the trustee of certain duties, restrictions, and liabilities imposed by statute. TEXAS TRUST CODE '113.059. Jewett v. Capital Nat. Bank of Austin, 618 S.W.2d 109 (Tex. App. B Waco 1981, writ ref=d n.r.e.); RESTATEMENT '228. b. Required Language to Override Duty to Diversify

Due to the fundamental duty to diversify trust investments under the UPIA, if a settlor wants the trustee to hold corporate stock as the sole or primary asset of the trust, the trust terms should expressly direct, or at least authorize, the trustee to retain the specific stock or other interest and explicitly relieve the trustee of the duty to diversify the trust=s investments. No Texas cases have considered what constitutes sufficient language to override the trustee=s duty to diversify, but several cases in other states have addressed the issue. The non-Texas cases addressing this issue have concluded that a general authorization for the trustee to hold assets originally contributed to the trust is not sufficient to override the duty to diversify. Rather, the settlor must direct the trustee to hold a specific business interest without regard to the duty to diversify.

See RESTATEMENT (3d) '229, Comment d: AA general authorization in an applicable statute or in the terms of the trust to retain investments received as a part of a trust estate does not ordinarily abrogate the trustee=s general duty to act with prudence in investment matters.@ But see Nat=l City Bank v. Noble, 2005 WL 3315034 (Ohio App.) (trustee not required to diversify Smucker Company stock under general retention clause Abased on the clear intent of Welker Smucker@).


19

c. ASpecial Circumstances@ May Override Duty to Diversify If the language of the trust is not sufficient alone

to override the duty to diversify, Aspecial circumstances@ may excuse diversification under Texas Trust Code Section 117.005. This provision has received no attention in Texas and little elsewhere. It was discussed somewhat in Wood v. U.S. Bank, 828 N.E.2d 1072, 1078-79 (Ohio App. 2005). The Ohio Court of Appeals stated that the term Aspecial circumstances@ generally refers to a holding that is important to a family or trust. Wood, 828 N.E.2d at 1079. The court cites Brackett v. Tremaine, where the Nebraska Supreme Court held that there was no duty to diversify when the asset in question was a piece of farmland that had special meaning to the family. Wood, 828 N.E.2d at 1079. The court recognized that stock could have a special relationship to the family, which could be a special circumstance relieving the trustee of the duty to diversify. Id. The court stated that a controlling interest in a family business might be another example of a Aspecial circumstance@ that would override the duty to diversify. Id. at 1079.

It can be argued that a company founded, developed and successfully operated by the settlor, and contributed to the trust by the settlor, would have special meaning and a special relationship to the family, which would permit the trustee to retain it as the sole or primary asset.

d. Beneficiaries May Excuse Performance of Duty to

Diversify. If there is any question whether the trust

instrument permits the trustee to retain a holding, the trust beneficiaries may excuse performance by the trustee of the duty to diversify in writing. TEXAS

TRUST CODE '114.005, 114.032. A beneficiary also may, by his consent, acquiescence or ratification, be estopped to complain of a trustee=s failure to diversify if the beneficiary had full knowledge of all material facts. Burnett v. First Nat=l Bank of Waco, 536 S.W.2d 600 (Tex. Civ. App. B Eastland, writ ref=d n.r.e.); RESTATEMENT '216 & Illustrations 1-3:

(1) A is trustee of $100,000 for B. By the terms of the trust A is directed to invest only in bonds. B requests A to invest in shares of stock and A does so. The shares fall in value. B cannot hold A liable for breach of trust.

(2) The facts are as stated in Illustration 1, except that A suggested the investment in shares of stock and B consented to it. B cannot hold A liable for breach of trust.

(3) A is trustee of Blackacre for B. By the terms of the trust A is forbidden to sell Blackacre.

With the consent of B, A sells Blackacre. B cannot hold A liable for breach of trust.

2. When Trustee is also Officer/Director - Standard

of Care Issues When a trust owns all or a controlling interest in a

corporation, it is not uncommon for the individual serving as trustee to also be an officer, director, employee and/or shareholder of the trust-owned corporation, and possibly other related entities. Although these multiple roles create areas of potential conflict and confusion, each role is legally separate and has its own unique set of duties and standards. The rules applicable to trustees differ significantly from those applicable to corporate officers and directors, and the differences are crucial to the types of claims that may be made, who can make them, and the required proof. a. Business Judgment Rule vs Fiduciary Duties of a

Trustee A director is required to handle his duties with the

care Aan ordinary prudent man would use under similar circumstances@ McCollum v. Dollar, 213 S.W. 259, 261 (Tex. Comm=n App. 1919, holding approved). Generally, a director fulfills his obligation to act with care if his actions comport with the Abusiness judgment rule.@ The Texas Supreme Court described the business judgment rule as follows:

[I]f the acts or things are or may be that which the majority of the company have a right to do, or if they have been done irregularly, negligently, or imprudently, or are within the exercise of their discretion and judgment in the development or prosecution of the enterprise in which their interests are involved, these would not constitute such a breach of duty, however unwise or inexpedient such acts might be, as would authorize interference by the courts at the suit of a shareholder.

The business judgment rule is considered to be a lower legal standard of care than the fiduciary duties of a trustee. See Cates v. Sparkman, 11 S.W. 846, 849 (Tex. 1887); Gearhart v. Smith, 741 F.2d 707, 719-20 (5th Cir. 1984).

If the same individual serves as trustee of a trust owing corporate stock and as an officer/director of that corporation, it is critical to determine the capacity in which he has acted in connection with any claim. Due to the higher legal standard applicable to trustees as compared to officers and directors, a beneficiary would prefer to assert claims against the person under the fiduciary standard applicable to a trustee rather than


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the business judgment rule. b. Texas Recognizes Legal Distinction Between

Person Serving in Different Capacities Under Texas law, if the trustee is also an officer

or director in his individual capacity, the trust beneficiaries cannot sue him as trustee for actions taken as a director or officer. The law recognizes that actions by an individual in one capacity are not treated as the actions of that individual in any other capacity. As one court explained:

A person who sues or is sued in his official or representative capacity is, in contemplation of law, regarded as a person distinct from the same person in his individual capacity and is a stranger to his rights or liabilities as an individual. It is equally true that a person in his individual capacity is a stranger to his rights and liabilities as a fiduciary or in a representative capacity.

Elizondo v. Texas Natural Resource Conservation Commission, 974 S.W.2d 928, 931 (Tex. App. B Austin 1998, no pet.), and cases cited therein. See also McGinnis v. McGinnis, 267 S.W.2d 432, 435 (Tex. Civ. App.-San Antonio 1954, no writ). As another court stated: AThe law is clear that there is a legally significant difference between a person in his individual capacity and the very same person in his representative capacity.@ In Re: Estate of Spivey, 2000 WL 4397 (Tex. App.BTexarkana) (not designated for publication). This distinction was explained by a New York court as follows:

[T]he mere fact that a person occupies the position of an estate fiduciary does not result in coloring his entire life and action to the exclusion of all his other rights and interests. He still eats breakfast, performs his daily tasks, and retires for the night as an individual and these private activities are as immune from the prying eyes of the beneficiaries of the estate of which he is a fiduciary as if they had been performed by an entirely different person. As a matter of legal fact, he is not subject to scrutiny as a fiduciary except to those matters which are performed strictly in the management of the estate, and any knowledge or information he may possess or acquire in his extra fiduciary relations are as privileged as are his breakfast menu or his nocturnal habits.

In re Ebbets= Estate, 267 N.Y.S. 268, 267-68 (N.Y.

Surrogate=s Court, Kings County 1933). Commenting further on this dual personality, the New York court stated: AIt has been repeatedly held that persons suing or being sued in their official or representative capacity are, in contemplation of law, distinct persons, and strangers to any right or liability as an individual.@ Id. at 267.

Current Texas law draws a clear line between the actions of a trustee of a trust and the actions of an officer or director of a corporation owned all or in part by the trust, even where the same person Awears both hats.@ Adam v. Harris, 564 S.W.2d 152 (Tex. Civ. App. B Houston [14th Dist.] 1978, writ ref=d nre). A claim against a trustee for self-dealing or other breach of fiduciary duty can only be brought against a trustee acting in his trustee capacity. Transactions between the corporation whose stock is held by the trust and the trustee not acting in his trustee capacity do not constitute self-dealing or breaches of fiduciary duties by the trustee and cannot form the basis for a claim by a trust beneficiary against the trustee. Adam v. Harris, 564 S.W.2d 152. Thus, the actions of a director or officer will not be subject to the higher fiduciary duties owed by a trustee to the trust beneficiaries.

In Adam, the court held that an alleged self-dealing transaction between a director of a corporation, who was also the trustee of a trust owning a controlling interest in the corporation, and a related entity did not constitute a breach of fiduciary duty by the trustee or self-dealing with trust property. Robert Adam was the trustee of a testamentary trust that owned a controlling interest in a trucking corporation. Adam also was a director of the corporation. The corporation purchased truck insurance from Adam Gordon Insurance Agency, an agency owned by Adam=s brothers. The trust beneficiaries sued Adam as trustee for self-dealing under the Texas Trust Act, which prohibited a trustee from buying property from a related party. The beneficiaries argued that the transaction between the corporation, of which Adam was a director and was the owner as trustee, with the insurance company owned by Adam=s brothers constituted prohibited self-dealing by Adam as trustee. They sought to recover any profits made from the insurance transactions. The Houston Court of Appeals disagreed with the beneficiaries, stating as follows:

The flaw in this argument, however, is that whatever breach of fiduciary duty Robert Adam committed was in his capacity as director of the truckline corporation and not in his capacity as trustee. Robert Adam did not self-deal with the trust property, the shares in the corporation, but rather with the corporation=s property, the monies used to purchase the insurance for the trucks.


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Section twelve of the Texas Trust Act directs that a >trustee shall not buy nor sell . . . any property owned by or belonging to the trust estate ... from or to ... a relative ....@ Here, no property either entered or left the trust res; the trustee neither bought nor sold trust property. Under these circumstances we hold that no cause of action for self-dealing lies against anyone on the basis of the beneficiary-trustee relationship.

Id. See also Cleaver v. Cleaver, 935 S.W.2d 491 (Tex. App. B Tyler 1996) (Trust beneficiary=s spouse [in divorce action] claimed trustee, who owned minority interest in corporation as trustee and controlling interest in his individual capacity, breached his fiduciary duty as trustee by allegedly suppressing dividends. In dicta, the court found no evidence that the trustee received any personal benefit arising out of his service as trustee, but the court also discussed the fairness of the transactions to all of the shareholders, thereby blurring the lines between the separate capacities.) See also Guerra v. Guerra, 2011 WL 3715051 (Tex. App. B San Antonio)(not designated for publication), discussed infra.

In some non-Texas cases, courts have drawn a clear distinction between the actions of an individual as trustee and his actions as a director or officer only where the trustee owned less than a majority of the corporate stock and thus was unable to control corporate affairs. See In re Ebbets= Estate, 267 N.Y.S. 268, 270 (Surrogate=s Court 1933).

However, if an estate holds a controlling interest in the corporation, the executor may be required to disclose corporate information in an estate accounting. In re Sylvester=s Estate, 172 N.Y.S.2d 57 (S. Ct. 1958) (A[t]here can be no question that where an estate fiduciary is a controlling stockholder in a corporation by reason of holding such stock in a fiduciary capacity, he can be compelled to disclose details of a corporate activity.@); Taylor v. Errion, 44 A.2d 356 (NJ 1945) (trustee holding majority of stock and who actively managed the corporation, breached his fiduciary duties as trustee when he utilized his control of the board of directors to make an unjustified increase in his salary as a corporate officer and was subject to removal as trustee); Brown v McLanahan, 148 F.2d 703 (4th Cir. 1945 ) (trustees breached fiduciary duties owed to beneficiaries where they misused their voting powers for their own benefit or for the benefit of corporations in which they were interested personally).

For further discussion see Mary C. Burdette, Fiduciary Duties within Fiduciary Duties, Trust Owning Stock in a Closely-Held Corporation, State Bar of Texas Fiduciary Litigation: Beyond the Basics Course, 2011.

III. TRUST RECORDS AND ACCOUNTINGS A. Record Keeping

A trustee has a duty to keep accurate, complete and orderly books and records for the trust. In addition to financial records, a trustee has the duty to keep accurate legal and business records regarding the trust estate. Shannon v. Frost National Bank, 533 S.W.2d 389 (Tex. Civ. App.BSan Antonio 1975, writ ref=d n.r.e.); BOGERT ' 962. There is no statute specifically requiring a trustee to keep accurate books and records, but proper books and records are essential for the trustee to properly administer a trust, including compliance with the trustee=s duty to provide proper disclosure, prepare a statutory accounting, determine trust income for distributions, and prepare trust tax returns. Corpus Christi Bank & Trust v. Roberts, 587 S.W.2d 173 (Tex. Civ. App. B Corpus Christi 1979), reformed in part on other grounds and aff=d in part, 597 S.W.2d 752 (Tex. 1980). Trust records must be retained indefinitely from inception - no exceptions. A beneficiary can demand an accounting upon termination of the trust from inception. The trustee will be liable for any amounts for which it cannot account.

A trustee has a fiduciary duty, upon demand, to allow a beneficiary on a reasonable basis to inspect the non-privileged books and records of the trust. RESTATEMENT '82; SCOTT '173; and BOGERT '961. See also Shannon v. Frost National Bank, supra.

Although a beneficiary should be given reasonable access to the books and records of the trust, a mandated open door policy is not reasonable. For example, the following can allow a beneficiary to make unreasonable demands:

The trustees shall keep (or cause to be kept) accurate books of account reflecting all of the receipts and disbursements of the trusts. Each beneficiary shall have free access to all the trust books, records, and accounts at all reasonable times during regular business hours.

Likewise, the beneficiary=s rights should not be restricted to the whims of the trustee. Attempting to create a balance can be difficult, but one approach is as follows:

The trustees shall maintain the books and records of the trust. A beneficiary then entitled to received distributions and/or with a vested remainder interest shall be entitled to periodically (i) review the trust books and records upon request, and (ii) duplicate the trust books and records (at such beneficiary=s expenses); provided, nothing herein shall require a trustee to disclose any beneficiary=s private and confidential information to another beneficiary without a court order.


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B. Texas Trust Code Accounting Unless required by the trust instrument, a trustee

has no duty to make periodic accountings to the beneficiaries under Texas law. However, the Texas Trust Code gives a beneficiary the right to demand a written accounting of all of the trust transactions from inception or since the last accounting. TEXAS TRUST

CODE ' 113.151. Except in unusual circumstances, a trustee is not required to provide an accounting more frequently than once every 12 months. If the trustee fails or refuses to provide an accounting within 90 days, the beneficiary may file suit to compel the trustee to provide the accounting. If the beneficiary is successful, the court may order the trustee in his individual capacity to pay all of the beneficiary=s attorney=s fees. Id.

An Ainterested person@ also may file suit to compel the trustee to provide an accounting. The court will order the trustee to account if it finds that Athe nature of the interest in the trust of, the claim against the trust by, or the effect of the administration of the trust on the interested person is sufficient to require an accounting by the trustee.@ TEXAS TRUST CODE

'113.151(b). An Ainterested person@ includes a trustee, beneficiary, or any other person having an interest in or claim against the trust or any person who is affected by the administration of the trust. AWhether a person, excluding a trustee or named beneficiary, is an interested person may vary from time to time and must be determined according to the particular purposes of and matter involved in any proceeding.@ TEXAS TRUST

CODE '111.004(7). A Statutory trust accounting is an allocation of

cash received and cash disbursed between principal and income and a description of all financial transactions affecting the trust. The contents of an accounting are prescribed by Trust Code Section 113.152:

1. The trust property that has been received and was not previously listed in a prior accounting.

2. A list of receipts and disbursements, allocated between income and principal.

3. A list and description of all property being administered (with descriptions).

4. Cash accounts, their balance, and where they are deposited.

5. A list of all trust liabilities. A trust accounting is the primary vehicle through which a beneficiary obtains the information necessary to understand and protect his interests and enforce his rights. The accounting should be in understandable form and include all information necessary for the beneficiary to get a complete picture of the trust

administration during the time period covered. The detail required in an accounting and the amount of time required to prepare the accounting will depend on the nature of the trust assets and the activity (receipts of income, sales of assets, investments, payment of expenses and distributions to beneficiaries) of the trust.

An accounting also may put the beneficiary on notice of the trustee's acts for purposes of the statute of limitations on claims against the trustee. The statute of limitations for breach of fiduciary duty claims and most other trust-related actions is four years. TEX. CIV. PRAC. & REM. CODE ANN. '' 16.004, 16.051. The discovery rule applies, so the statute does not begin running until the facts constituting a cause of action are discovered. Seay v. Burnett Trust, 187 S.W.2d 377 (Tex. 1945). The statute may be tolled during a beneficiary's minority or disability. If a transaction has been fully disclosed in an accounting, the accounting may be used to bar claims relating to such disclosed transactions more than four years later. However, an accounting does not settle a trustee=s tort liability. Texas State Bank v. Amaro, 87 S.W.3d 538 (Tex. 2002). Approval of the trustee=s investment philosophy and adjudication of the trustee=s potential tort liability to the beneficiary was not proper in connection with the approval of an accounting, as these matters were not components of an accounting. Id.

Based on the trustee=s duty to maintain proper books and records, the trustee=s records should permit the preparation of a trust accounting at a reasonable cost and in a reasonable period of time. If the trustee has not maintained his records in this manner, then he may have committed a breach of the duty to maintain proper books and records. Any portion of the cost of preparation of the accounting that is attributable to the trustee=s inadequate records could be assessed against the trustee individually. The trustee also should make reasonable efforts to procure a trust accounting at a reasonable cost. C. Trust Accounting Alternatives

A formal Trust Code accounting may be expensive and the reasonable and necessary cost generally is a proper trust expense. A trustee may consider offering to provide some type of substitute to a formal accounting. The beneficiary is not obligated to accept anything less than a full and complete accounting meeting all of the requirements of the Trust Code. However, to avoid the expense of a formal accounting, there may be circumstances in which a beneficiary would agree to accept an alternative, less costly method of obtaining the desired information, at least as a preliminary step. This approach may be particularly useful for a trust that has been in existence for many years and for which no accounting has ever been provided.


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IV. COMPENSATION A. Compensation

Unless the terms of the trust instrument provide otherwise, a trustee is entitled to reasonable compensation from the trust for acting as trustee. See TEXAS TRUST CODE ' 114.061. This is true even if the trust instrument does not mention compensation. See Id.; see also City of Austin v. Austin Nat. Bank, 488 S.W.2d 586 (Tex. Civ. App.CAustin 1972 writ granted), aff'd in part and rev'd in part on other grounds, 503 S.W.2d 759 (Tex. 1973)(trustee is entitled to be paid for his or her work on behalf of trust estate). If the trustee commits a breach of trust, the court may in its discretion deny him all or part of his compensation. TEXAS TRUST CODE ' 114.061 (b). Thus, while a trustee is not permitted to profit individually in the course of trust transactions, this does not prohibit a trustee from being compensated for his, her or its services. And, compensation for services actually rendered does not make a trustee a beneficiary of a trust or disqualify him or her from serving as trustee. See McCauley v. Simmer, 336 S.W.2d 872 (Tex. Civ. App.CHouston [1st Dist] 1960, writ dism'd).

A beneficiary is entitled to a trustee who will charge only a reasonable cost. Unless the trust instrument provides otherwise, a trustee is entitled to Areasonable@ compensation from the trust for acting as trustee. TEX. TRUST CODE '114.061. The beneficiary is entitled to all information regarding compensation paid to the trustee and the basis for its determination. Thus, a trustee should keep good records of all time spent as trustee.

If the trustee is an attorney or an accountant, it is preferable for the trustee to use outside professionals rather than his own firm. Such arrangements may raise concerns and may give rise to claims of self-dealing by a beneficiary and excessive compensation. If he does use his own firm to provide legal or accounting services, a request for copies of those statements should be made. The trustee should not be paid professional fees for actions required as a trustee, as well as a trustee fee. This would constitute a double fee. A trustee is not entitled to be paid his hourly professional fee for all actions taken with respect to the trust unless it produces a reasonable fee.

If an individual trustee has delegated investment authority to an investment advisor, it seems logical and reasonable that his trustee fees should be adjusted to avoid receiving excessive compensation.

Excessive fees may be grounds for removal. See Lee v. Lee, 47 S.W.3d 767 (Tex. App.BHouston [14th Dist.] 2001, writ denied) (removal of trustee was mandatory where a trustee charged excessive fees and took actions that resulted in material financial loss.) If the trustee commits a breach of trust, the court may in

its discretion deny the trustee all or part of his compensation. TEX. TRUST CODE '114.061. See Langford v. Shamburger, 417 S.W.2d 438 (Tex. Civ. App.BFort Worth 1967, writ ref=d n.r.e.), disapproved of on other grounds by Texas commerce Bank, N.A. v. Grizzle, 96 S.W.3d 240 (Tex. 2002).

B. Reimbursement of Expenses

Likewise, unless modified by the trust instrument, a trustee is entitled to reimbursement for:

(1) advances made for the convenience, benefit, or protection of the trust or its property;

(2) expenses incurred while administering or protecting the trust or because of the trustee's holding or owning any of the trust property; and

(3) expenses incurred for any action taken under Section 113.025.

TEXAS TRUST CODE ' 114.063. C. Exoneration for Torts

A trustee is entitled to exoneration for torts committed in the administration of the trust when:

(1) the trustee was properly engaged in a business activity for the trust and the tort is a common incident of that kind of activity;

(2) the trustee was properly engaged in a business activity for the trust and neither the trustee nor an officer or employee of the trustee is guilty of actionable negligence or intentional misconduct in incurring the liability; or

(3) the tort increased the value of the trust property.

TEXAS TRUST CODE ' 114.062(b); but see TEXAS

TRUST CODE ' 114.062(c) (A[a] trustee who is entitled to exoneration or reimbursement under Subdivision (3) of Subsection (a) is entitled to exoneration or reimbursement only to the extent of the increase in the value of the trust property@). V. RESIGNATION AND REMOVAL OF

TRUSTEES A. Resignation

A trustee may resign in accordance with the terms of the trust instrument or by petitioning a court for permission to resign. TEXAS TRUST CODE'113.081. If by petition to the court, the court may accept a trustee's resignation and discharge the trustee from the trust on the terms and conditions necessary to protect the rights of other interested persons. Id.

If the trust instrument contains a resignation


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procedure, a trustee can resign pursuant to the specified terms without any court involvement. The resigning trustee must comply with all requirements, which may include: $ Who should receive notice: all beneficiaries,

current beneficiaries, trustee appointers, trust protector and/or advisor, etc.;

$ How notice should be given; $ Means for delivery of notice; $ Time period before resignation is effective; $ Ability of certain persons or entities to waive the

notice time period; $ What happens if no successor trustee is appointed

at the time the resignation is effective; $ Filing of resignation in deed records B. Removal 1. Judicial Proceeding

TEXAS TRUST CODE '113.082(a) provides for the removal of a trustee as follows:

A trustee may be removed in accordance with the terms of the trust instrument, or, on the petition of an interested person and after hearing, a court may, in its discretion, remove a trustee and deny part or all of the trustee=s compensation if:

(1) the trustee materially violated or attempted to

violate the terms of the trust and the violation or attempted violation results in a material financial loss to the trust;

(2) the trustee becomes incapacitated or insolvent;

(3) the trustee fails to make an accounting that is required by law or by the terms of the trust; or

(4) the court finds other cause for removal. TEXAS TRUST CODE '113.082(a).

In addition to these specified statutory grounds, a court may remove a trustee on any grounds that the court considers necessary and proper. See Novak v. Schellenberg, 718 S.W.2d 822 (Tex. App. B Corpus Christi 1986, no writ). For example, lack of business experience has been considered on the question of the removal of a trustee. See Moore v. Sanders, 106 S.W.2d 337 (Tex. Civ. App. B San Antonio 1937, no writ). But, ill will or hostility between the trustee and the beneficiary of the trust, standing alone, is not a sufficient ground for removal of the trustee for office. See Akin v. Dahl, 661 S.W.2d 911 (Tex. 1983). The burden of proof is on the party who seeks to remove a trustee for dereliction of duty. See Novak, 718 S.W.2d

at 822. 2. Removal Power in Trust Instrument

It is becoming much more common for trust instruments to grant a removal power to either the beneficiaries or a third party trust protector or trust committee. If the removal power is properly exercised, the trustee is removed and must promptly deliver the assets to the successor trustee in accordance with the removal provision. The trustee probably cannot retain any trust assets to use in filing for a judicial discharge. Trustees should fully understand the impact of removal powers before agreeing to accept the appointment. C. Discharge of Liability Upon Resignation 1. Judicial Release

When the trust instrument does not contain resignation provisions and a trustee resigns through a judicial proceeding, the trustee may file a final accounting of the trust administration and ask the court to approve it and discharge the trustee, as well as appoint a successor trustee. TEXAS TRUST CODE '115.001(a)(4), (9) (court may Adetermine the powers, responsibilities, duties and liability of a trustee@ and Asettle interim or final accounts@). A judgment approving the trustee=s accounting should fully release the trustee from liability on subsequent claims relating to all matters adequately disclosed, raised or litigated in the proceeding. See BOGART '972. This result is based on fundamental concepts of res judicata. Travelers Ins. Co. V. Joachim, 315 S.W.3d 860, 862 (Tex. 2010); Barr v. Resolution Trust Corp., 837 S.W.2d 627, 628 (Tex. 1991); and Estate of Lynch, 395 S.W.3d 215, 226 (Tex. App. B San Antonio 2012, review denied). The trustee must plead for a release, and the court must conduct an evidentiary hearing regarding the trustee=s actions. Texas State Bank v. Amaro, 87 S.W.3d 538, (Tex. 2002); Compare Coble Wall Trust Co., Inc. v. Palmer, 859 S.W.2d 475, 480-481 (Tex. App. B San Antonio 1993, writ denied) (Probate Court=s approval of Guardian=s accounting after full hearing based on objections of interested parties discharged and released the Guardian from all subsequent claims.)

If the trust instrument contains resignation procedures, it has been argued that a trustee cannot be reimbursed for the cost of seeking a judicial resignation and discharge. However, in any trust proceeding, the court has the power to award legal fees as the court deems Aequitable and just.@ TEXAS TRUST

CODE ' 114.064. See VI.D.1. infra. It may be necessary for the resigning trustee to personally pay the legal fees to pursue the discharge and release and seek recovery of its fees in that proceeding. Unless the trust instrument specifically provides, it is not clear whether the resigning trustee can retain trust assets


25

pending its release and discharge. 2. Non-Judicial Release

To avoid the cost and delay of obtaining a judicial discharge of liability, the resigning trustee can provide an accounting to the beneficiaries and obtain a written release of liability. See TEXAS TRUST CODE ' 114.032(a) (beneficiaries may enter into binding written release). The trustee will want all current and future beneficiaries to sign or be bound by the release agreement. VI. LITIGATION TOPICS A. Duty of Impartiality

A beneficiary is entitled to have a competent, loyal and impartial trustee who is willing to act in the beneficiary=s best interest. This means that the trustee should be free of significant conflicts of interest. Slay v. Burnett Trust, 187 S.W.2d 377 (Tex. 1945); SCOTT ' 170; RESTATEMENT '170; Interfirst Bank Dallas, N.A. v. Risser, 739 S.W.2d 882, 888 (Tex. App.BTexarkana 1987, no writ).

A trustee has a duty of impartiality, which requires the trustee to deal impartially with multiple beneficiaries. RESTATEMENT '183; BOGERT ' 541, 612; Commercial Nat. Bank of Nacogdoches v. Hayter, 473 S.W.2d 561 (Tex. Civ. App. 1968, writ ref=d n.r.e.). This duty requires that a trustee remain neutral (not take sides) in disputes that affect beneficiaries differently. As stated in Cox-Rushing Greer Co. v. Richardson, 277 S.W. 718, 721 (Tex. App.-Austin 1925):

While a receiver may bring or defend an action which affects the estate in his hands from the viewpoint of the parties to the suit, as a whole, it is quite generally held that as between the respective parties to the litigation the receiver is an indifferent person, and orders and judgment of the court giving preference or priority, or turning over specific property to one or more of the litigants, are matters in which the receiver, as such, has no interest and must be litigated by the parties affected thereby [citations omitted] On the other hand, where the claim asserted by or against the receiver affects alike the interest of all parties to the suit in the property, the receiver is the proper party to bring or defend the action.

Thus, a trustee should participate in litigation as a neutral trustee to defend the trust and protect its assets and not to pursue the interests of some beneficiaries to

the detriment of others. Although the trustee may need to file a suit for instructions or declaratory judgment to resolve the disputed issue, the trustee cannot advocate for the position of one beneficiary to the detriment of another beneficiary unless necessary to preserve the existence of the trust or to protect its assets. The trustee should minimize his involvement in the litigation to avoid incurring unnecessary costs, which the beneficiaries may object to or the court may not permit to be paid out of the trust.

Further, although a trustee has a duty to defend an attack on the validity of the trust, the trustee=s duty of impartiality may prevent the trustee from defending a trust amendment that changed the interests of the pre-amendment beneficiaries. See Whittlesey v. Aiello 104 Cal. App.-4th 1221, 128 Cal. Rptr.2d 741 (2002) (trustee not entitled to pay legal fees from trust because she was not representing interests of the trust since whether or not the challenge to the amendment prevailed, Athe trust would remain intact.@). See also Terry v. Conlan, 131 Cal. App.4th 1445 (2005); RESTATEMENT '' 79, 88; BOGERT ' 581.

B. Judicial Review of Discretionary Decisions There are two basic principles that can be derived

from the case law in Texas. They allow courts the latitude to take whatever action they deem necessary according to the facts in each situation. The first principle is that courts will not second guess the trustee unless there is an Aabuse of discretion.@ Coffee, 408 S.W.2d at 269. This rule is still valid today; ATexas courts are prohibited by law from interfering with the discretion of the trustee absent a clear showing of fraud or other egregious conduct.@ In re Bass, 171 F.3d 1016 (5th Cir. 1999). The second principle is that any decision by the trustee that subverts the Aintent of the settlor@ will be overturned. State v. Rubion, 308 S.W.2d at 4. The logical conclusion to be drawn from these two principles is that the Aintent of the settlor@ is the paramount consideration when a trustee is exercising its discretion. A closer look at these seemingly clear principles reveals that the courts have not actually provided any real guidance. The case law only leads the trustee back to the place at which it started. After all, if the settlor=s intent is abundantly clear to all parties then there would be no need for court intervention in the first place. Furthermore, it is apparent from the cases that the settlor=s intent is often secondary to a trustee=s discretion. See Coffee, 408 S.W.2d at 269. The lack of clarity in this area does not provide much guidance for a trustee that is faced with a tough decision. On the other hand, the entire purpose for having a trustee in a Adiscretionary trust@ is to burden the trustee with the responsibility of making decisions based on future events, and to have the benefit of the trustee=s judgment and discretion. In Re


26

Shea=s Will, 254 N.Y.S. 512 (1931). The extent that courts are willing to intervene in

the administration of a trust is dictated by the two principles of law discussed above. Courts in Texas are free to intervene in the administration of trusts under Rubion, and free to wash their hands of trust administration when they see fit under Coffee. Therefore, it can reasonably be inferred that courts are likely to intervene when the facts of a particular case offend the court=s sensibilities, and likely to cite Coffee or its progeny when the courts agree with the trustee=s decision.

A trustee may seek court clarification of ambi-guous terms in the trust instrument or of issues relating to discretionary decisions (other than the trustee=s power to adjust between principal and income, judicial control over which is now provided in '116.006). An action may be filed under the Declaratory Judgment Act, Tex. Civ. Prac. & Rem Code ''37.001 et seq. However, a court will not substitute its discretion for that of the trustee. Coffee v. William Marsh Rice University, 408 S.W.2d 269 (Tex. Civ. App. B Houston 1966). An action also may be filed under Texas Trust Code '115.001(a) to:

(1) construe a trust instrument; (2) determine the law applicable to a trust

instrument; (3) appoint or remove a trustee; (4) determine the powers, responsibilities, duties

and liability of a trustee; (5) ascertained beneficiaries; (6) make determinations of fact effecting the

administration, distribution, or duration of a trust;

(7) determine a question arising in the administration or distribution of a trust;

(8) relieve a trustee from any or all of the duties, limitations, and restrictions otherwise existing under the terms of the trust instrument or of this subtitle;

(9) require an accounting by a trustee; review trustee fees, and settle interim or final accounts; and

(10) surcharge a trustee. C. Remedies For Breach of Fiduciary Duties 1. Comprehensive Statutory List of Remedies

TRUST CODE SECTION 114.008 provides the following remedies for a breach of trust that has occurred or Amight occur@:

(1) compel the trustee to perform the trustee=s duty or duties;

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

(3) compel the trustee to redress a breach of trust, including compelling the trustee to pay money or to restore property;

(4) order a trustee to account (5) appoint a receiver to take possession of the

trust property and administer the trust; (6) suspend the trustee; (7) remove the trustee as provided under Section

113.082; (8) reduce or deny compensation to the trustee; (9) subject to Subsection (b), void an act of the

trustee, impose a lien or a constructive trust on trust property, or trace trust property of which the trustee wrongfully disposed and recover the property of the proceeds form the property; or

(10) order any other appropriate relief. 2. Damages a. Liability

A trustee is personally liable for damages resulting from a breach of fiduciary duty. TEXAS

TRUST CODE ' 114.001(c). Conversely, a trustee is not liable for a loss or depreciation in value of the trust property or for a failure to make a profit that does not result from a breach of trust. TEXAS TRUST CODE ' 114.001(b).

In addition, even in the absence of a breach of trust, a trustee is accountable to the trust and its beneficiaries for the trust property and for any profit made by the trustee through or arising out of the administration of the trust. TEXAS TRUST CODE ' 114.001 (a). The reason for this rule was stated by the Texas Supreme Court in Slay v. Burnett Trust, 187 S.W.2d 377 (Tex. 1945):

It is a well-settled rule that a trustee can make no profit out of his trust. The rule in such cases springs from his duty to protect the interests of the estate, and not to permit his personal interest to in any wise conflict with his duty in that respect. The intention is to provide against any possible selfish interest exercising an influence which can interfere with the faithful discharge of the duty which is owing in a fiduciary capacity.

Id. at 388. b. Measure of Damages

A trustee is liable for the amount necessary to fairly and reasonably compensate the trust estate for damages resulting from the breach of trust. There are basically three measures of damages for breach of trust:


27

(1) any loss or depreciation of the value of the trust estate as a result of the breach of trust;

(2) any profit made by the trustee through the breach of trust;

(3) any profit that would have accrued to the trust estate if there had been no breach of trust.

TEXAS TRUST CODE ' 114.001(c); Tex. Pattern Jury ChargesCFamily & Probate 235.14 (2012).

The beneficiaries are entitled to be put in the position that they would have been in if no breach had been committed. This is true even if no loss is suffered by the trust. The gain or profit not realized by the trust because of a breach of trust constitutes sufficient injury. SCOTT ' 205. The trustee=s liability for any profit made by the trustee through a breach of trust is not affected by an exculpation clause. TEXAS TRUST

CODE ' 114.001(a)(2). Thus, even if a trustee is not liable for damages for a breach of trust resulting from ordinary negligence because a trust provision exculpates him for any breach unless intentional or due to gross negligence, the trustee is still liable to the trust for any profit realized by the trustee resulting from the breach.

The beneficiary may choose the most advantageous remedy. Some of these concepts are illustrated as follows:

BREACH 1. Trustee sells property for less than fair market value.

DAMAGES Value at time of sale over sales price.

2. Trustee purchases property for more than fair market value.

Purchase price over value at time of sale.

3. Trustee sells property in violation of duty to retain and property value increases after sale.

Value at time of sale plus interest; or Value at time of suit plus income if had not been sold.

4. Trustee retains property in violation of duty to sell and property value decreases after sale.

Value on date trustee should have sold property

5. Trustee makes a profit through a breach of trust or not.

Amount of the profit

6. Trustee makes improper investment that decreases in value.

Purchase price plus interest

7. Trustee directed to invest only in bonds, but instead invests in stocks.

Amount invested in stocks plus interest, or Amount trust would have received if bonds had been purchased.

8. Instead of investing in bonds, Trustee misappropriates trust funds and uses in personal business.

Amount invested in business plus interest, or Amount invested in business plus profits earned in business (pro rata share), or Current value of principal and income if bonds had been invested properly.

9. Trustee sells trust property to self (even if for FMV) Set aside sale and take back property, or

Trustee pay trust FMV on date of judgment


28

If a trustee breaches a duty that produces a gain for the trust and also breaches a duty that produces a loss, generally the trustee is chargeable with the entire loss and accountable for the entire gain and cannot net the two in determining damages where the breaches are separate and distinct. For example, if the trust requires that the trustee invest solely in bonds and the trustee instead invests in stocks, the trustee will be liable for any losses suffered on any stocks, while the trust keeps any gains on others. RESTATEMENT ' 213; SCOTT ' 213. However, if the gains and losses result from a single breach, then the trustee is liable only for the net loss or net gain. The following factors may be considered in determining whether two breaches of trust are separate:

(1) Whether the improper acts are the result of a single strategy or policy, a single decision or judgment, or a single set of interrelated decisions;

(2) The amount of time between the instances of misconduct and whether the trustee was aware of the earlier misconduct and its resulting loss or profit;

(3) Whether the trustee intended to commit a breach of trust or knew the misconduct was a breach of trust; and

(4) Whether the profit and loss can be offset without inequitable consequences, for example to beneficiaries having different beneficial interests in the trust.

RESTATEMENT ' 101. Netting might be allowed where a trustee breached his duty to diversify trust assets, resulting in damages equal to the return that would have been earned if the assets had been properly diversified over the actual return earned on the portfolio.

Damages for breach of trust ordinarily include interest or a return from the date of the breach. See Anderson v. Armstrong, 132 Tex. 122, 120 S.W.2d 444 (1938); United Hay Co. v. Ford, 81 S.W.2d 776 (Tex. Civ. App.CGalveston 1935, writ ref=d); Langford v. Shamburger, 392 F.2d 939, 943 (5th Cir. 1968); SCOTT

' 207. This is not Apre-judgment interest@ but rather is an element of damages as an amount that would have accrued if no breach had occurred as authorized by Trust Code 114.001(c). Thus, Texas Finance Code Section 304.1045 should not prevent this recovery. The pre-judgment interest statute applies only to claims for wrongful death, personal injury, or property damage, and does not apply to claims for breach of fiduciary duty. TEX. FIN. CODE ANN. ' 304.102 (West); See also Lee v. Lee, 47 S.W.3d 767, 798-99 (Tex. App.CHouston [14th Dist.] 2001, pet. denied). However, a successful plaintiff in a breach of

fiduciary duty case may still recover common law or equitable pre-judgment interest which is computed as simple interest. Id. So, while there is no statutory right to recover pre-judgment interest, a plaintiff should still plead for the recovery of pre-judgment interest. In any case, Aany profit that would have accrued to the trust estate if there had been no breach of trust@ is recoverable as actual damages in a breach of trust case under Trust Code Section 114.001(c), which should include a return of any income or growth that would have been earned on any misapplied trust funds.

Some courts have indicated that actual damages in a breach of fiduciary duty action can be based on contract-type damages such as Abenefit of the bargain@ or out-of-pocket compensatory damages, as well as consequential damages. See Lesikar v. Rappeport, 33 S.W.3d 282 (Tex. App.CTexarkana 2000, pet. denied) (actual damages for breach of fiduciary duty and fraud include general or direct damages as well as special or consequential damages). However, it is unclear whether contract damages are available for a breach of fiduciary duty. Further, resort to these concepts, which do not squarely fit most breach of trust cases, may not be appropriate or necessary because Trust Code Section 114.001(c)(3) specifically authorizes recovery of actual damages measured by Aany loss or depreciation in value of the trust@ or Aany profit@ that would have accrued to the trust estate if there had been no breach of fiduciary duty. c. Collection by Offset if Trustee is also a

Beneficiary. If the trustee who is liable for damages for breach

of trust also is a beneficiary of the trust, the liability can be satisfied by offset against his beneficial interest in the trust. TEXAS TRUST CODE ' 114.031(b). 3. Constructive Trust

If the fiduciary is insolvent or has used trust or estate assets to purchase property that has appreciated, the remedy of constructive trust may be preferable to a judgment against the trustee for money damages. A constructive trust is an equitable remedial devise used to prevent unjust enrichment due to the wrongful acquisition of title to property. SCOTT ' 462.2. It is a remedy imposed to redress a wrong or prevent unjust enrichment. Young v. Fawcett, 376 S.W.3d 209, 215 (Tex. App.CBeaumont 2012, no pet.); Lesikar v. Rappeport, 33 S.W.3d 282, 303 (Tex. App.CTexarkana 2000, pet. denied); Omohundro v. Matthews, 161 Tex. 367, 341 S.W.2d 401 (1960); In re Estate of Arrendell, 213 S.W.3d 496 (Tex. App.CTexarkana 2006, no pet.). A constructive trust is a relationship with respect to property, subjecting the person by whom the title to the property is held to an equitable duty to convey it to another on the ground


29

that his acquisition or retention of the property is wrongful and that he would be unjustly enriched if he were permitted to retain the property. Talley v. Howsley, 142 Tex. 81, 86, 176 S.W.2d 158, 160 (1943). Thus, a constructive trust is a device equity uses to remedy a wrong. Lesikar v. Rappeport, 33 S.W.3d 282, 303 (Tex. App.CTexarkana 2000, pet. denied); see also Meadows v. Bierschwale, 516 S.W.2d 125, 131 (Tex.1974); Blankenship v. Citizens Nat=l Bank of Lubbock, 449 S.W.2d 77 (Tex. App.CAmarillo 1970, writ ref=d n.r.e.); In re Estate of Preston, 346 S.W.3d 137, 165 (Tex. App.CFort Worth 2011, no pet.); SCOTT ' 462. While the form of a constructive trust is practically without limit, its existence depends upon the circumstances. Hubbard v. Shankle, 138 S.W.3d 474, 485 (Tex. App.CFort Worth 2004, pet. denied); Troxel v. Bishop, 201 S.W.3d 290, 297 (Tex. App.CDallas 2006, no pet.). The remedy of constructive trust Ais broad and far reaching and designed to circumvent technical legal principles of title and ownership in order to reach a just result.@ Southwest Livestock & Trucking v. Dooley, 884 S.W.2d 805, 810 (Tex. App.CSan Antonio 1994, writ denied).

A constructive trust is a remedy available for breach of fiduciary duty. TEXAS TRUST CODE '114.008(9); In re Estate of Arrendell, 213 S.W.3d 496 (Tex. App.CTexarkana 2006, no pet.). It applies to all types of fiduciaries, including trustees, executors and administrators, guardians, and agents. A constructive trust may be imposed when one acquires legal title to property in violation of a fiduciary relationship. Lesikar v. Rappeport, 33 S.W.3d 282, 303 (Tex. App.CTexarkana 2000, pet. denied). A constructive trust may be imposed on any property transferred or converted by a fiduciary in breach of his duty so long as there is no subsequent bona fide purchaser for value without notice of the breach. For example, if a fiduciary acquires property for himself in breach of his duty of loyalty, a constructive trust may be imposed on the property wrongfully acquired in favor of the trust.

To obtain a constructive trust for a breach of fiduciary duty, the proponent must specifically plead and strictly prove the following elements: (1) breach of a fiduciary relationship, (2) unjust enrichment; and (3) tracing to an identifiable res. Troxel, 201 S.W.3d at 297; Hubbard, 138 S.W.3d at 485. If a plaintiff is seeking to impose a constructive trust, but does not know what property may have been acquired by the fiduciary with the proceeds of his wrongdoing, the plaintiff should make general allegations in the petition such as the following: APlaintiff requests that a constructive trust be imposed on all property owned, in whole or in part, by defendant X which was acquired, in whole or in part, but defendant X with the funds misappropriated from the plaintiff=s account.@ Moore,

Litigation Involving Fiduciaries: Trial Handbook 2009, 33rd Annual Advanced Estate Planning & Probate Course, p. 74. The plaintiff should send discovery aimed at locating the funds and demand a statutory accounting of the estate or trust to assist with at least the initial tracing steps. The plaintiff also may consider seeking an equitable accounting of the funds once in the trustee=s individual possession. Southwest Livestock & Trucking, 884 S.W.2d at 810. Whether a constructive trust should be imposed is within the discretion of the court. Id.

The person seeking to impose a constructive trust initially has the burden to trace trust funds or property into the specific property sought to be recovered. Wilz v. Flournoy, 228 S.W.3d 674 (Tex. 2007); Meyers v. Baylor Univ. in Waco, 6 S.W.2d 393 (Tex. Civ. App.CDallas 1928, writ ref=d). If this is not possible due to commingling, the right to a constructive trust is not defeated if the beneficiary can trace to the commingled fund.@ Southwest Livestock & Trucking, 884 S.W.2d at 810; Eaton v. Husted, 141 Tex. 349, 358, 172 S.W.2d 493, 498 (1943); Peirce v. Sheldon Petroleum Co., 589 S.W.2d 849, 853 (Tex. Civ. App.CAmarillo 1979, no writ). If a trustee commingles trust funds with the trustee's personal funds, the entire commingled fund is subject to the trust. Moody v. Pitts, 708 S.W.2d 930, 937 (Tex. App.CCorpus Christi 1986, no writ); Gen. Assoc. of Davidian Seventh Day Adventists, Inc. v. Gen. Assoc. of Davidian Seventh Day Adventists, 410 S.W.2d 256, 259 (Tex. Civ. App.CWaco 1966, writ ref'd n.r.e.). When a trustee has commingled funds and has expended funds, the money expended is presumed to be the trustee's personal funds, and the remaining funds belong to the trust. Batmanis v. Batmanis, 600 S.W.2d 887, 890 (Tex. Civ. App.CHouston [14th Dist.] 1980, writ ref'd n.r.e.).

Once this tracing burden has been met, the entire property will be treated as subject to a constructive trust unless the trustee can distinguish and separate that property which is his own. Wilz, 228 S.W.3d at 676; Collins v. Griffith, 125 S.W.2d 419 (Tex. Civ. App.CAmarillo 1938, writ ref=d); Graham v. Turner, 472 S.W.2d 831, 840 (Tex. Civ. App.CWaco 1971, no writ). Thus, if a fiduciary commingles trust or estate property with his own, and purchases property in his name, the burden is on the fiduciary to show how much of the property was purchased with his own funds. Eaton v. Husted, 141 Tex. 349, 172 S.W.2d 493 (1943); Lung v. Lung, 259 S.W.2d 253 (Tex. Civ. App.CAustin 1953, writ ref=d n.r.e.); see also Moseley v. Fikes, 126 S.W.2d 589 (Tex. Civ. App.CFort Worth 1939), aff=d, 136 Tex. 386, 151 S.W.2d 202 (1939).

Tracing to an identifiable res can range from straightforward to highly complex. It does not matter how many transactions have occurred with the property


30

as long as it can clearly be identified. As stated in BOGERT :

If trust property can be traced step by step in the dealings of the trustee and others, it does not matter how many changes in form have been experienced or what the nature of the substitute trust property now is. The trustee may have entered into fifty different transactions of sale and reinvestment with regard to the original trust property and its proceeds. He may have held bank credit at the beginning, purchased corporate stock with that credit, exchanged the stock for bonds, and sold the bonds and invested in realty.

G. T. BOGERT , Trust & Trustees ' 921 (2d rev. ed. 1993).

A fairly simple tracing example is where a fiduciary has taken money from a trust bank account and used it to purchase real property in his individual name. The trust funds can be traced to the real property through the trust=s and the trustee=s personal bank records and the closing documents for the purchase of the property. However, if the fiduciary has engaged in multiple or complex transactions, it may be necessary to engage a forensic accountant to trace the property and provide expert testimony at trial. It also may be possible to obtain a court appointed auditor under Rule 172 of the Texas Rules of Civil Procedure to do the tracing. 4. Special Fiduciary Remedies a. Equitable Lien

Rather than use the remedy of constructive trust, a beneficiary may choose to obtain a money judgment against the trustee, secured by an equitable lien against any trust res or it product in the hands of the trustee. TEXAS TRUST CODE '114.008(9). This remedy leaves title to the wrongfully acquired property in the defendant, but orders that such property be sold and the proceeds paid to the trust to satisfy the judgment. BOGERT ' 865. b. Fee Forfeiture

Forfeiture or denial of a fiduciary=s compensation is a remedy similar to a constructive trust. ERI Consulting Engineers, Inc. v. Swinnea, 318 S.W.3d 867 (Tex. 2010) (Acourts may fashion equitable remedies such as profit disgorgement and fee forfeiture to remedy a breach of fiduciary duty@). Where a fiduciary has committed a breach of trust, the court may deny him all or part of his compensation. A basis for denial of compensation is that a fiduciary is not entitled to compensation unless he has properly

performed the necessary services. In addition, the remedy of fee forfeiture is intended to protect relationships of trust by discouraging agents' disloyalty. Burrow v. Arce, 997 S.W.2d 229, 238 (Tex.1999). It is not necessary to prove that the fiduciary=s breach caused actual damages in order to obtain the remedy of fee forfeiture. Id. at 240. AIt is the [fiduciary=s] disloyalty, not any resulting harm, that violates the fiduciary relationship and thus impairs the basis for compensation.@ Id. at 238. A fiduciary=s fee may be disallowed even though the fiduciary is not liable for damages for a breach of trust due to an exculpatory clause in the trust instrument. SCOTT ' 243

Under Texas Trust Code Section 114.061(b), a court may in its discretion deny a trustee all or part of his compensation if he commits a breach of trust. See also, TEXAS TRUST CODE '114.008(8). Texas Estates Code Section 352.004 provides that a court may deny a commission in whole or in part if the executor or administrator Ahas not taken care of and managed the estate property prudently@ or has been removed under Estates Code Sections 404.003 or Subchapter B, Chapter 361.

A plaintiff must specifically plead for the remedy of fee forfeiture or denial. Shands v. Tex. State Bank, 121 S.W.3d 75, 78 (Tex. App.CSan Antonio 2003, pet. denied) (citing Lee v. Lee, 47 S.W.3d 767, 780B81 (Tex. App.-Houston [14th Dist.] 2001, pet. denied)) (failure to plead for fee forfeiture waives recovery).

Fee forfeiture is not automatic in every case involving a breach of fiduciary duty. The remedy must fit the circumstances and may be limited to Aclear and serious@ violations of duty. Burrow v. Arce, 997 S.W.2d 229, 241 (Tex. 1999) (relating to forfeiture of fee by an attorney who breaches a fiduciary duty to the client). Whether fee forfeiture should be ordered, and in what amount, is determined by the court based on a consideration of all relevant circumstances. Any contested fact issues must first be resolved by the jury, such as whether the fiduciary=s actions were intentional, or merely inadvertent. Id. at 245; See also Tex. Pattern Jury ChargesCBusiness, Consumer, Insurance & Employment 115.17 (2010). In exercising its discretion regarding forfeiture of a trustee=s compensation for breach of trust, the court should consider the following factors:

(1) whether the trustee acted in good faith or not; (2) whether the breach of trust was intentional or

negligent or without fault; (3) whether the breach of trust related to the

management of the whole trust or related only to a part of the trust property;

(4) whether or not the breach of trust occasioned any loss and whether if there has been a loss


31

it has been made good by the trustee; and (5) whether the trustee's services were of value

to the trust. Burrow, 997 S.W.2d at 243, quoting RESTATEMENT ' 243. c. Profit Disgorgement

A fiduciary breaches his duty of loyalty if he uses his position of trust to profit personally. The duty of loyalty requires that the trustee must place the interests of the beneficiary above his own. Slay v. Burnett Trust, 187 S.W.2d 377 (Tex. 1945). A trustee is prohibited from making a profit for himself so that his personal interests do not conflict with the decisions made in administering the trust. Id. at 388.

A trustee is accountable to the trust for any profit made by the trustee through or arising out of the administration of the trust, even where there is no breach of trust, the trust has suffered no loss, and the trustee is fully exculpated. TEXAS TRUST CODE '

114.0001(a) (disgorgement of any profit made by trustee even if no breach of trust); ' 114.0001(c)(2) (disgorgement of any profit made by trustee through breach of trust); and ' 114.007(a)(2) (exculpation clause that relieves trustee of liability for any profit derived from a breach of trust is unenforceable). This remedy is often referred to as Aprofit disgorgement@ by a trustee. See Kinsbach Tool Co. v. Corbett-Wallace Corp., 160 S.W.2d 509 (Tex. 1942) (third party defendant required to repay secret commission earned by breaching fiduciary agent); Langford v. Shamburger, 392 F.2d 939 (5th Cir. 1968) (trustee who commingled trust funds with his personal funds could be required to pay highest legal rate of interest to principal); Slay v. Burnett Trust, 187 S.W.2d 377 (Tex. 1945) (trustee required to return all profits made as result of unauthorized loan of trust funds). A plaintiff must specifically plead for profit disgorgement as a remedy for breach of fiduciary duty and allege facts to support the remedy.

Profit disgorgement does not present a jury question. However, the jury will decide any factual disputes regarding the amount of profit received by the fiduciary. d. TRO/Temporary Injunction

One of the most effective tools in representing a beneficiary-plaintiff in a suit against the trustee is to seek a temporary restraining order and temporary injunction prohibiting the trustee from using trust assets to pay the trustee=s legal fees during the litigation, at least not without a prior court order. Trust Code Section 115.001(c) (enacted in 2005) specifically authorizes a court to Aintervene in the administration of a trust to the extent that the court=s

jurisdiction is invoked by an interest party or as otherwise provided by law. Trust Code Section 114.008 (2) specifically provides for injunction as a remedy for breach of trust that Ahas occurred or might occur.@ In 183/620 Group Joint Venture v. SPF Joint Venture, 765 S.W.2d 901 (Tex. App. B Austin 1989, writ dism=d w.o.j.), the court of appeals upheld the trial court=s temporary injunction prohibiting the defendants from using funds held by them as fiduciaries for the payment of attorneys fees and expenses in defending the breach of fiduciary lawsuit.

Seeking a temporary restraining order and temporary injunction also presents an excellent opportunity to obtain expedited and supervised discovery at the hearing on the temporary injunction that must take place within 14 days. TEX. R. CIV. P. 680. It may also be the only way to protect the beneficiary and the trust assets from further damage in the event the fiduciary will not be able to adequately respond in damages.

The procedural requirements for a temporary restraining order and temporary injunction are provided in Texas Rules of Civil Procedure 680-693. The trial court has broad discretion in determining whether to grant or deny a temporary injunction. Transport Company of Texas v. Robertson Transports, 261 S.W.2d 549 (1953). At the temporary injunction hearing, the only issue before the trial court is whether the applicant is entitled to preservation of the status quo of the subject matter of the suit pending trial on the merits. Davis v. Huey, 571 S.W.2d 859 (Tex. 1978). An order granting a temporary injunction will not be reversed on appeal absent a clear abuse of discretion. State v. Southwestern Bell Telephone Co., 526 S.W.2d 526 (Tex. 1975). To be entitled to a temporary injunction, the party must plead and prove a probable right to recovery and a probable injury without such temporary equitable relief. Transport Company of Texas v. Robertson Transports, 261 S.W.2d at 551. The party is not required to prove that he will finally prevail in the litigation. Sun Oil Company v. Whitaker, 424 S.W.2d 216 (Tex. 1968).

Injunctive relief generally will not be granted unless the applicant has shown that irreparable injury will result if such relief is not afforded and that the applicant has no adequate remedy at law for damages which may result pending an outcome of the litigation. The test for determining whether an existing remedy is adequate is whether such remedy is as complete and as practical and efficient to the ends of justice and its prompt administration as is equitable relief. Brazos River Conservation & Reclamation District v. Allen, 171 S.W.2d 847 (Tex. 1943). No adequate remedy at law exists if damages are incapable of calculation or if the defendant is incapable of responding in damages.

However, most Texas cases have held that in a


32

fiduciary case, the beneficiary is not required to show that he has an inadequate remedy at law. 183/620 Group Joint Venture v. SPF Joint Venture, supra, at 903-904, and authorities cited therein. Since a breach of fiduciary claim is by nature an Aequitable@ action, even in cases where damages may be sought, if the fiduciary relationship is still continuing, the beneficiary has an equitable right to be protected from further harm. Thus, there is never an adequate remedy at law for a breach of fiduciary duty claim. However, at least one case has required a beneficiary to show that no adequate remedy at law for damages exists. See Ballenger v. Ballenger, 694 S.W.2d 72 (Tex. App. B Corpus Christi 1985, no writ)(holding that trust beneficiary failed to show irreparable injury or the absence of an adequate remedy at law to enjoin trustees from making distribution to themselves as beneficiaries because any damages that might ensue were capable of exact calculation and the evidence did not show that trustees were insolvent or unable to respond in damages for any wrongful distributions made by them from the trust in question).

Further, in a fiduciary case, the usual burden of establishing a Aprobable right to recover@ before the court will grant a temporary injunction does not apply if the gist of the complaint is Aself-dealing@. In a fiduciary self-dealing action, the Apresumption of unfairness@ attaches to the transactions of the fiduciary shifting the burden to the defendant to prove that the plaintiff will not recover. If the presumption cannot be rebutted as a matter of law at the temporary injunction state, then the injunction should be granted since the plaintiff, by simply presenting a prima facie case of the existence of a fiduciary relationship and a probable breach of that duty has adduced sufficient facts tending to support his right to recover on the merits. Cf. Camp v. Shannon, 348 S.W.2d 517, 519 (Tex. 1961); and, Jenkins v. Transdel Corp., 2004 WL 1404364 (Tex. App. B Austin 2004, no pet.)(exculpatory provision would not defeat showing of Aprobable right to recover@ where some evidence that agreement including the clause was induced by fraud). e. Receiver

Section 64.001(a)(6) of the Texas Practice and Remedies Code provides that a receivership may be created by a court in any case in which Aa receiver may appointed under the rules of equity.@ Receivers have been appointed to take charge of trust assets during litigation. Pfeiffer v. Pfeiffer, 394 S.W.2d 679 (Tex. App. B Houston 1965, writ dism=d); Temple State Bank v. Mansfield, 215 S.W. 154 (Tex. Civ. App.B Galveston 1919); Smith v. Smith, 681 S.W.2d 793, 795 (Tex. App.-Houston [14th Dist.] 1984, no writ). A receiver also may be appointed in an action between persons Ajointly owning or interested in any property or

fund.@ The receivership must be ancillary or auxiliary to

some right that constitutes an independent cause of action. See Manning v. State, 423 S.W.2d 406, 410 (Tex .Civ. App. B Austin 1967, writ ref=d n.r.e.); Pelton v. First Nat=l Bank of Angelton, 400 S.W.2d 398, 401 (Tex. Civ. App. B Houston 1966, no writ); Greenland v. Pryor, 360 S.W.2d 423, 425 (Tex. Civ. App. B San Antonio 1962, no writ).

The rules of equity allow a receivership only when it is shown to be reasonably necessary for preservation of property involved in litigation, and for the protection of the rights of persons having claims against it. The party seeking receivership must have an interest, or a probable interest, in the property in question. It must also be shown that the property or fund is in danger of being lost, removed, or materially injured, if left in the hands of the person in possession of the property. Finally, there must be no other remedy available to the petitioner that is adequate and complete. f. Auditor

Texas Rules of Civil Procedure 172 provides that Awhen an investigation of accounts or examination of vouchers appears necessary for the purpose of justice between the parties to any suit, the court shall appoint an auditor or auditors to state the accounts between the parties and to make report thereof to the court as soon as possible . . .@. To request an audit, a specific motion or application should be filed with the court with the claims to be submitted to the auditor spelled out in as much detail as possible.

The circumstances in which an audit will be ordered depend on the facts of each individual case. See, e.g., Robson v. Jones, 33 Tex. 324, 328 (1870)(auditor unnecessary where no particular complications apparent on face of account); Ellison v. Keese, 25 Tex. 84, 91 (Supp. 1860)(court found no reason for appointment of auditor in will contest); Gifford v. Gabbard, 305 S.W.2d 668, 672-73 (Tex. Civ. App. B El Paso 1957, no writ)(no necessity for auditor where all pertinent documents are in evidence and books are in simp form); Peters v. Brookshire, 195 S.W.2d 181, 186-87 (Tex. Civ. App. B Ft. Worth 1946, writ ref=d n.r.e.)(no reversible error in failing to appoint auditor where books did not appear to be complicated and private auditors had access to books); but see, Dwyer v. Kaltayer, 68 Tex. 554, 5 S.W. 75, 77 (1887)(audit proper where estate large and settlement embraced results of testator=s business); Whitaker v. Bledsoe, 34 Tex. 401 (1870-71)(partnership accounting necessary to assist court); Hunt v. Ullibari, 35 S.W. 298 (Tex. Civ. App. 1896, no writ)(dispute involving examination or revision of complicated account).

The granting or refusal of an audit is within the


33

discretion of the trial court, and its decision will be reversed on appeal only when gross abuse of discretion is shown. H.E. & W.T. Ry. Co. V. Snelling, 59 Tex. 116, 123 (1883); Robson, 33 Tex. at 328; Padon v. Padon, 670 S.W.2d 354, 360 (Tex. App. B San Antonio 1984, no writ).

Once the auditor files its report, the parties must file exceptions and objections to the auditor=s report within thirty (30) days. Tex. R. Civ. Proc. 172. Failure to file exceptions to the auditor=s report may result in a waiver of the right to introduce evidence contrary to the report at the time of trial. Sanchez v. Jary, 768 S.W.2d 933 (Tex. App. B San Antonio 1989, no writ). See also, Burns v. Burns, 2 S.W.3d 339 (Tex. App. B San Antonio, 1999). D. Attorney=s Fees 1. Statutory Basis

The award of attorney=s fees and costs in trust litigation is strictly within the discretion of the court. Trust Code Section 114.064 provides that in any trust proceeding, the court may make an award of costs and reasonable and necessary attorney=s fees Aas may seem equitable and just.@ Section 114.064 is not a prevailing party statute. Thus, an award of attorney=s fees under Section 114.064 is not dependent on a finding that the party Asubstantially prevailed.@ Hachar v. Hachar, 153 S.W.3d 138, 142-143 (Tex. App. B San Antonio 2004, no pet.). The reasonable and necessary requirements for attorney=s fees are questions of fact to be determined by the fact finder, but the equitable and just requirements are questions of law for the trial court to decide. Id. See Sammons v. Elder, 940 S.W.2d 276 (Tex. App.BWaco 1997, writ denied) (court refused to award attorney=s fees to either side).

Under Trust Code Section 113.082, if a trustee is removed for materially violating or attempting to violate the terms of the trust, which results in material financial loss to the trust, or the trustee fails to make a required accounting, or for Aother cause,@ the court may deny part or all of the trustee=s compensation. If a trustee is removed for cause, he should not be entitled to recover his attorney=s fees out of the trust and may be ordered to personally bear the beneficiary=s attorney=s fees. RESTATEMENT '188.4; Jernigan v. Jernigan, 677 S.W.2d 137 (Tex. App.BDallas 1984, no writ) (where one of three beneficiaries successfully sued the trustee for breach of trust, the trial court acted improperly in ordering the entire trust corpus and accumulated income paid to the plaintiff=s attorney=s as their fee); Tindell v. State, 671 S.W.2d 691, 693 (Tex. App.BSan Antonio 1984, writ ref=d nre) (estate should not be charged with executor=s legal expenses if executor=s conduct is at the root of the litigation. Where litigation is caused by the trustee=s misconduct, the trustee is not entitled to recover attorney=s fees out

of the trust. 76 AM. JUR.2D TRUSTS '673. See also Tindall v. State, 671 S.W.2d 691, 693 (Tex. App.BSan Antonio 1984, writ ref=d n.r.e.) (Ait is thus apparent that when the fiduciary=s omission or malfeasance is at the root of the litigation, the estate will not be required to reimburse the fiduciary for his or her attorneys= fees. Such fees are not necessarily incurred in connection with the management of the estate.@); In Re Estate of Bessire, 399 S.W.3d 642 (Tex. App.--Amarillo 2013, review denied); In Re: Higginbotham=s Estate, 192 S.W.2d 285, 290 (Tex. Civ. App.BBeaumont 1946, no writ); and In Re: Estate of Washington, 289 S.W.3d 362 (Tex. App.BTexarkana 2009, pet. denied) (administratrix who was removed was not entitled to recover attorney=s fees from the estate incurred by her to contest her removal. Her removal as administratrix involved neither the preservation or safekeeping of the estate, nor the management of the estate as provided in TEXAS ESTATES CODE ' 352.051.) However, if the trustee successfully defends a suit for breach of fiduciary duty or removal, his fees are properly payable out of the trust. RESTATEMENT '188.4.

If a beneficiary is successful in a suit to compel an accounting, the court may award all or part of the costs of court and all of the suing beneficiary=s reasonable and necessary attorney=s fees and costs against the trustee in the trustee=s individual capacity or in the trustee=s capacity as trustee.@ TEX. TRUST CODE

'113.151(a). 2. Trust Terms

Trust instruments often authorize a trustee to hire professionals and to pay them reasonable fees out of trust assets. Trust Code Section 114.063 authorizes a trustee to pay out of trust assets expenses incurred while administering or protecting the trust. Trustees often try to rely on these provisions as support to pay their attorneys= fees in litigation filed by a beneficiary for alleged wrongdoing by the trustee. Although no Texas case has ruled directly on this question, a strong argument can be made that neither of these provisions authorizes a trustee to pay its attorney=s fees incurred in connection with such trust litigation because the fees are being incurred to protect the trustee solely in his individual capacity, not the trust. The attorney=s fees for all parties in litigation against a trustee, including the trustee, should be awarded by the court upon conclusion of the litigation under Section 114.064 (or other statute claimed to authorize fee in the suit).


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3. Legal Fees Allocation Clause Similar to debt and tax allocation clauses, it is

important to consider how legal fees and expenses should be allocated between and among beneficiaries. The instruments should address whom and under what circumstances such fees and expenses will be allocated against a particular beneficiary=s share or interest. The instrument may also limit the circumstances when a beneficiary can seek reimbursement for his or her legal fees. See Donaho, OFFENSIVE AND DEFENSIVE

ESTATE PLANNING, State Bar of Texas 25th Annual Estate Planning and Probate Course (2001).

This is particularly important when a pot trust is utilized. For example, if a beneficiary unsuccessfully sues a trustee in an attempt to increase his or her distributions, the trustee may be authorized to offset all the defenses costs against the beneficiary=s current distributions or future share, when the trust terminates. Of course, these provisions should not be drafted in such an onerous manner that the beneficiary has no recourse against a rogue trustee.


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APPENDIX A PRINCIPAL AND INCOME ALLOCATIONS UNDER TEXAS TRUST CODE

Trust Code '

Income Principal Receipts: 116.151

Funds received from entity Other property received from entity

Net short-term capital gain dividends

Distributions for liquidation or redemption Capital gain dividends from mutual funds or REIT (net LTCG over net STCL)

Reinvested dividends.

116.161

Proceeds from sale/exchange of a

principal asset.

Transfers to trust by settlor during life or

from estate (except as otherwise required).

Payments received as beneficiary of life

insurance or annuity (except as otherwise required).

Income received during period where no

permissible income beneficiary exists. 116.162

Rent Refundable rent deposit

116.163

Interest on debt Principal payments

116.164

Insurance policy dividends Life or casualty insurance proceeds

Insurance proceeds for loss of income or profits.

116.174

Mineral interests Aallocated equitably@ Allocations are presumed equitable if equal to depletion deduction under the IRC '611:

85% May continue allocation under prior law under prior law for interests owned on 1/1/04:

72.5%

Mineral interests Aallocated equitably@ 15% 27.5%

Disbursements:


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116.201 & 116.202 2 trustee fee 2 trustee fee

2 investment advisory fees 2 investment advisory fees.

2 costs of accounting that covers income and principal interests.

2 costs of accounting that covers income and principal interests.

2 costs of judicial proceedings involving income and principal interests.

2 costs of judicial proceedings involving income and principal interests.

Costs of judicial proceeding involving primarily income interests.

Ordinary expenses incurred in connection with administration, management, preservation of trust property and distribution of income, including: ordinary repairs property taxes interest

Casualty insurance premiums Title insurance premiums

Other insurance premiums

Trustee fee for acceptance, distribution or

termination of trust.

Disbursements to prepare property for

sale.

Principal payments on debt

Costs of judicial proceeding primarily

relating to principal, including suit to construe trust or to protect trust or trust assets.

116.205 & 116.206*

Tax on receipts allocated to income Tax on receipts allocated to principal

Taxes on excess of receipts distributed

from an entity. Transfers between income and principal: 116.203 & 116.204

Reasonable amount of net cash receipts

from depreciable asset (except for beneficiary=s residence or during estate administration)

*Trustee may make equitable adjustments to offset shifting of economic interests or tax benefits between income and remainder beneficiaries due to tax elections or decisions

Documents

WHAT EVERY TRUSTEE SHOULD KNOW - · PDF fileWHAT EVERY TRUSTEE SHOULD KNOW MARY C. BURDETTE, Dallas Calloway Norris Burdette & Weber State Bar of Texas 25TH ANNUAL ESTATE PLANNING