Remainder Beneficiaries Not Entitled to Accounting From Settlor’s Trustee

A revocable trust is owned by the settlor of the trust.  The trustee, if different from the settlor, owes a fiduciary duty to the settlor.  The beneficiaries of a revocable trust have no ownership interest or right to any accounting of the trust assets until after the settlor’s death.  This is because the settlor, as the owner, can terminate the trust at any time. Once the settlor dies, however, the trust becomes irrevocable and the named beneficiaries now have a right to an accounting and the trustee owes a duty to the beneficiaries to administer the trust in their best interests. But, Iowa law has been ambiguous about what duty a trustee owes to beneficiaries to provide an accounting of the trust assets while the trust was revocable when the request was made after the settlor died and the trust was irrevocable. A recent Iowa Supreme Court opinion clarified the matter.  

The settlor died at the age of 104 without any children of her own, but planned to provide for her nieces and nephews. She established a revocable trust in which she acted as trustee and was the sole beneficiary from 1999 until her death. During this time, she amended the trust document to tweak the named remainder beneficiaries and the interest in the trust. The final amendment changed the trustee to be Ms. Cunningham, who was also named the successor trustee. The settlor continued to receive the bank account statements and make financial decisions regarding the trust until her health deteriorated to the point where she was required to enter a nursing home. Cunningham, as trustee, continued to make reports to the settlor and consulted her regarding financial transactions until her death. No reporting of the trust assets was made to the remainder beneficiaries during this time nor was any reporting required under the terms of the trust documents.

At the time of settlor’s death there were 18 beneficiaries to the trust, including the trustee, Ms. Cunningham. One of these beneficiaries, Ms. Miller, which was Cunningham’s sister demanded an accounting of all trust activities from the trust’s inception. Cunningham agreed to provide an accounting of the trust activities from the time after the settlor’s death, but declined to provide an accounting for the activities of the trust when the settlor was still alive and the trust was still revocable.

Miller petitioned the probate court to intervene and demanded an accounting of the trust for the period of time when Cunningham was named trustee until the present. She also sought reimbursement of her attorney fees from Cunningham for the costs of bringing the action. Cunningham resisted, relying on Iowa Code § 633A.3103 and the fact that during the period requested, the settlor retained her competency and had the power to revoke the trust during this time, so the remainder beneficiaries had no rights to the trust and have no authority to seek an accounting of the assets during this period. Fourteen of the sixteen non-party beneficiaries joined Cunningham’s resistance; none joined Miller’s motion.

As part of the suit, Miller served discovery responses seeking accounting documents for this period, and Cunningham resisted. Miller filed a motion to compel. The probate court granted Miller’s motion to compel finding that Iowa Code § 633A.3103 did not apply because the request for an accounting was made at a time when the trust was irrevocable. An temporary  administrator of the trust was appointed at Miller’s request who also sought an accounting. Cunningham provided a report on the activities and supplemented several times because Miller continued to object to the sufficiency of the reporting.

A final hearing was held in which the court stated that a final accounting was provided with no substantial objections. Both parties testified. A witness who served as a trustee for a bank also provided testimony regarding the reasonableness of Cunningham’s objection to an accounting for the period when the settlor was still alive. The witness testified that her bank’s policy was to refuse to provide an accounting of the trust for the period of time when the trust was still revocable even if the request was made once the trust was irrevocable.

After the hearing, the probate court held that Cunningham, as trustee, had an obligation to provide an accounting to the beneficiaries of the trust for the period of time when the trust was still revocable and ordered Cunningham to personally pay the attorney fees for Miller and the temporary administrator of the trust for the cost of the litigation associated with her refusal to provide an accounting. The remaining legal fees were to be paid by the trust.

In rendering its opinion, the court acknowledged that the legal issue was debatable as to whether an accounting was required. Despite the probate court’s decision that Cunningham’s position was debatable, she was ordered to personally pay more than $54,000 in attorney fees for Ms. Miller and the temporary administrator’s litigation costs. The court stated that the beneficiaries should not be burdened with the cost of the litigation despite any allegations improprieties or mismanagement of trust funds. Unsurprisingly, Cunningham appealed.

The Iowa Supreme Court took the appeal to determine whether a trustee owes a duty to residual beneficiaries to provide an accounting of trust activities for the period of time between when the trustee takes over while the trust is still revocable and when the trust becomes irrevocable upon the settlor’s death.  The court also clarified when a trustee can be held personally liable for the costs of litigation in the absence of any breach of fiduciary duty.

In reviewing the issue, the court identified two reasons why revocable trusts are typically used as estate planning tools that bear on the issue. The first reason is to avoid the costs and administration of probate and the second is because trusts allow more privacy than a will administered through probate. The court concluded that based on these goals, requiring a trustee to provide accounting to beneficiaries for the assets during the settlor’s life could increase the administrative costs of a trust and defeat the privacy sought by the settlor in distributing her assets. Because of this, the court sided with Cunningham’s interpretation of the duty owed to residual beneficiaries for the period of time while the trust is still revocable. According to the court, a trustee owes no accounting to beneficiaries while the trust is revocable, so the trustee should not face retroactive accounting duties for the same period upon the settlor’s death.

The court then addressed the issue of requiring Cunningham to personally pay attorney fees for costs incurred in defending against Miller’s request for an accounting. The court noted that there was no previous Iowa precedent requiring personal payment of attorney fees in the absence of any breach of fiduciary duties or other misconduct and that legitimate concerns had been raised regarding the difficulty in finding persons willing to serve as trustees if persons could be subjected to significant personal financial costs for simply administering trustee duties.

The court offered guidance on determining when attorney fees should be awarded. First, the court held that the probate court’s “duty of prudence” standard should not be the only factor in determining what is just and equitable under Iowa Code § 633A.4507 and the court must look at whether the expenditures were properly incurred in the administration of the trust or otherwise benefitted the trust. The next inquiry involves several factors taken from an Oklahoma Court of Appeals case,Atwood v. Atwood, 25 P.3d 936 (Okla. Civ. App. 2001).  Those factors include:

1. The reasonableness of the parties’ claims, contentions, or defenses;
2. Unnecessarily prolonging litigation;
3. Relative ability to bear the financial burden;
4. Result obtained by the litigation and prevailing party concepts; and
5. Whether a party has acted in bad faith, vexatiously, wantonly, or for oppressive reasons in bringing or conducting litigation.

Based on these factors, the court held that Cunningham was not personally responsible for the attorney fees incurred by Miller and the temporary administrator. The court held that Cunningham was successful in defending her interpretation of the legal question as to whether an accounting was due, she provided documents and an accounting after being compelled, she was acting in her capacity as trustee and in the absence of any malfeasance the issue of her ability to pay was not relevant, and despite some likely personal animosity between Cunningham and Miller, there was no bad faith in the litigation. Based on these factors, the court reversed the award against Cunningham personally and ordered the trust to pay for her attorney fees and the fees of the administrator. The court also reversed the award for attorney fees to Miller and held that she was required to bear the costs of the litigation herself. Because Miller made no request that the trust pay for the suit and 14 of the 16 other beneficiaries sided with Cunningham, the court held that Miller should be required to bear the costs for unsuccessfully litigating the accounting issue herself particularly when there was no proof of any malfeasance by Cunningham.

In the end, the court resolved the issue for trustees bridging the time period between when a duty is owed to the settlor of a revocable trust and when the trust becomes irrevocable and the duty transfers to the beneficiaries.  In re Trust #T-1 of Mary Faye Trimble, No. 11-1967, 2013 Iowa Sup. LEXIS 8 (Iowa Sup. Ct. Jan. 25, 2013).