A. Definition of a Beneficiary
According to the Restatement (Third) of Trusts (“Restatement 3d”), trust beneficiaries are generally defined as persons that are intended to have enforceable rights in trust property and the successors to those persons. Restatement 3d § 48 adds that “[a] person is a beneficiary of a trust if the settlor manifests an intention to give the person a beneficial interest; a person who merely benefits incidentally from the performance of the trust is not a beneficiary.”
These rules are very relevant to the determination of whether a person has standing to bring a claim against the trustee to enforce the provisions of a trust.
B. Impact of Beneficiaries on Trust Modification and Termination
The issues of whether a person is a beneficiary, and, if so, what type of beneficiary, are relevant with regard to the termination or modification of non-charitable trusts. In most jurisdictions, trust beneficiaries may compel a trust’s termination or modification if: (1) continuance of the trust is not necessary to carry out a material purpose for which it was created; and (2) all of the trust beneficiaries consent and are not incapacitated. If the settlor is alive and not incapacitated, his or her consent is also necessary. Also, the trust will be terminated or modified if the trust’s purposes have become impossible to accomplish, or, because of a change of circumstances, continuance of the trust would defeat or substantially impair the fulfillment of the trust purposes. IV Scott & Fratcher, The Law of Trusts, §§ 337, 340 (4th ed. 2001) (hereinafter “Scott”).
Non-consenting beneficiaries whose interests are not benefited by a termination or modification of a trust will prevent a trust termination, whether or not such beneficiaries only hold contingent interests or are not yet ascertained. Scott § 340; Matter of Schroll, 297 N.W.2d 282 (Minn. 1980) (an inter vivos trust provided that a successor trustee should be a bank. The court held that this provision could not be eliminated by the consent of the settlor and all living beneficiaries, because there were possible unborn contingent beneficiaries). On the other hand, in a number of cases the court has decreed the partial termination of the trust, although one or more of the beneficiaries did not consent to such termination, on the ground that the interests of the non-consenting beneficiaries were not adversely affected. Scott § 340.2.
Some court laws may differ. For example, Cal. Prob. Code § 15404(b) provides that if one or more beneficiaries do not consent to the proposed modification or termination, then a court may still grant a modification or termination if the interests of the non-consenting beneficiaries are not substantially impaired. Section 15404(c) provides that if the trust instrument provides for the disposition of principal among a class of persons, the court may limit the class of beneficiaries whose consent is needed to compel the modification or termination of the trust to the beneficiaries who are reasonably likely to take under the circumstances.
C. Required Disclosures to Beneficiaries
The determination of whether a person is a beneficiary, and, if so, what type of beneficiary, is also relevant to determining the nature and amount of information concerning the trust to which the beneficiary is entitled.
A trustee’s successful administration of a trust is often facilitated by clear and frequent communication with the beneficiaries. Keeping the beneficiaries informed can help avoid the trustee’s involuntary removal and/or being sued for breach of fiduciary duty. Furthermore, to be able to enforce the trustee’s duties, the beneficiaries must know of the trust’s existence and the details of its administration.
1. Information Required to be Disclosed — Nature and Timing
a. The Restatement and Case Law. Usually, when the settlor is competent and can revoke the trust, the settlor can easily keep information regarding the trust from the beneficiaries. Restatement (Third) of Trusts (“Restatement 3d”) § 74 (T.D. 2005). Once the settlor becomes incapacitated or dies and can no longer revoke the trust, however, the trustee’s duties that are owed directly to the beneficiaries and the beneficiaries’ rights regarding the trust are implicated.
b. State Statutory Law. States have enacted statutes regarding a trustee’s duty to disclose to beneficiaries. California provides that the trustee has a duty to: 1) keep beneficiaries of the trust reasonably informed of the trust and its administration, 2) provide upon reasonable request a report of transactions, 3) provide prompt notice to the beneficiaries when the trust becomes irrevocable and whenever there is a change in trustee, 4) provide upon a request a copy of the trust instrument when such trust becomes irrevocable, and 5) provide annual accountings to current beneficiaries. Cal. Prob. Code 16061.2; 16062; 16061.5; 16060; 16061.
c. Duty to Keep Beneficiaries Informed Under the Uniform Trust Code.
The UTC contains provisions concerning how much trust information must be disclosed to beneficiaries and a settlor’s right to control such disclosure. The provisions of the UTC that codify the trustee’s duty to inform and report are among the most controversial portions of the UTC and, as a result, have become the least uniform among jurisdictions that have enacted the UTC.
D. Trustee Compensation
1. State Law Regarding Trustee Compensation
For some time a trustee has been allowed compensation in the United States unless the trustee voluntarily serves without compensation or waives his or her right to compensation. The amount of the compensation is fixed either by the terms of the trust instrument, by contract between settlor and trustee, by statute or by court action.
In most states there are statutes that govern the allowance of a trustee’s compensation.
There are basically three types of trustee compensation statutes in force. The most common type of statute authorizes the court in its discretion to allow the trustee “reasonable compensation.” See, e.g., Cal. Prob. Code 15681. Under this type of statute the trustee often requests a specific amount on one or more of the trustee’s accountings, and the court grants the trustee a fee which it deems fair and reasonable under the circumstances. A second type of statute provides that the trustee is “entitled” to compensation and authorizes the trustee to collect the compensation from the trust estate without prior court authorization but subject to review upon petition of an interested person. The third basic type of compensation statute sets forth, in varying degrees of detail, a schedule or scale of commissions or fees that are permitted a trustee.
The following factors have been considered in determining the reasonableness of a trustee’s appropriate compensation: (1) the size of the trust; (2) the responsibility involved; (3) the character of the work involved; (4) the results achieved; (5) the knowledge, skill, and judgment required and used; (6) the time and services required; (7) the manner and promptness in performing its duties and responsibilities; (8) any unusual skill or experience of the trustee; (9) the fidelity or disloyalty of the trustee; (10) the amount of risk; (11) the custom in the community for allowances to trustees; (12) any estimate of the trustee of the value of his services.
Many corporate trustees publish schedules of fees for their services as trustee under a will or a trust agreement.
2. Other Considerations in Corporate and Individual Trustee Compensation
Fees charged by a corporate trustee, including minimums, can vary greatly. A frequent misconception is that substantial amounts are saved by naming an individual trustee. Often, however, using an individual trustee can end up costing money due to the individual’s inexperience with the complex legal requirements of trusts, lack of investment or tax knowledge or not having time to perform the job. The fees charged by a corporate trustee are sometimes believed to be less than the differential between the investment return earned in a given trust by a corporate trustee and the investment return that would have been earned in such trust had a family member served as trustee. Also, in most states, using a corporate trustee avoids the need to obtain a bond.
Frank discussion of fees and expenses in advance can also extinguish unrealistic expectations and potential problems. Acting as trustee entails considerable responsibility, inconvenience and potential risk. Although it is often anticipated that an individual trustee will not charge a fee, the trustee should certainly understand what is involved before agreeing to serve without a fee. If it is anticipated that the individual trustee will take a fee, it may avoid misunderstanding if the instrument specifies (or there is agreement) that a fee will be taken and, if possible, how it will be calculated.
The trust instrument should discuss compensation especially when the trust instrument appoints co-trustees. Depending on the circumstances, each trustee may receive a full fee; a single fee may be divided between two trustees, or the individual trustee may forego receiving any compensation. However, it is generally unwise to set forth a rigid compensation schedule in the trust instrument because of the difficulty in anticipating the services that may be required of the trustee and the difficulty of obtaining approval of any change in such schedule.
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About Daniela Lungu, Attorney at Law
Daniela Lungu, founder of the Law Offices of Daniela Lungu, devotes her law practice to asset protection through estate and business planning. Ms. Lungu’s goal is to provide the people of the Bay Area and California with the highest quality, and most personalized legal services possible. Her attention to detail and a high level of communication with her clientele distinguish her from other attorneys in the field.