Texas Statute of Limitations in Trust Litigation

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					                        TRUSTEE’S DUTIES AND OBLIGATIONS:
                              PRACTICAL PROBLEMS

                                      WRITTEN AND PRESENTED BY:
                                       SHARON B. GARDNER*
                                        CRAIN, CATON & JAMES
                                           A PROFESSIONAL CORPORATION
                                    1401 MCKINNEY, 17TH FLOOR
                                      HOUSTON, TEXAS 77010
                                           (713) 658-2323
                                  EMAIL: sgardner@craincaton.com




                                      SOUTH TEXAS COLLEGE OF LAW
                                          Will and Probate Institute
                                                Houston, Texas
                                              September 6-7, 2007


                                                             N




*
  Portions of this outline include material generously provided by Sarah Patel Pacheco and Darlene Payne Smith, Shareholders
at Crain, Caton & James, P.C.
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     Sharon Brand Gardner, a shareholder with Crain, Caton & James, P.C. in Houston, Texas,
limits her practice to probate, trust, fiduciary litigation and guardianship law. She is the Editor
of the Texas Guardianship Manual published by the State Bar of Texas and a Co-author of
West‘s Texas Probate Guide. Mrs. Gardner is current an adjunct professor at South Texas
College of Law, Houston, Texas, where she teaches estate administration and guardianship. She
is a Fellow of the American College of Trust and Estate Counsel




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                 DISCLAIMERS, WARNINGS AND CONDITIONS
           (OR WHY YOU CANNOT SUE THE AUTHOR/PRESENTERS)

THIS OUTLINE AND ANY RELATED PRESENTATION IS FOR EDUCATIONAL PURPOSES
ONLY AND IS NOT INTENDED TO ESTABLISH AN ATTORNEY-CLIENT RELATIONSHIP
OR PROVIDE LEGAL ADVICE.

THIS OUTLINE IS NOT A PRACTICE STANDARD MEANT TO OUTLINE COMPULSORY
ACTIONS. RATHER IT OFFERS IDEAS BASED ON A REVIEW OF THE CURRENT STATE
OF TEXAS LAW AND RECENT CASES AND CLAIMS INVOLVING ATTORNEYS
PRACTICING IN THE ESTATE, TRUST AND GUARDIANSHIP AREA.

AS A CONDITION OF ATTENDING THIS SEMINAR OR READINGTHIS OUTLINE, YOU
REPRESENT THAT YOU ARE NOT RELYING UPON ANY STATEMENT OR
REPRESENTATION OF THE AUTHOR AND YOU ARE RELYING ON YOUR OWN
JUDGMENT AND THE ADVICE OF SEPARATE LEGAL COUNSEL.

TO ENSURE COMPLIANCE WITH REQUIREMENTS IMPOSED BY THE INTERNAL
REVENUE SERVICE, THE AUTHOR INFORMS YOU THAT ANY U.S. FEDERAL TAX
ADVICE CONTAINED IN THIS COMMUNICATION (INCLUDING ANY ATTACHMENTS) IS
NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, FOR THE PURPOSE
OF: (I) AVOIDING PENALTIES UNDER THE INTERNAL REVENUE CODE, AS AMENDED
OR (II) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY
TRANSACTION OR TAX-RELATED MATTER[S].




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By: Wiley Miller




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                                                   TABLE OF CONTENTS

I.         SCOPE OF ARTICLE ..............................................................................................1
II.        LEGISLATION EFFECTING TRUSTS BEGINNING SEPTEMBER 1, 2007.............1
III.       ELEMENTS OF THE FIDUCIARY LAWSUIT ........................................................1
IV.        EVALUATING THE BUSINESS OPPORTUNITY ...................................................2
           A.   Considerations................................................................................................2
                1.    History Repeats Itself! ...........................................................................2
                2.    No Good Deed Goes Unpunished! .........................................................2
                3.    Be Careful What You Wish For! ............................................................2
                4.    I Am Just A Trustee Who Can‘t Say .......................................................2
                5.    Should I Stay Or Should I Go? ...............................................................3
                6.    Is The Family Unit Akin To Those On ...................................................3
                7.    Follow The Yellow Brick Road! ............................................................3
                8.    Do You Need This Tsures? ....................................................................3
                9.    Money Is The Root Of All Evil! .............................................................3
                10. When You Lay Down With Dogs, You Wake Up With Fleas...................3
                11. Who‘s Peeking Out From Under the Stairway? .......................................3
                12. Houston, We Have A Problem! ..............................................................3
                13. May The Force Be With You! ................................................................3
                14. Can You See The Forest For the Trees? ..................................................3
                15. With Age Comes Experience! ................................................................4
                16. Are Your Standards Poor? .....................................................................4
                17.    Ghost Writing Will Come Back To Haunt You ......................................4
                18. This Is The Dawning Of The Age Of Technology—Voice Mail Messages
                      And Answering Machines .....................................................................4
                19. You Gotta Have Friends ........................................................................4
                20. Share and Share Alike ...........................................................................4
                21. Final Accounting ..................................................................................4
                22. Man‘s Best Friend Can Be Your Enemy .................................................4
IV.        FUNDAMENTALS OF INTERPRETING TRUST DOCUMENTS ............................4
           A.   Overview .......................................................................................................4
           B.   Unambiguous Instrument ................................................................................4
           C.   Ambiguous Instrument ....................................................................................4
                1.    Actions During Lifetime ........................................................................5
                2.    Other Trusts Created by Testator ............................................................5
                3.    Context of the Creation of the Trust .......................................................5
                4.    Framing the Issue: Overall Intent vs. Specific Intent ................................5
           D.   Common Terms..............................................................................................5
                1.    Shall Versus May..................................................................................5
                      a.      Necessary Versus Appropriate......................................................5
                      b.      Absolute or Uncontrolled Discretion .............................................6
                      c.      Sole, Final or Conclusive Discretion .............................................6
V.         NOW WHAT? .........................................................................................................7
           A.    Fiduciary Duties ............................................................................................7
           B.   Standards .......................................................................................................8
           C.   Reducing Risk to the Fiduciary ........................................................................8



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                1.    Modifying The Terms Of The Trust Without Court Intervention ..............8
                2.    Modifying The Terms Of The Trust With Court Intervention ...................8
                3.    Change The Trust Principal Office Or Situs ............................................9
VI.        BURDEN OF PROOF – FIDUCIARY DUTIES ........................................................9
           A.   Burden on Plaintiff – Breach of Fiduciary Duty Lawsuit ...................................9
           B.   Burden of Proof on Fiduciary or Defendant in
                Breach of Fiduciary Duty Lawsuit .................................................................10
           C.   Affirmative Defenses ....................................................................................10
           D.   Open Issues on Burden .................................................................................10
                1.    Government Oversight ........................................................................10
                2.    Self-Dealing .......................................................................................10
                3.    Fulfillment .........................................................................................11
                4.    Section 32.45: Misapplication Of Fiduciary Property.............................11
           E.   Duty by Parent to Minor Ward .......................................................................11
           F.   Guardian Ad Litem Under Texas Trust Code ..................................................11
VII.       LIABILITY ASSOCIATED WITH DISTRIBUTIONS ............................................12
VIII.      SOURCES OF GUIDANCE AND AUTHORITY ....................................................12
           A.   Overview .....................................................................................................12
           B.   The Trust Instrument ....................................................................................12
           C.   Texas Trust Code Section 101.001 et seq .......................................................13
           D.   Texas Common Law .....................................................................................13
           E.   Restatements of Trust ...................................................................................13
IX.        DISTRIBUTION STANDARDS.............................................................................14
           A.   Mandatory Distributions ...............................................................................14
           B.   Discretionary Distributions ...........................................................................14
                1.    Ascertainable Standard ........................................................................14
                      a.     Its Origins and Importance .........................................................14
                             (i)       Beneficiary as Trustee - Distributions to Self - Avoid Estate
                                       Tax Inclusion and Avoid Gift on Lapse ............................... 14
                             (ii) Beneficiary as Trustee – Avoids Loss of Spendthrift
                                       Protection.............................................................................. 15
                             (iii) Beneficiary as Trustee - Avoid Gift for Distributions to
                                       Others ................................................................................... 15
                             (iv) Grantor as Trustee - Avoid Estate Tax Inclusion ................. 15
                             (v) Grantor or Grantor‘s Spouse as Trustee - Income Tax
                                       Relevance ............................................................................. 15
                      b.     ―Support‖ and ―Maintenance‖ ....................................................15
                             (i)       Bare Necessities.................................................................... 16
                             (ii) Educational Expenses ........................................................... 16
                             (iii) Implied Standard of Living................................................... 16
                             (iv) Trust Size .............................................................................. 16
                             (v) Present Versus Future Needs ................................................ 16
                      c.     Education .................................................................................17
                      d.     Health.......................................................................................17
                2.    Unascertainable Standards ...................................................................17
                      a.     Happiness .................................................................................17
                      b.     Benefit......................................................................................18
                      c.     Welfare.....................................................................................18



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                      d.     Comfort ....................................................................................18
X.         POTENTIAL LIMITATIONS ON DISTRIBUTION STANDARDS .........................18
           A.  Standard of Living - Station in Life................................................................18
           B.  Other Resources ...........................................................................................18
               1.     General Rule ......................................................................................18
               2.     Exception ...........................................................................................18
                      a.     Other Trusts Created By Same Settlor .........................................18
                      b.     Beneficiary Not Intended to be Self-Supporting...........................18
               3.     What Other Resources? .......................................................................18
           C.  Priority of Beneficiaries ................................................................................19
               1.     Expressed Intent Of Testator ................................................................19
                      a.     Guidelines Under Restatement When No Expression of Intent ......19
           D.  Other Relevant Factors..................................................................................19
XI.        EXERCISE OF DISCRETION ...............................................................................19
           A.  Exercise Requires Action ..............................................................................19
           B.  Relevant Information ....................................................................................20
               1.     Information Requested Of Beneficiary .................................................20
               2.     Information Provided By The Trustee...................................................20
           C.  Judicial Review ............................................................................................21
               1.     Context Of Review .............................................................................22
               2.     Extent Of Review ...............................................................................22
XII.       EXCULPATORY PROVISIONS ............................................................................22
           A.  In General ....................................................................................................22
           B.  Environmental Liability ................................................................................22
           C.  Equitable Apportionment ..............................................................................23
               1.     Taxes .................................................................................................23
               2.     Adjustments to Principal .....................................................................23
           D.  Equitable Recovery.......................................................................................24
               1.     Life Insurance.....................................................................................24
XIII.      CLAIMS RELATED TO TRUSTEES AND PERSONAL REPRESENTATIVES......24
XIV.       CLAIMS BY THE .................................................................................................24
           A.  867 Trustee ..................................................................................................25
           B.  Duties by and to Trustees by Guardian ...........................................................25
           C.  Fiduciary Duty to Report Abuse, Neglect or Exploitation ................................26
XV.        DAMAGES AS THEY RELATE TO TRUST LITIGATION ...................................26
           A.  Overview of Trust Litigation .........................................................................26
               1.     Actual Damages ..................................................................................26
                      a.     Statutory ...................................................................................26
                      b.     Appreciation Damages ...............................................................26
                      c.     Depreciation Damages ...............................................................26
               2.     Punitive Or Exemplary Damages .........................................................27
               3.     Attorneys‘ Fees And Expenses As Damages .........................................27
                      a.     Fiduciary‘s Attorneys‘ Fees and Expenses ..................................27
                      b.     Beneficiary‘s Attorneys‘ Fees and Expenses ...............................27
                      c.     Attorneys‘ Fees Related to Exemplary Damages..........................28
           B.  Specific Damages for Certain Breaches of Trust .............................................28




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               1.  Damages For Improper Investments .....................................................28
               2.  Damages For Breach Of Duty Of Loyalty .............................................28
               3.  Damages For Breach Of Duty To Disclose Material Information ............28
               4.  Damages Due To Actions Of Others ....................................................28
               5.  Damages Relating To Life Insurance Trusts ..........................................29
               6.  Damages Relating To An Invalid Trust.................................................29
XVI.       CONCLUSION .....................................................................................................29




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          TRUSTEE’S DUTIES AND                                3. A person who deals with a
             OBLIGATIONS:                                        trustee in good faith and for fair
          PRACTICAL PROBLEMS                                     value is not liable to the trustees
                                                                 or beneficiaries if the trustee has
                                                                 exceeded his authority.        The
I. SCOPE OF ARTICLE                                              trustee can provide a certificate
    The term ―fiduciary‖ usually means ―any                      of trust or a copy of the
person who occupies a position of peculiar                       instrument. See Section 114.086
confidence towards another.‖ Based on this                       of the Texas Trust Code.
definition, it is not difficult to be one and it is           4. Several provisions were put in
becoming almost impossible to be the ―perfect‖                   place to allow easier creations of
fiduciary in the world of tort reform. Lawyers                   a Section 142 trust as a special
are much more open to suing fiduciaries, both                    needs trust. See Section 14.005
individual and corporate, and other lawyers. To                  of the Texas Probate Code.
bring a cause of action and prevail, (1) there                5. Termination of uneconomical
must exist a fiduciary relationship between the                  trust. The ―Default Rule‖ allows
plaintiff and defendant; (2) the defendant must                  any trustee to terminate a trust
have breached that trust; and (3) the breach                     that is less than $50,000.00. See
resulted in injury to the plaintiff or benefit to the            Section 112.059 of the Texas
defendant.                                                       Trust Code.
                                                              6. Charities are given 25 days
II. LEGISLATION EFFECTING TRUSTS                                 notice before a hearing may be
    BEGINNING SEPTEMBER 1, 2007                                  held in proceedings involving a
    The Legislature came, went and left us with                  charitable trust. See ________
some new Rules that Trustees must follow. A                   7. A court may judicially order a
summary of the more significant of the new                       trustee to bond. See Section
legislation effective September 1, 2007, is as                   113.058 of the Texas Property
follows:                                                         Code.
1. Section 128(A)(c) is amended                               8. A majority of co-trustees may
    and pertains to property received                            now act without the joinder of all
    in whole or in part by a Trustee.                            trustees. See Section 113.08(a).
    Section (c)(1) requires notice to                         9. Disclosure and Timegap – From
    be sent to the trustee of a trust or                         January 1, 2006 to June 15, 2007
    if the trustee is also executor to                           – Trustees must make disclosure
    the income beneficiary upon the                              of everything.         Failure to
    probate of a will. If a party has                            disclose can result in removal
    already appeared in the probate                              and the statute of limitations
    proceeding, no notice must be                                begins to run on the disclosure.
    given. Likewise, a trustee may                               See Texas Property Code
    waive notice. The Contents of                                §113.060.
    Affidavit or Certificate is found
    at Section 128A(g) of the Texas                           III. ELEMENTS OF THE FIDUCIARY
    Probate Code.                                                  LAWSUIT
2. A trustor can now authorize or                                  Texas Law has established in stone some of
    permit self-dealing by corporate                          our fiduciary relationships:
    trustees.          See      Section                       a. attorney to client – Burrow v. Arce, 997
    111.0035(b)(2) and 114.006(a)                                  S.W.2d 229, 240 (Tex. 1999)
    of the Texas Trust Code. Section                          b. trustee to beneficiary – Huie v. DeShazo,
    111.035 outlines how a trustor                                 922 S.W.2d 920,923 (Tex. 1999)
    may         waive        disclosure                       c. executor to beneficiary- Huie, supra
    requirements.



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d. guardian to ward –Byrd v. Woodruff, 891                   IV. EVALUATING             THE         BUSINESS
     S.W.2d 710 (Tex.App.—Dallas, 1994, Writ                      OPPORTUNITY
     denied)                                                 A. Considerations
e. spouse to spouse – Schleuter v. Schleuter,                1. HISTORY REPEATS ITSELF!
     975 S.W.2d 584, 589 (Tex. 1998)                              When you are asked to serve as a fiduciary,
f. partner to partner – Bohatch V. Butler,                   it is important to determine whether you are the
     Binion, 977 S.W.2d 543, 545 (Tex. 1998)                 initial fiduciary or one in a long line of
g. agent to principal – Kinzbach Tool Co. v.                 successions. It is true that history repeats itself.
     Corbett-Wallace, 160 S.W.2d 509,512 (Tex.               You should determine what grounds for removal
     1942)                                                   must exist in order for you to be removed, how
just to name a few. It is the more subtle, less              easy it is to take you out as the acting fiduciary
formal relationships, which become problematic.              when you make an unpopular decision.
These can be called ―confidential relationships‖             Determine if the administration has gone
and may arise where one person trusts in and                 smoothly previously or have the beneficiaries
relies upon another, whether the relationship is             visited the courthouse or bombarded the former
moral, social, domestic, or personal. It can also            trustee with e-mails, letters and demands for
arise where influence has been acquired and                  your services on a daily basis.
abused, or in which confidence has been
betrayed.                                                    2. NO GOOD DEED GOES UNPUNISHED!
     Once a fiduciary relationship has been                       When the personal injury, estate planning, or
established, the law looks at breach. The words              probate lawyer calls you and makes apologies up
you hear most in breach of fiduciary duty                    front for the size of the trust or the nature of the
lawsuits are ―failed to exercise the utmost good             assets, a good fiduciary will remember the adage
faith, fairness and honesty‖ and ―self-dealing.‖             that no good deed goes unpunished. In my
These are the buzzwords in most any fiduciary                experience, the smaller the trust, the smaller the
litigation. If you read the entire Trust Code, and           fee, and there is a tendency to service that trust
read every section of the Texas Probate Code                 last, bringing a trustee the most risk of liability.
that relates to executors, administrators, and
guardians, you have to wonder how much more                  3. BE CAREFUL WHAT YOU WISH FOR!
difficult the law could make the task of                         You may have financial goals to market and
fiduciary.                                                   bring in revenue. As important as those goals are
     Damages are a little different in fiduciary             to maintaining your job and paying your bills, be
litigation, as there are often allegations of mental         careful that you do not take every trust,
anguish. Fee forfeiture is often pled as to an               guardianship, or estate offered to you, no matter
executor, guardian or trustee. Obviously, if it is           the risk or demand.
alleged that a fiduciary profited from a breach,
the profit allegedly gained is sought as one form            4. I AM JUST A TRUSTEE WHO CAN‘T
of damages. Along with the allegation of breach                  SAY ―NO‖
of duty of full disclosure will also come                        Are the beneficiaries asking you up front to
fraudulent       concealment.            Fraudulent          commit to a discretionary distribution or a
concealment can toll a statute of limitations,               change in distribution patterns? Will you say
which is typically four years. Keep in mind that             ―Yes‖ just to get the business and have you
a portion of your damages can also be in the                 considered the effect on the remainderman?
form of equitable relief.                                    Committing to any distribution just to get the
     The realm of litigation can range from                  business in and of itself may bring about
amending, constructing, terminating, and                     liability. A better way to address ―up front‖
accounting in trusts, to all species of litigation           demands is to agree to submit requests to
on breach of fiduciary duties, conversion and                committee.
civil conspiracy.




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    5.    SHOULD I STAY OR SHOULD I                           9.     MONEY IS THE ROOT OF ALL
GO?                                                       EVIL!
    Sometimes the hardest decision is getting                 New found wealth, remarriages, prima
out while the getting is good. If the thought of          donnas, trust babies and feelings of entitlement
resignation as a fiduciary has entered your mind          are personalities found in the trust world. Can
on several occasions, perhaps getting out is the          you handle those personalities or will they never
best decision you can make. When the going                be satisfied?
gets tough, the tough get going. Remember to
whom you will ultimately owe a final                          10. WHEN YOU LAY DOWN WITH
accounting and that individual, who is making             DOGS, YOU WAKE UP WITH FLEAS
you think of resigning, is the one who will have              Is there a co-trustee who is difficult to deal
standing to complain during final account time.           with or is a control freak?

    6.    IS THE FAMILY UNIT AKIN TO                          11. WHO‘S PEEKING OUT FROM
THOSE ON ―LOST‖ OR ―AMERICAN                              UNDER THE STAIRWAY?
GLADIATORS‖?                                                  Everyone knows it‘s a tort lawyer. Attached
    Beneficiaries come in all shapes and sizes.           to this article as Exhibit B is the pattern jury
Some have no idea what the terms of the trust             charge related to fiduciary duties. These are the
are and rely on the Trustee for the Trustee‘s             questions and presumptions that will be given to
wisdom and guidance. Others know that the                 a jury in evaluating your conduct as a fiduciary.
squeaky wheel gets the grease and they are                They set out an almost impossible burden for the
gladiators for their cause, which may or may not          fiduciary to fulfill. Keep this jury charge in mind
be in the best interest of the trust.                     when evaluating taking new business.

     7.    FOLLOW THE YELLOW BRICK                            12. HOUSTON,            WE       HAVE        A
ROAD!                                                     PROBLEM
     Look over the instrument that governs the                In my experience if the trustee discloses a
funds and other assets.        Does it contain            problem and relates it to class of beneficiaries in
exculpatory clauses? Does it restrict sales of            a timely fashion, the majority of conflicts and
particular assets? Are you constantly balancing           problems can be cured.
what the income beneficiaries demand despite
the fact that the remainderman have to be treated             13. MAY THE FORCE BE WITH YOU!
fairly? Attached as Exhibit A is a form to                    You, as a trustee, should vary your referrals
utilize when determining the value of the trust           and representation and keep a broad range of
assets.                                                   lawyers and CPAs on the go to list. You want a
                                                          law firm that will send a message of forcefulness
    8.    DO YOU NEED THIS TSURES?                        only when necessary, but when it is necessary,
    Tsures is an old Yiddish saying which                 you should let the lawyer serve as your force and
translates into ―headache.‖ Will the trust be all         shield from problems.
time consuming so that it becomes one of your
major daily headaches, which aspirin will not                 14. CAN YOU SEE THE FOREST FOR
cure and will keep your attention to the                  THE TREES?
detriment of all your other files? You should                 Are your trust statements legible and
assume you are being taped by beneficiaries.              understandable to the beneficiary? If a juror
You should also assume that your e-mails will             cannot understand them, they will believe that a
be read by a jury. E-mails may be recovered               beneficiary cannot understand the statements.
even if they are deleted and can be damaging,             Even worse, they may believe the statements are
especially when derogatory toward a judge,                intentionally misleading.
lawyer, or beneficiary.




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    15. WITH AGE COMES EXPERIENCE!                               22. MAN‘S BEST FRIEND CAN BE
    A trust officer who has been around has                 YOUR ENEMY
wisdom and history. Utilize that wisdom to                       Is your beneficiary a dog or a cat? This can
avoid problems. If an action is questionable, run           make for an interesting disclosure problem.
it by someone else. In other words, share the               Texas allows ―pet‖ trusts. These are unique and
blame.                                                      come with a special set of rules. The best source
                                                            is to go to ProfessorBeyer.com and look under
     16. ARE YOUR STANDARDS POOR?                           Articles. There is an excellent discussion on
     A corporate trustee is held to a higher                Estate Planning for Animals on this website.
standard than a non-experienced trustee under               Rover probably does not have e-mail.
the theory you get what you pay for. See Ertel v.
O’Brien, 852 S.W.2d 17 (Tex.App.—Waco                            IV. FUNDAMENTALS                         OF
1953, writ dism‘d).                                         INTERPRETING TRUST DOCUMENTS
                                                                 A. Overview
     17. GHOST WRITING WILL COME                                 The primary focus in interpreting the
BACK TO HAUNT YOU                                           provisions of the trust is the intent of the
     Sometimes trust companies keep ―shelf‖                 testator/settlor. See State v. Rubion, 308 S.W.2d
trusts. While it is probably fine to provide a              4 (Tex. 1957). The general rule is that the court
form to a lawyer, you do not want to be the                 should determine the intention of the testator
draftsperson and release yourself as trustee and            from the language he used in the will. See
later have the beneficiary allege it was a conflict         Hurley v. Moody Nat. Bank of Galveston, 98
of interest for you to draft the trust.                     S.W.3d 307, 310 (Tex. App.—Houston [1st
                                                            Dist.] 2003, no pet.) (citing Rekdahl v. Long,
    18. THIS IS THE DAWNING OF THE                          417 S.W. 2d 387, 389 (Tex. 1967)).
AGE OF TECHNOLOGY—VOICE MAIL
MESSAGES AND ANSWERING MACHINES                                 B. Unambiguous Instrument
    We are in an age of electronics. Do not                     Where the language of the trust instrument
leave irate messages on an answering machine.               is unambiguous and expresses the intentions of
Those tapes are admissible in evidence. Do not              the maker, the trustee‘s powers are conferred by
write string e-mails, discussing more than one              the instrument and neither the court nor the
trust with a lawyer or CPA on the same e-mail.              trustee can add or take away such power. See
                                                            Beaty v. Bales, 677 S.W.2d at 754. The trust is
    19. YOU GOTTA HAVE FRIENDS                              entitled to that construction which the maker
    The trust beneficiary is not a ―friend‖, he is          intended. Id. In such circumstances, outside
a client. Do not cross the line. It is a                    evidence should not be considered. Id.
professional relationship. Sex with a beneficiary
is never appropriate.                                           C. Ambiguous Instrument
                                                                What if the language is not clear? When the
    20. SHARE AND SHARE ALIKE                               intent of the settlor is not clear from the
    You should make sure your trust committee               language of the instrument, the trustee should
meets and follows the handbook! A handbook                  consider the value of the corpus of the trust, and
makes a great exhibit if you have no idea what it           the relations between the settlor and the
says.                                                       beneficiaries, and all circumstances regarding
                                                            the trust and beneficiaries at the time the trust
    21. FINAL ACCOUNTING                                    was executed. See First National Bank of
    Remember, ultimately you want a release                 Beaumont v. Howard, 229 S.W.2d 781, 783
from this person, so think before you act. Have             (1950) citing McCreary v. Robinson, 59 S.W.
you made regular and timely disclosures? Has                536 (Tex. 1900).
your fee calculation been consistent with your
fee schedule?




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     1.    ACTIONS DURING LIFETIME                           Further, conditions had significantly changed
     If the testator provided for the beneficiary in         between the time when the trust was created and
a certain manner during his/her lifetime then that           the date in 1966 when the suit was brought.
action is relevant in determining what the                   Therefore, the trustees, under the doctrine of cy
testator intended to be provided from the trust.             pres, were free to disregard the particular
See Beaumont v. Howard, 229 S.W.2d 781, 783                  provisions applicable to race in order to
(Tex. 1950). In Beaumont the testator had been               accomplish the overall intent of the settlor.
very generous toward both of his daughters
during his life. Id at 785. The court found that                  D. Common Terms
the trustee lacked the same generous attitude in                  1.    SHALL VERSUS MAY
administering the trust and therefore was not                     Most trustees understand the literal meaning
―acting in that state of mind in which the settlor           of these words is that ―shall‖ is mandatory and
contemplated that it should act.‖ Id.                        requires that distributions be made and that
                                                             ―may‖ provides the trustee with discretion to
     2.    OTHER TRUSTS CREATED BY                           make distributions. But see Penix v. First
TESTATOR                                                     National Bank of Paris, 260 S.W.2d 63
     If the testator created multiple trusts for the         (Tex.Civ.App.-Texarkana 1953) (discussed
beneficiary, then considering all of the trusts and          supra). The court in Penix ruled that the trustee
the terms of each trust provides evidence of the             in the case was within his discretion to withhold
testator‘s intent. See RESTATEMENT (THIRD) OF                a portion of the income generated by the trust
TRUSTS        § 50 cmt e, illus. g(1) (2003)                 despite the language of the trust that stated:
(significance of beneficiary‘s other resources               ―[income] shall be used for support,
and illustrative situation).                                 maintenance and schooling.‖ Id at 64 (emphasis
                                                             added).
    3.    CONTEXT OF THE CREATION OF                              Note, the Penix decision, when viewed
THE TRUST                                                    within the context of the entire body of case law,
    A testator may have desired to give all of his           should not be interpreted to stand for the
property outright to his/her spouse but, on                  proposition that ―shall‖ and ―may‖ are
advice of counsel, leaves the property to his/her            interchangeable terms. Rather it is one of many
spouse in trust. See RESTATEMENT (THIRD) OF                  examples of the courts looking to the desired
TRUSTS § 50 cmt e, illus. g(1) (2003).                       outcome and elevating ―trustee discretion‖ or
                                                             ―intent of the settlor‖ over the plain language of
     4.   FRAMING THE ISSUE: OVERALL                         the trust.
INTENT VS. SPECIFIC INTENT
     The decision of Coffee v. William Marsh                      a.     Necessary Versus Appropriate
Rice University is most often discussed in the                    Necessary provides a basis for the trustee to
context of judicial respect for the trustee‘s                consider the beneficiary‘s other resources when
discretion. 408 S.W.2d 269 (1966); see also                  the trust is silent as to the consideration of other
discussion infra. There is, however, a subtle but            resources. Appropriate provides the trustee with
important distinction made in Coffee between                 more discretion. However, the Restatement
the overall intent of the settlor, and the intent            (Third) of Trusts, in discussing the intent of the
expressed within a specific provision in the trust.          settler, states:
     In Coffee the trust document in question
provided that the University was for the use of                  . . . the settlor may manifest an intention
―the white residents of Houston.‖ Id. at 272.                    that other resources are not to be taken
The plaintiffs brought suit against the trustees of              into account (as in an absolute gift of
Rice in order to prevent them from admitting                     support) or that they must be (as in a
black students. The Court acknowledged that                      provision for payments ‗only if and as
the language of the trust was clear. The court,                  needed‘ to maintain an accustomed
however, reasoned that the overall intent of the                 standard of living), with the trustee to
settlor was to create and maintain a university.                 have no discretion in the matter.



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    (Contrast, however, the common phrase                     v. Robinson, 59 S.W. 536 (Tex. 1900; 101
    ―necessary for support,‖ which without                    A.L.R. p. 1462, Anno. II. a. 1). Thus, even
    more normally does not limit the                          when a trustee‘s discretion is declared to be final
    trustee‘s discretion in this way.).                       and conclusive, courts will interfere if the trustee
                                                              acts outside the bounds of a reasonable
    RESTATEMENT (THIRD) OF TRUSTS § 50                        judgment. See Id.; but see Story v. Story, 176
cmt e (significance of beneficiary‘s other                    S.W.2d 925 (Tex. 1944);             Ballenger v.
resources)                                                    Ballenger, 694 S.W.2d 72 (Tex.App.—Corpus
                                                              Christi 1984, no writ) (trial court erred in
    b.     Absolute or Uncontrolled Discretion                granting temporary injunction that served to
    Both case law and the Restatement state that              restrict trustees from exercising their ―sole
these terms are not to be interpreted literally. A            discretion‖ authority by substituting the
trustee‘s discretion is always subject to judicial            judgment of the trial court for that of the named
review and control. State v. Rubion, at 9. A                  trustees).
trustee continues to be required to act honestly
and in a manner contemplated by the settlor.                      In the recent decision of Monroe v. Trustee,
The inclusion of these terms serves to                        2006 WL 2192641 (Tex. App.—Houston [1st
discourage remaindermen from complaining if                   Dist.] 2006, application for rehearing pending).
the distributions are generous.
    However, the provision does not serve to cut                  Ugo di Portanova, a partially incapacitated
completely the other way to allow the trustee to              adult (―Ugo‖), is the grandson of H.R. and Lillie
make no distributions.          The Restatement               Cullen. Ugo has lived with Mr. and Mrs.
discusses this lopsided interpretation stating:               LaMatta since 1974. Mrs. LaMatta is the
―The overall tenor of the terms of a power may,               guardian of Ugo‘s person and Mr. Monroe is the
however, in the context of the trust‘s more                   successor guardian of this estate.
general purposes, lead to an interpretation
granting the trustee ordinary discretion with                      Paul Piero di Portanova and Antonella
respect to the benefits to which the discretionary            Apuzzo di Portanova are Ugo‘s half brother and
beneficiary is minimally entitled (e.g. reasonable            sister. They share the same father. Ugo‘s
support), with the extended discretion applicable             mother is D‘Alesandro Filament, a woman from
to the trustee‘s allowance of more. Comment c                 Naples, Italy.
Effect of Extended Discretion
                                                                   The guardian filed an application to make
     c.   Sole, Final or Conclusive Discretion                tax motivated gifts for the benefit of the LaMatta
     Likewise, terms such as sole, final or                   family in which guardian sought to use over $5
conclusive do not vest an unlimited discretion in             million from a trust to fund the gifts and taxes to
a trustee. Howard, 229 S.W.2d at 783. Rather,                 be paid from the trust—for a total of $6.6
in Howard, the Court held that the ―test to be                million.      If approved, approximately $2.9
applied is: When it makes payments to the                     million would remain in the trust.
beneficiaries out of the corpus of the estate is the          Simultaneously, the guardian also filed a
trustee acting in that state of mind in which the             declaratory judgment action that the Cullen wills
settlor contemplated that it should act?‖ Id.                 permitted or authorized a distribution of income
(citing SCOTT ON TRUSTS, Vol. 2, Sec. 187, p.                 and corpus from the trust for funding purposes
987; see also 65 C.J., Trusts, Sec. 727, p. 847).             of the gifts and taxes.
When the settlor‘s intention is not made clear by
the terms of the trust, consideration is given to                  The trustees filed a partial summary
(i) value of the estate, (ii) the previous, relations         judgment that there was no material fact
between him and the beneficiaries, and (iii) all              question as the trustees had already exercised
the circumstances in regard both to the estate                their discretion and decided not to make the
and the parties existing when the will was made               gifts. The di Portanovas filed two summary
and when the settlor died. Id. (citing McCreary               judgments: (1) invoking the in terrorem clause,



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and (2) that the dispersal of the trust funds for             modifying, varying, setting aside or
the stated purpose would not be in Ugo‘s best                 nullifying any provision hereof
interest.                                                     relating to my Louisiana estate on
                                                              any ground whatsoever, all interest
     The guardian moved for partial summary                   of such beneficiary, and the issue of
judgment that the terms of the trust would                    such beneficiary, to my Louisiana
support the dispersal of such funds and it was in             estate shall cease, and the interest of
Ugo‘s best interest to make the distributions. On             such      beneficiary,     and    such
November 23, 2004, a final declaratory                        beneficiary‘s interest shall be paid,
judgment was signed by the trial court indicating             assigned, transferred, conveyed, and
that the wills and codicil authorized the                     delivered to, or for the benefit of,
proposed gifts, including the payment of federal              those person who would take such
gift taxes and that there had been no violation by            beneficiary‘s     interest    in    my
the guardian of the in terrorem clause. The court             Louisiana estate if such beneficiary
of appeals rejected guardian‘s argument that the              died intestate, unmarried, and
request for a declaratory judgment was nothing                without issue on the date of the
more than an improper request for an advisory                 institution of the above described
opinion. The appellate court reversed the trial               action or proceeding. (Emphasis
court indicating that no justiciable issue exists.            added).

     The wills and codicils provided that the                      The di Portanovas argue that the guardian
trustee may make distributions from the trust                 sought to modify, nullify and vary the purpose
estate only if the distribution is ―in the discretion         and effect of the Louisiana trust by, as a
of the Trustee; [is] in the best interest of the              practical matter, changing the trust beneficiaries.
[beneficiary].‖     Therefore, the trial court‘s              The trial court held that the request for
declaration that the trustees were authorized to              declaratory relief by guardian did not violate the
fund the gifts and that the proposed                          in terrorem clause. The court of appeals
disbursement was essentially in Ugo‘s best                    reversed the decision holding that there was no
interest. The court of appeals reversed the                   justiciable controversy and dismissed that
judgment of the trial court holding that the                  portion of the case for want of jurisdiction as it
beneficiary of a discretionary trust cannot                   was clearly in the trustee‘s discretion to make a
compel the trustee to pay to him or apply for his             distribution without court interference.
use any part of the trust property. The trial court
reiterated the long-standing rule that a court                    V. NOW WHAT?
cannot substitute its judgment for the trustee.                   If you have accepted the business, you have
                                                              accepted many fiduciary duties. A listing of the
    The record was devoid of any evidence that                most common duties owed include:
the trustees had acted with malice or lack of
good faith. The holding of the trial court                        A. Fiduciary Duties
usurped the trustees‘ role and decision.                          a. The duty of loyalty
                                                                  b. The duty of competence
    Each of the Cullens‘ wills contains the                       c. The duty of furnish information in a
following in terrorem or ―no contest‖ clause:                 timely and accurate fashion-Communicating
                                                              with the beneficiary is important. It avoids
    Should         any        beneficiary                     misunderstandings and can help to prevent a
hereunder, or anyone duly authorized                          problem preemptively and it has the added
to act for such beneficiary, institute                        bonus of starting the statute of limitations.
or direct, or assist in the institution of                        d. The duty of impartiality—Every
prosecution of, any action or                                 beneficiary must be treated the same unless the
proceeding of any kind in any court,                          trust instrument provides to the contrary.
at any time, for the purpose of



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    e. The duty to segregate—This is yours,                  Act allows a trustee to adjust or allocate trust
ours and mine standard.                                      returns between income and principal based on
    f. The duty to take control and marshal the              what is fair rather than traditional allocations.
assets.
    g. The duty to diversify—This is the                          C. Reducing Risk to the Fiduciary
―don‘t put all your eggs in one basket‖ duty.                     1.    MODIFYING THE TERMS OF THE
    h. The duty of confidentiality—Loose lips                TRUST WITHOUT COURT INTERVENTION
sink ships.                                                       In order to reduce uncertainty in
    i. The duty to keep records—It is the                    administering a trust and clarify matters that
fiduciary‘s obligation to always be in a position            could not have been foreseen by the trustor, a
to provide records of the administration of the              smart fiduciary will always consider modifying
estate or trust. You should review operating                 the terms of the trust. Tex. Prop. Code 112.051
manuals and policy statements periodically so                deals with revocation, modification, or
that you are adhering to the principals set out by           amendment by a settlor. It provides:
management. If you stray from the principals                      (a) A settlor may revoke the trust unless it
whether major or minor, it will be used to your              is irrevocable by the express terms of the
detriment.                                                   instrument creating it or of an instrument
    j. The duty of full and fair disclosure.                 modifying it.
    k. The duty to account—There is both a                        (b) The settlor may modify or amend a
statutory and common law duty to account for                 trust that is revocable, but the settlor may not
assets under management.                                     enlarge the duties of the trustee with the
    l. The duty to invest—read the Uniform                   trustee‘s express consent.
Principal and Investment Act adopted by Texas.                    If the trust was created by a written
    m. The duty to use common sense—(While                   instrument, a revocation, modification, or
not a traditional duty, it is a practical one. Never         amendment of the trust must be in writing.
refer to your beneficiary in derogatory terms.
Keep your cool under fire. Remember your                         2.     MODIFYING THE TERMS OF THE
emails and trust committee minutes are                       TRUST WITH COURT INTERVENTION
discoverable in litigation.)                                      Texas Property Code section 112.054
                                                             provides for a court method of modifying or
     All the duties are obligations and standards            terminating a trust. Specifically, it provides:
that the executor or trustee must adhere to in                   (a) On the petition of a trustee or a
fulfilling his or her responsibilities. Conversely,              beneficiary, a court may order that the
the beneficiary has no obligations, standards or                 trustee be changed, that the terms of the
duties to the fiduciary. You cannot force a                      trust be modified, that the trustee be
beneficiary to keep abreast of the administration.               directed or permitted to do acts that are
While you can send them statements, they are                     not authorized or that are forbidden by
not under any duty to read those statements. It is               the terms of the trust, that the trustee be
recommended that statements be sent to all                       prohibited from performing acts required
known remaindermen as it may result in the                       by the terms of the trust, or that the trust
running of the statute of limitations, which is a                be terminated in whole or in part, if:
four-year statute for breach of fiduciary duty.                  (1)         the purposes of the trust have
                                                                 been fulfilled or have become illegal or
    B. Standards                                                 impossible to fulfill;
    Texas has adopted the Uniform Prudent                        (2)         because of circumstances not
Investor Act. Generally speaking the Act                         known to or anticipated by the settlor, the
contemplates trustee investment according to the                 order will further the purposes of the
modern portfolio theory, which focuses on total                  trust;
return, rather than on traditionally separate                    (3)         modification                    of
categories of income and principal. The UPIA                     administrative, nondispositive terms of
coupled with the Uniform Principal and Income                    the trust is necessary or appropriate to



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    prevent waste or avoid impairment of the                can impact the trustee as the rules, the right to a
    trust‘s administration;                                 jury trial, arbitration, creditors and taxes may
    (4)          the order is necessary or                  differ from one situs to another.
    appropriate to achieve the settlor‘s tax                    The Restatement (Second) of Conflicts of
    objectives and is not contrary to the                   Law, Sections 270, comment c, and 272
    settlor‘s intentions; or                                comment d provides as follows:
    (5)          subject to Subsection (d):
    (A) continuance of the trust is not                         If the settlor has not manifested an
    necessary to achieve any material purpose               intention that the trust should be
    of the trust; or                                        administered in a particular state, and
    (B) the order is not inconsistent with a                has not designated the law to control it,
    material purpose of the trust.                          the administration of the trust will be
                                                            determined by the local law of the state
    (b) The court shall exercise its discretion             in which the administration is most
to order a modification or termination under                substantially related.
Subsection (a) in the manner that conforms as
nearly as possible to the probable intention of                Restatement (Second) Conflicts of
the settlor. The court shall consider spendthrift           Law, §§ 270 comment c, and 272
provisions as a factor in making its decision               comment d.
whether to modify or terminate, but the court is
not precluded from exercising its discretion to                  Contacts determining the state include 1) the
modify or terminate solely because the trust is a           state of the domicile of the settlor; 2) the state
spendthrift trust.                                          where the trust instrument was executed and
    (c) The court may direct that an order                  delivered, 3) the state where the trust assets are
described by Subsection (a)(4) has                          located, and 4) the state of the beneficiary‘s
retroactive effect.                                         domicile.
    (d) The court may not take the action
permitted by Subsection (a)(5) unless all                       VI. BURDEN              OF       PROOF         -
beneficiaries of the trust have consented to                FIDUCIARY DUTIES
the order or are deemed to have consented                       It is difficult to assess the burden of proof in
to the order. A minor, incapacitated,                       a fiduciary case. It can shift from plaintiff to
unborn, or unascertained beneficiary is                     defendant depending on what type of fiduciary
deemed to have consented if a person                        relationship exists and which of the duties is
representing the beneficiary‘s interest                     alleged to be breached.
under Section 115.013(c) has consented or
if a guardian ad litem appointed to                              A. Burden on Plaintiff - Breach of
represent the beneficiary‘s interest under                  Fiduciary Duty Lawsuit
Section 115.014 consents on the                                  The following are fiduciary allegations
beneficiary‘s behalf                                        where the burden is usually placed on the
                                                            plaintiff as the person asserting the claim:
     3.    CHANGE THE TRUST PRINCIPAL                            (a) Existence of a Fiduciary Relationship -
OFFICE OR SITUS                                             Thigpen v. Locke, 363 S.W.2d 247 (Tex. 1962);
     Laws vary from state to state on the                        (b) Fiduciary Not Acting Competently -
administration and governance of a trust. If the            Jewitt v. Capital National Bank of Austin, 618
settlor has specifically directed that a law of a           S.W.2d 109 (Tex. App.—Waco 1981, writ ref‘d
jurisdiction is applicable to the trust and as              n.r.e.);
Trustee you are not versed in other state‘s law,                 (c) Fraud - Archer v. Griffith, 390 S.W.2d
try to change the situs of the trust.                       735 (Tex. 1965);
     Typically, the domicile of the grantor                      (d) Breach of Contract - Omohundro v.
controls the rules related to the trust. A grantor,         Matthews, 341 S.W.2d 401 (Tex. 1960);
however, is free to pick his choice of law which



127 - 342286v1                                        N-9
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    (e) Conversion - Avila v. Havana Painting              facts supporting no fiduciary relationship or not
Co., 761 S.W.2d 398 (Tex. App.—Houston [14th               in the scope of a fiduciary role, if applicable, and
Dist.] 1988, writ den‘d);                                  a realm of affirmative defenses.              Some
    (f) Tortious Interference with Trust                   affirmative defenses include:
Administration;     Tex.    Prop.   Code      §                 1. No fiduciary relationship or breach did
114.031(a)(1);                                             not fall within scope of fiduciary role; - Blieden
    (g) Removal of Trustee by Petition - Tex.              v. Greenspan, 751 S.W.2d 858 (Tex. 1988);
Prop. Code § 113.082;                                           2. res judicata - Coble Wall Trust Co.,
    (h) Conspiracy - Kinzbach Tool Co., Inc.               Inc. v. Palmer, 859 S.W.2d 475 (Tex. App.—
v. Corbett-Wallace Corporation, 160 S.W.2d                 San Antonio 1993, writ denied);
509 (Tex. 1942); International Bankers Life Ins.                3. Accord and Satisfaction - King v.
Co. v. Holloway, 368 S.W.2d 567 (Tex. 1963).               Cliett, 31 S.W.2d 350 (Tex. Civ. App.—Waco
                                                           1930, no writ);
    B. Burden of Proof on Fiduciary or                          4. Release - Tex. Prop. Code § 114.005;
Defendant in Breach of Fiduciary Duty                           5. Estoppel - Langford v. Shamburger,
Lawsuit                                                    417 S.W.2d 438 (Tex. Civ. App.—Ft. Worth
    (a) Self-Dealing and Presumption of                    1967, writ ref‘d n.r.e.);
Unfairness - Texas Bank & Trust Co. v. Moore,
                                                                6. Waiver - Ford v. Culbertson, 308
595 S.W.2d 502;
                                                           S.W.2d 855 (Tex. 1958);
    (b) Tracing Commingled Funds - Eaton v.
                                                                7. Ratification - Burnett v. First Nat.
Husted, 172 S.W.2d 493 (Tex. 1943);
                                                           Bank of Waco, 536 S.W.2d 600 (Tex. Civ.
    (c) Gifts from Beneficiary to Fiduciary;
                                                           App.—Eastland 1976, writ ref‘d n.r.e.);
Sorrell v. Elsen, 748 S.W.2d 584 (Tex. App.—
San Antonio 1988, writ denied);                                 8. Laches - Fitzgerald v. Hull, 237
    (d) Conflict of Interest - Stephens County             S.W.2d 256 (Tex. 1951);
Museum, Inc. v Swenson, 571 S.W.2d 257 (Tex.                    9. Avoidance or Exculpatory Clauses; -
1974);                                                     Moulton v. Alamo Ambulance Service, Inc., 414
    (e) Usurpation of Trust Opportunity -                  S.W.2d 444 (Tex. 1967); Tex. Prop. Code
Huffington v. Upchurch, 532 S.W.2d 576 (Tex.               §113.059;
1976);                                                          10. Statute of Limitations - §16.004; Peek
    (f) Purchase, loans, contracts and business            v. Berry, 184 S.W.2d 272 (Tex. 1944); see
transactions of fiduciary in relation to trust or          conversely Estate of Degley, 797 S.W.2d 299
beneficiary - Land v. Lee, 777 S.W.2d 158 (Tex.            (Tex. App.—Corpus Christi 1990, no writ).
App.—Dallas, 1989, no writ); Dominguez v.
Brackey Enterprises, Inc., 756 S.W.2d 788 (Tex.                D. Open Issues On Burden
App.—El Paso 1988, writ denied); InterFirst                    1.    GOVERNMENT OVERSIGHT
Bank Dallas v. Risser, 739 S.W.2d 882 (Tex.                    The government has created reulations and
App.—Texarkana 1987, no writ);                             rules that impose duties and obligations for
    (g) Failure to keep records, exercise                  national bank trustees. See C.F.R. § 9.
discretion or obtain information - Corpus Christi
Bank and Trust v. Roberts, 597 S.W.2d 752                      2.    SELF-DEALING
(Tex. 1980); Jewitt v. Capital Nat. Bank of                    With self-dealing allegations, the burden is
Austin, 618 S.W.2d 109 (Tex. Civ. App.—Waco                on the fiduciary to rebut the presumption that the
1991, writ ref‘d n.r.e.);                                  transaction was unfair. The case law indicates
    (h) Show cause for removal - burden on                 the presumption is ―rebuttable.‖ See Stephens
trustee to show cause why he or she should not             County Museum, Inc. v. Swenson, 517 S.W.2d
be removed.                                                257 (Tex. 1974).
                                                               The question is if the unfairness
    C. Affirmative Defenses                                presumption is rebutted, does the burden shift to
    If you are the defendant and alleged                   the plaintiff to submit a finding as to whether a
fiduciary, you may want to plead and introduce             specific fiduciary duty was breached? If so,



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does the fairness issue disappear or become a                 dental care, and education. TEX. FAM. CODE
part of an instruction? See Archer v. Griffith,               ANN § 151.001 (Vernon 2002 & Supp. 2004).
supra, at 739.                                                This obligation exists regardless of whether the
                                                              parent has been ordered to provide such support
    3.    FULFILLMENT                                         by a court. See Curton v Gordon, 510 S.W.2d
    If the transaction is found to be fair, the               682 (Tex Civ App—Austin 1974, writ ref n.r.e.);
fiduciary will want the jury question phrased in              Laslie v Cole, 465 S.W.2d 811 (Tex.Civ.App.—
terms of whether he ―fulfilled‖ his duty, not in              Corpus Christi 1971, no writ). This duty of
terms of whether he ―breached‖ his duty. But, is              support should be considered when making
this the correct placement of the burden? The                 distributions from a trust. If a parent fails to
case law varies on both the burden and the                    provide the required support to the ward, the
submission as to whether it is submitted as a                 parent may be held liable for such amounts
―breach‖ or as whether a fiduciary ―fulfilled‖                expend to support the ward. TEX. FAM. CODE
and ―complied‖ with his or her duties. See                    ANN § 151.001(d) (Vernon 2002 & Supp. 2004).
Townes v. Townes, 867 S.W.2d 414 (Tex.                        Furthermore, a child support obligation does not
App.—Houston [14th Dist.] 1994, writ denied);                 terminate upon the death of the stated obligee.
Sorrell v. Elsey, 748 S.W.2d 584 (Tex. App.—                  Therefore, if the support was ordered to be paid
San Antonio 1988, writ denied); Cole v.                       to the deceased mother on behalf of a ward, the
Plummer, 559 S.W.2d 87 (Tex. Civ. App.—                       guardian of the ward or a trustee will be entitled
Eastland 1977, writ ref‘d n.r.e.); Johnson v. J.              to collect the child support. TEX. FAM. CODE
Hiram Moore, Ltd., 763 S.W.2d 496 (Tex.                       ANN § 154.013 (Vernon 2002 & Supp. 2004).
App.—Austin 1988, writ denied).                                    It is important to recognize and remind a
                                                              parent, that, when a minor has funds, but the
     4.    SECTION 32.45: MISAPPLICATION                      parent also has sufficient individual resources
OF FIDUCIARY PROPERTY                                         available, the parent is still obligated and has an
     Section 32.45 of the Texas Penal Code                    affirmative duty to support the ward out of the
provides that it is a criminal offense for a                  parent‘s resources and may not resort to the use
person, with a legal or statutory duty to act, to             of the minor‘s estate. Tharp v. Blackwell,
―intentionally,    knowingly,      or     recklessly          570 S.W.2d      154,      159      (Tex.Civ.App.—
misapplies property he holds as a fiduciary or                Texarkana 1978, no writ).
property of a financial institution in a manner
that involves substantial risk of loss to the owner               F. Guardian Ad Litem Under Texas
of the property or to a person for whose benefit              Trust Code
the property is held.‖ TEX PENAL CODE ANN. §                      Finally, a guardian ad litem may be
32.45(b) (Vernon Supp. 2004).                Section          appointed pursuant to Texas Trust Code
32.45(a)-(1) defines a fiduciary to include a                 115.014. See TEX. PROP. CODE ANN. § 115.014
trustee. TEX PENAL CODE ANN. § 32.45(c)                       (Vernon 1995). Section 115.014 provides:
(Vernon Supp. 2004). The guardian will be
charged with an offense dependent on the value                    At any point in a proceeding a court
of the misappropriated property. They range                       may appoint a guardian ad litem to
from a Class C misdemeanor for property less                      represent the interest of a minor, an
than $20, to a first-degree felony for property in                incapacitated, unborn, or unascertained
excess of $200,000. TEX PENAL CODE ANN. §                         person, or person whose identity or
32.45(c) (Vernon Supp. 2004).                                     address is unknown, if the court
                                                                  determines that representation of the
    E. Duty by Parent to Minor Ward                               interest otherwise would be inadequate.
    Under Texas law, parents have a legal                         If there is not a conflict of interests, a
obligation to support his or her minor children.                  guardian ad litem may be appointed to
The Texas Family Code provides that such a                        represent several persons or interests.
duty of support includes the duty to provide a                See Id.
child with clothing, food, shelter, medical and



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    Unlike a guardian ad litem appointed under                     A form to utilize in evaluation request for
the Texas Probate Code, there is no statutory                 distributions is attached as Exhibit C.1
immunity for a guardian ad litem appointed
under the Texas Trust Code. Therefore, while                      VIII. SOURCES OF GUIDANCE AND
there is no Texas case clearly on point, it is                AUTHORITY
assumed that a guardian ad litem appointed                        A. Overview
pursuant to Section 115.014 will be subject to                    Trust law is primarily a function of state
the same standard of liability as one appointed               law. Whenever there is a dispute involving a
pursuant to Texas Rule of Civil Procedure 173.                trust governed by Texas law, state law will
See discussion supra.                                         control. There are four primary sources of
    Special attention should be given whether                 guidance and authority when construing a Texas
there is truly a need for such ad litem or the                trust. They are:
doctrine of virtual representation would apply.                   1) The trust instrument,
                                                                  2) The Texas Trust Code,
     VII. LIABILITY ASSOCIATED WITH                               3) Texas common law; and
DISTRIBUTIONS                                                     4) The Restatement (Third) of Trusts.
     In administering a trust, the trustee is
required to exercise his or her discretion or some                B. The Trust Instrument
form of judgment in almost every circumstance.                    It is well settled in Texas that the first
Perhaps no area of discretion is more complex                 principle of trust construction is to honor the
that those relating to trust distributions. A                 intent of the settler. Thus, the terms of a trust as
trustee is not only required to exercise his or her           set forth in the governing instrument generally
discretion in a purely discretionary trust, but also          governs. This principal has been recognized by
when the trust includes a standard for                        Section 1211.0035(b) of the Texas Trust Code
distribution. If the trust provides for mandatory             which provides that:
distribution of income ,the Trustee may also
need to determine whether any adjustment can                      The terms of a trust prevail over any
or should be made to income under the Uniform                     provision of this subtitle, except that the
Principal and Income Act and, if so, the amount                   terms of a trust may not limit:
of the adjustment.                                                (1) the requirements imposed under
     The key component is that the Trustee must                   Section 112.031;
actually exercise his, her or its discretion. If the              (2) the duties and liabilities of and
Trustee makes a well thought out and                              restrictions placed on a corporate trustee
substantiated decision, the courts are reluctant to               under Section 113.052 or 113.053;
overturn that judgment. The objective in the                      (3) the applicability of Section 114.007
following discussion is to provide guidance for                   to an exculpation term of a trust;
the Trustee in that process, and to provide the                   (4) the periods of limitation for
beneficiary with some guidance on the factors                     commencing a judicial proceeding
relevant to the Trustee in exercising its                         regarding a trust;
discretion. These include                                         (5) a trustee‘s duty:
     1) The intent of the testator;                               (A) with regard to an irrevocable trust,
     2) The terms of the document;                                to respond to a demand for accounting
     3) The circumstances of the testator and                     made under Section 113.151 if the
beneficiaries at the time of the trust to provide a               demand is from a beneficiary who, at the
context for interpreting the trust, and                           time of the demand:
     4) The current circumstances of the trust                    (i) is entitled or permitted to receive
and the beneficiaries.                                            distributions from the trust; or

                                                              1
                                                               I do not recall the genesis of this form with any
                                                              certainty. However, my guess is to give credit to
                                                              Kate Hopkins in Dallas, Texas.



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     (ii) would receive a distribution from                      D. Texas Common Law
the trust if the trust terminated at the time of                 The powers, and duties of a trust are also
the demand;                                                 governed by common law to the extent (i) the
     (B) to act in good faith and in accordance             trust instrument does not validly provides
with the purposes of the trust; and                         otherwise and (ii) they are applicable and not
     (C) under Section 113.060 to a                         inconsistent with the provision of the Texas
beneficiary described by Paragraph (A) that                 Trust Code. See TEX. PROP. CODE ANN. §
is 25 years of age or older; or                             111.005 (Vernon 1995)(―If the law codified in
     (6) the power of a court, in the interest              this subtitle repealed a statute that abrogated or
of justice, to take action or exercise                      restated a common law rule, that common law
jurisdiction, including the power to:                       rule is reestablished, except as the contents of
     (A) modify or terminate a trust or take                the rule are changed by this subtitle.‖)
other action under Section 112.054;                              Note, however, that common law in Texas,
     (B) remove a trustee under Section                     as in many other states, is not as extensive as
113.082;                                                    one may expect. There are a small number of
     (C) exercise jurisdiction under Section                cases from the middle of the 20th century that are
115.001;                                                    cited again and again in most of the subsequent
     (D) require, dispense with, modify, or                 decisions. This outline will focus primarily on
terminate a trustee‘s bond; or                              the seminal cases of Texas trust law.
     (E) adjust or deny a trustee‘s
compensation if the trustee commits a breach                    E. Restatements of Trust
of trust.                                                       Finally, the Restatement (Third) of Trust
     TEX. PROP. CODE ANN. 111.0035(b) (Vernon               provides some guidance when construing and
Supp. 2006); see also Beaty v. Bales, 677 S.W.2d            interpreting a trust. Specifically relevant is
750, 754 (Tex. App.—San Antonio 1984, writ                  Section 50 of entitled ―Enforcement and
ref‘d n.r.e.)(when language of trust instrument is          Construction of Discretionary Interests.‖ The
unambiguous and expresses intentions of maker,              comments to this section provide material and
the trustee‘s powers are conferred by instrument            guidance which did not appear in either of the
and neither court nor trustee can add or take away          prior restatements.    Section 50 provides as
such power).                                                follows:

    C. Texas Trust Code Section                                (1) A discretionary power conferred
101.001 et seq                                                 upon the trustee to determine the
    As previously discussed, Texas has                         benefits of a trust beneficiary is subject
adopted the Texas Trust Act. See TEX. PROP.                    to judicial control only to prevent
CODE ANN. 101.001 et seq. (Vernon 1995 &                       misinterpretation or abuse of the
Supp. 2006). The Texas Trust Account                           discretion by the trustee.
applies to all trusts governed by Texas law                    (2) the benefits to which a beneficiary
unless the trust indicates a clear intent to                   of a discretionary interest is entitled, and
provide otherwise (and only to the extent that                 what may constitute an abuse of
the provisions do not limit the matters set                    discretion by the trustee, depend on the
forth in Section 111.0035 discussed supra).                    terms of the discretion, including the
Therefore, unless the terms of a trust validly                 proper       construction       of       any
provide otherwise, the Texas Trust Code                        accompanying standards, and on the
governs:                                                       settlor‘s purposes in granting the
    1) The duties and powers of a trustee;                     discretionary power and in creating the
    2) Relations among trustees; and                           trust.
    3) The rights and interests of a                        RESTATEMENT (THIRD) OF TRUSTS § 50 (2003).
beneficiary.
    See TEX. PROP. CODE ANN. 111.0035(a)
(Vernon Supp. 2006).



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     IX. DISTRIBUTION STANDARDS                              ascertainable or HEMS standard is often used
     A. Mandatory Distributions                              when the settler desires to include more
     A mandatory distribution standard is one                objective distribution standard. It is also often
that requires the distribution of income or                  used when the settler is concerned about
principal, or both, is manner that generally does            maintaining the trust principal for the reminder
not require the exercise of a trustee‘s discretion.          beneficiaries.
The most common mandatory distributions
involve the distribution of all income. For                      a.    Its Origins and Importance
example, a Qualified Terminable Interest Trust                   A HEMS standard is particularly important
is required to distribution all income to a spouse           to avoid unintended tax consequences. This
at least annually. See I.R.C. 2056(b)(7). A                  standard is considered to be an ―ascertainable‖
settler can also, however, provide for mandatory             standard under the Internal Revenue Code and
distributions of principal. For example, some                thus provide a permissible distribution standard
trusts provide that the trust distribute a certain           to avoid granting the trustee a general power of
percentage of principal each year. Likewise, a               appointment with the tax consequences of
trust may provide that a certain percentage of               holding that power. Even documents which
principal be distributed to a beneficiary upon               name an independent trustee frequently use
reaching a particular age or goal, such as                   these terms to retain flexibility for the possible
graduating from college.                                     appointment in the future of the grantor,
     While a mandatory distribution standard                 grantor‘s spouse, beneficiary or other sensitive
may be required in certain situations, such as               person as trustee.
with a QTIP Trust, they should be used with                      While a complete discussion of the HEMS
caution in others. A mandatory distribution                  standard is beyond the scope of this outline, the
standard will generally result in the loss of the            following provides an overview of some of the
spendthrift protection as to portion required to             more common planning situations in which the
be distributed and may require distributions to              use of an ―ascertainable standard‖ is important.
persons who because of age or incapacity are
unable to handle the funds.                                      (i) Beneficiary         as       Trustee       -
                                                             Distributions to Self - Avoid Estate Tax
     B. Discretionary Distributions                          Inclusion and Avoid Gift on Lapse
     In contrast, discretionary distributions                    If a beneficiary of a trust holds a power, as
standards generally require the exercise of a                trustee or otherwise, to make distributions to
trustee‘s discretion. Discretionary distribution             himself or for his benefit, and the power is
standards      may      be     ascertainable     or          limited by an ascertainable standard relating to
unascertainable.       The selection of the                  the beneficiary‘s health, education, support, or
distribution standards is often based on a number            maintenance, then the trust property will not be
of factors including:                                        included in the gross estate of the beneficiary for
      Purpose of trust;                                     federal estate tax purposes by reason of the
      Whether a beneficiary may serve as                    beneficiary‘s possession of such power, because
trustee;                                                     such a limited power does not constitute a
      Preference between current and                        ―general power of appointment.‖              I.R.C.
remainder beneficiaries; and                                 §2041(b)(1)(A). Treas. Reg. §20.2041-1(c)(2).
      Preference       for    objective     versus          Also, the lapse or other release or exercise of
subjection standard of review.                               such a power limited by such an ascertainable
                                                             standard will not be a taxable gift for federal gift
   1.    ASCERTAINABLE STANDARD                              tax purposes by the beneficiary which held the
   The most commonly used standard for                       power.     I.R.C. §2514(c)(1).        Treas. Reg.
making distributions from a trust is ―health,                §25.2514-1(c)(2).
education, maintenance and support‖. This is
commonly referred to as a HEMS standard. An




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    (ii) Beneficiary as Trustee – Avoids Loss                      (iv) Grantor as Trustee - Avoid Estate
of Spendthrift Protection                                      Tax Inclusion
    If a beneficiary of a trust, as trustee or                     Several court cases and IRS rulings have
otherwise, holds a power to make distributions                 held that if the grantor is the trustee or controls
to himself or for his benefit, an issue arises                 the trustee of a trust, then the trustee‘s
regarding the ability of the beneficiary‘s                     possession of a power to make distributions to or
creditors to satisfy claims against the beneficiary            for the benefit of a beneficiary of the trust, if
from the beneficiary‘s interest in the trust.                  limited by an ascertainable standard relating to
When, however, the trust has a spendthrift                     the beneficiary‘s health, education, support, or
provision and the beneficiary‘s power is limited               maintenance, will not cause the trust property to
by an ascertainable standard relating to the                   be included in the gross estate of the
beneficiary‘s health, education, support, and/or               grantor/trustee for federal estate tax purposes
maintenance, a creditor generally cannot attach                under I.R.C. §2036 or 2038. Estate of Budd, 49
the beneficiary‘s interest on the basis that the               T.C. 468 (1968) acq. 1973-2 C.B. 1; Estate of
beneficiary holds a distribution right or power.               Frew, 8 T.C. 1240 (1947); Rev. Rul. 73-143,
TEX. PROP. CODE ANN. § 112.035 (Vernon 1995                    1973-1 C.B. 407; PLRs 200213013, 200123034,
& Supp. 2006).                                                 200011055, 200011054, 199903025, 9527025.

     (iii) Beneficiary as Trustee - Avoid Gift                     (v) Grantor or Grantor’s Spouse as
for Distributions to Others                                    Trustee - Income Tax Relevance
     Similarly, if a beneficiary of a trust exercises              The power of any trustee, including the
a fiduciary power during the beneficiary‘s                     grantor, to distribute corpus to or for a
lifetime, as trustee, to make distributions to or              beneficiary or beneficiaries, limited by a
for the benefit of another beneficiary of the same             ―reasonably definite standard‖ which is set forth
trust, and the power is limited by an                          in the trust instrument, will not cause the trust
ascertainable standard relating to the other                   income to be taxed to the grantor for federal
beneficiary‘s health, education, support, or                   income tax purposes. I.R.C. §674(b)(5)(A). A
maintenance, then the exercise of the power in                 ―reasonably definite standard‖ includes ―a power
accordance with such limitation will not be a                  to distribute corpus for the education, support,
taxable gift for federal gift tax purposes by the              maintenance, or health of the beneficiary.‖
beneficiary holding the power. Treas. Reg.                     Treas. Reg. §1.674(b)-1(b)(5)(i). However, a
§25.2511-1(g)(2).         However, this same                   reasonably definite standard which limits the
regulation states that ―if a trust instrument                  power to distribute income to or for a
provides that the determination of the trustee                 beneficiary or beneficiaries, is not sufficient to
shall be conclusive with respect to the exercise               prevent the trust income from being taxed to the
or non-exercise of a power,‖ then the power is                 grantor, if the grantor or grantor‘s spouse is one
not considered to be limited by the requisite                  of the trustees holding the power to distribute
standard. Furthermore, even if such a power is                 income. I.R.C. §674(b) and (d).
subject to an ascertainable standard, property
thus distributable to a person for whom the                         b.   ―Support‖ and ―Maintenance‖
beneficiary/trustee has a legal obligation to                       The terms support and maintenance are
support       could        be      included        in          generally considered to be similar. In fact,
beneficiary/trustee‘s gross estate for federal                 under the Restatement (Third) of Trusts, these
estate tax purposes, unless the trustee is                     terms are considered synonymous. In State v.
prohibited from making any distributions to a                  Rubion, the Texas Supreme Court noted that
beneficiary that would satisfy the trustee‘s                   these terms evidence the creation of a support
individual legal obligation to support such                    trust. 308 S.W.2d at 8.
beneficiary. Treas. Reg. §20.2041-1(c)(1).                          When the distribution standard includes the
                                                               terms support or maintenance, a trustee‘s
                                                               discretion is not an unbridled discretion. See Id.
                                                               (citing First National Bank of Beaumont v.



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Howard, 229 S.W.2d 781, 785 (Tex. 1950);                     ordinary living expenses.        Ordinary living
Anderson v. Menefee, 174 S.W. 904                            expenses include ―regular mortgage payments,
(Tex.Civ.App.—Fort Worth, writ refused); Scott               property taxes, suitable health insurance or care,
on Trusts, Vol. 2, § 187, p. 986). Rather, the               existing programs of life and property insurance
trustee‘s discretion must be ―reasonably                     and continuation of accustomed patterns of
exercised to accomplish the purposes of the trust            vacation and charitable and family giving.
according to the settlor‘s intention and his                 RESTATEMENT (THIRD) OF TRUSTS § 50 cmt d
exercise thereof is subject to judicial review and           (2003).
control‖. Id. (citing SCOTT ON TRUSTS, §§ 187,
187.1, 187.2, and 187.3; Kelly v. Womack, 268                    (ii) Educational Expenses
S.W.2d 903, 907 (Tex. 1954); Powell v. Parks,                    Support has also been held to include the
86 S.W.2d 725 (Tex. 1935); Davis v. Davis, 44                educational expenses of         the beneficiary‘s
S.W.2d 447, (Tex.Civ.App.--Texarkana, no                     dependants. First National Bank of Beaumont v.
writ)).                                                      Howard, 229 S.W.2d 781 (Tex. 1950). In First
    The Texas Supreme Court in Rubion                        National Bank of Beaumont, the Texas Supreme
recognized a number of factors that should be                Court held that the fact that the settlor had paid
considered by a trustee exercising its discretion            for his daughters‘ college education indicated
in a ―support‖ or ―maintenance‖ trust. Rubion,               that he considered the expense of a college
308 S.W.2 at 10. They include:                               education for a dependant a ―necessary‖
            The size of the trust estate,                   expenditure. Id.; see also discussion of Actions
            The     beneficiary‘s      age,   life          During Lifetime supra.
expectancy, and condition in life,
            The beneficiary‘s present and future                 (iii) Implied Standard of Living
needs,                                                            Generally the standard of living of the
            The other resources available to the            beneficiary is determined as of the time of the
beneficiary‘s individual wealth, and                         settlor‘s death or when the trust became
            The beneficiary‘s present and future            irrevocable. The implication that support is to
health, both mental and physical.                            be interpreted at that time is in keeping with
    Id. at 10-11; see also In re Gruber’s Will,              interpreting the trust according to the settlor‘s
122 N.YS.2d 654, 657 (N.Y. Sur. 1953)(age and                intent.
condition of beneficiary, the amount of the trust
fund, and ―other factors, Hanford v. Clancy,                     (iv) Trust Size
183 A. 271, 272 (N.H. 1936)(size of the fund,                    The interpretation of the terms of the trust
present situation of the beneficiary, present and            requires a constant balancing of all relevant
future needs, other resources, and future                    factors. The Restatement provides that the
emergencies); Falsey’s Estate, Sur., 56 N.Y.S.2d             standard may be increased if either; 1) a) the
556, 563 (N.Y. Sur. 1945). (age of the                       beneficiary‘s standard of living has increased, b)
beneficiary, physical and mental health of the               the increase is consistent with the trust‘s
beneficiary, size of the trust compared to                   productivity and c) is not inconsistent with the
beneficiaries life expectancy)                               productivity of the trust estate; or 2) considering
    There are common factors in all of these                 the productivity of the trust failure to increase
cases and the most relevant factors when a                   the beneficiary‘s standard of living results in
trustee is exercising its discretion are discussed           favoring the remainder beneficiaries over the
below.                                                       current beneficiaries.

    (i) Bare Necessities                                          (v) Present Versus Future Needs
    Support means more than the bare                              The needs of the beneficiary both present
necessities of life. Hartford-Connecticut Trust              and future are to be considered by the trustee.
Co. v. Eaton, 36 F.2d 710 (2d Cir. 1929).                    When, however, the trust is potentially
Rather, it generally includes the beneficiary‘s              insufficient to provide for both needs, the trustee
                                                             is faced with a difficult decision. Unfortunately,



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the few courts that have addressed this issue                expenses, tuition, fees, books and other cost of s
have not held consistently.        For example,              higher education and/or technical training. See
compare the decision of State v. Rubion with                 RESTATEMENT (THIRD) OF TRUSTS § 50 cmt
Penix v. First National Bank of Pari, 260                    d(3) (2003).
S.W.2d 63 (Tex. Civ. App. – Texarkana, writ
ref‘d).                                                           d.    Health
     In Rubion, the Texas Supreme Court ruled                     Generally      this     language    includes
that the trustee had abused his discretion by                distributions for health as would be implied from
refusing to invade the principle of the trust to             a support standard alone. See RESTATEMENT
make payments for the beneficiary‘s care while               (THIRD) OF TRUSTS § 50 cmt d(3) (2003).
she was in a state run mental hospital. Rubion,
308 S.W.2d at 8. The trustee argued that he was                   2.    UNASCERTAINABLE
within his discretion to withhold payments of                STANDARDS
principle because the corpus of the trust should                  While an ascertainable standard is
be preserved for her support if she were ever                commonly used, it is not mandatory. A settler
discharged from the hospital, and further, that if           can simple provide that distributions can be
the trust corpus were used to pay all of her                 made in the trustee‘s sole discretion.
medical care it would completely destroy the                 Alternatively, the settler can use other standards
trust. Id. Disagreeing, the court held the trustee           on which distributions can be made. These are
abuse his discretion by withholding the entire               generally considered to be unascertainable as the
principal and the trustee should have determined             there is no objective manner by which to
what amount could have been distributed while                determine whether a distribution (requested or
still preserving the long term health of the trust.          made) fits within the distribution standard of the
Id. at 9.                                                    instrument.
     In Penix, the appellate court ruled that a                   Unascertainable standards may be used
trustee was within its discretion to withhold                when the settler is less concerned about
principal as well as income in the present, in               maintaining the trust principal for the reminder
order to meet the future needs of the beneficiary.           beneficiaries or when he or she wants the trustee
See Penix, 260 S.W.2d at 67. The trustee argued              to have more flexibility in making distributions.
successfully that the beneficiary was a 9-year               Due to the potential tax implications, however,
old girl, that the income produced from the trust            these standards should be used with care. As
was well in excess of what was needed for her                discussed previously, when a beneficiary serves
current support etc., and that any excess above              as trustee or possess certain powers relating to
the beneficiary‘s current needs should be held in            the trust, the use of an unascertainable standard
reserve for emergencies. Id at 64-65. The court              can result in tax and creditor issues.
found that the trustee was within its discretion,                 While there is no clear definition of what
relying heavily on the language granting the                 terms will result in an unascertainable
trustee the power to carry out the terms of the              distribution standard, the following terms have
trust ―free from any supervision by the probate              been defined to create one.
or other courts.‖ The court discounted any
significance of the word ―shall‖ within the grant.               a.    Happiness
Id.                                                              The word happiness has been found to
     While Penix and Rubion appear to conflict               create an unascertainable standard. Commerce
with one, they actually hold true to the same                National Bank of San Antonio v. Scofield, 169
rule. When exercising discretion in a support                F2d 145 (CCA—5th Cir. 1948).                   The
trust, a trustee should consider both the present            Restatement provides that it is consistently
and future needs of the beneficiary.                         interpreted as broadening the standard and
                                                             indicating that the trustee exercise its discretion
   c.    Education                                           more generously. See RESTATEMENT (THIRD)
   Without limiting or expanding provisions,                 OF TRUSTS § 50 cmt d(3) (2003)(other standards
education is considered to include living                    and supplementary language)



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    b.     Benefit                                              1.    GENERAL RULE
    Likewise, the inclusion of the word benefit                 If the trust document is silent, a trustee
in a distribution standard been found to create a           should generally consider other resources but
unascertainable standard.       The Restatement             has some discretion in determining the impact of
provides that it is consistently interpreted as             the resources on the distributions to be made
broadening the standard and indicating that the             from the trust. The consideration of other
trustee exercise its discretion more generously.            resources, however, is a balancing of the intent
See RESTATEMENT (THIRD) OF TRUSTS § 50 cmt                  of the settlor regarding the treatment of the
d(3) (2003)(other standards and supplementary               beneficiary and the over purposes of the trust
language).                                                  and, these considerations my change the general
                                                            rule. See RESTATEMENT (THIRD) OF TRUSTS §
    c.    Welfare                                           50 cmt e, (significance of beneficiary‘s other
    A distribution standard that includes welfare           resources).
as a basis has been found to create a
unascertainable standard.       The Restatement                 2.   EXCEPTION
provides that it is consistently interpreted as                 There are two standardly          recognized
broadening the standard and indicating that the             exceptions to the general rule.
trustee exercise its discretion more generously.
See RESTATEMENT (THIRD) OF TRUSTS § 50 cmt                       a.    Other Trusts Created By Same Settlor
d(3) (2003)(other standards and supplementary                    When the settlor has created other trusts of
language).                                                  which the beneficiary receives distributions,
                                                            then the trustee is to take into account the other
    d.    Comfort                                           distributions in making discretionary payments.
    A distribution standard that includes comfort           See Id.
as a basis has been held to create a
unascertainable standard.       The Restatement                 b.    Beneficiary Not Intended to be Self
provides that it is consistently interpreted as             Supporting
broadening the standard and indicating that the                 When the beneficiary is in a situation in
trustee exercise its discretion more generously.            which he/she is not intended to be self
See RESTATEMENT (THIRD) OF TRUSTS § 50 cmt                  supporting such as in school, then the
d(3) (2003)(other standards and supplementary               beneficiary‘s other resources are generally not to
language).                                                  be considered. See Id.

     X. POTENTIAL LIMITATIONS ON                                3.    WHAT OTHER RESOURCES?
DISTRIBUTION STANDARDS                                          Other resources normally include the
     A. Standard of Living - Station in Life                beneficiary‘s other income but not principal
     As discussed above, even without the                   available to the beneficiary.           However,
inclusion of these terms a distribution for                 depending on the purpose of the trust, the
support is to be made according to one‘s station            principal of the beneficiary may be relevant.
in life.                                                    Once again the determination of what resources
                                                            to consider include the settlor‘s relationships
     B. Other Resources                                     both to the current beneficiary and the remainder
     When making any discretionary distribution,            beneficiaries, the liquidity of the beneficiary‘s
a trustee should consider whether he or she is              assets and the purposes of the trust both tax and
obligated to consider the beneficiaries other               non-tax.       See RESTATEMENT (THIRD) OF
resources. If the testator has provided guidance            TRUSTS § 50 cmt e(2) (what other resources are
in this area, the testator‘s intent will control.           to be considered).
Also, as is reflected in the discussion below, all
rules are tempered by the testator‘s intent as
reflected in the overall purpose of the trust.



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    C. Priority of Beneficiaries                             settlor‘s child or the children of a deceased
    The priority of various beneficiaries can                child).
impact distributions as between or among the
beneficiaries. A trustee should consider whether                See RESTATEMENT (THIRD) OF TRUSTS §
he or she is obligated to give preference to one             50 cmt f (multiple beneficiaries or groups as
or more beneficiaries prior to making a                      concurrent discretionary distributes).
discretionary distribution.
                                                                  D. Other Relevant Factors
     1.    EXPRESSED             INTENT          OF               The Restatement (Third) of Trusts lists other
TESTATOR                                                     factors which the courts have considered in
     The testator may express a specific intent to           interpreting the trust including:
favor a beneficiary or class of beneficiaries over                 whether the remainder beneficiaries
another. If the testator has provided guidance in            were to take ―the principal‖ or ―whatever
this area, the testator‘s intent will control. Some          principal remains‖;
trusts will expressly provide that it is the                       the relationship between the settlor
testator‘s intent to provide for a certain                   and one or more of the beneficiaries
beneficiary even the extent of the exhaustion of             including not only family relationships but
the trust. Other trusts will implicitly favor a              the personal feelings about a beneficiary, and
beneficiary or a class of beneficiaries. For                 occasionally about the beneficiary‘s spouse;
example, language which authorizes distribution                    whether the beneficiary is also a
of principal without regard to preservation of               trustee;
principal for distribution to the remaindermen                     whether the settlor made other
clearly expresses the intent of the testator that            provisions for the beneficiary;
the current beneficiary or beneficiaries are to be                 whether the settlor was aware of the
favored. See discussion infra.                               beneficiary‘s other resources or of other
                                                             circumstances; and,
    a.    Guidelines Under Restatement When                        whether a spendthrift restraint was
No Expression of Intent                                      imposed on the beneficiary.
    If there is no stated priority the Restatement                The Restatements provided that these words
(Third) of Trusts includes several inferences and            can be given more significance than the realities
constructional preferences as starting points                of drafting warrant. The Third Restatement
including:                                                   states that viewing the document as a whole, the
                                                             purpose of creating the trust and the role of the
     Relationship to the settlor is relevant,               discretionary power is more instructive than any
leading in the most common situations to an                  individual words. See RESTATEMENT (THIRD)
inference that the beneficiary at the top of a               OF TRUSTS § 50 cmt g (general observations on
line of descendants is favored over his or her               relevant factors in the interpretation of
own issue, with the settlor‘s spouse also so                 discretionary powers).
favored whether or not an ancestor of the
others (e.g. settlor‘s issue by prior marriage).                  XI. EXERCISE OF DISCRETION
                                                                  A. Exercise Requires Action
      Among multiple lines of descent                            Paramount to the exercise of discretion is
(e.g., all of the settlor‘s issue) there is an               that the trustee must actually act to ―exercise‖
inference of priorities per stirpes, that is, that           his, her or its discretion.      A trustee that
(i) the various lines are entitled to similar,               establishes a process of determining the
impartial (. . . but not necessarily equal)                  distributions to be made is less subject to
treatment, with disparities to be justified on a             challenge than a trustee distributing far less or
principled basis consistent with the trust                   far more with no process in place. Trustees that
purposes, and that (ii) the inference of                     can present a well thought out and reasonable
favored status within a descending line                      decision making process often are victorious,
begins with the person(s) at the top (e.g. the



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even if their decisions appear to contradict the              may be periodically requested by a trustee to
language of a trust, i.e. Penix, or the clear intent          consider distribution requests and carry out the
of the testator, i.e., Coffee v. Rice.                        terms of the trust.
                                                                   Perhaps one of the more difficult issues is
    B. Relevant Information                                   the information that a trustee feels he or she
    In order to properly exercise his or her                  requires to justify a distribution. Some trustees
discretion, a trustee can not exist in a vacuum.              desire to obtain extensive information from the
The trustee will generally need to obtain                     beneficiary to ―paper‖ their file, however, this
information from the beneficiary in order to                  can lead to feelings of ill will and invasion of
make a fully informed distribution decision.                  privacy towards a trustee. Other trustees go to
Furthermore, a beneficiary may require certain                the opposite extreme and request no information.
information from the trustee in order to property             This can lead to claims of breach of fiduciary
assess whether to make a distribution request                 duty against the trustee by the other beneficiaries
and understand the manner in which the trustee                who may eventually request that the trustee
decides to exercise his or her discretion.                    justify his or her prior distributions. In acting,
                                                              ―the trustee generally may rely on the
    1.     INFORMATION REQUESTED OF                           beneficiary‘s representations and on readily
BENEFICIARY                                                   available, minimally intrusive information
    The trustee must exercise its discretion and              requested of the beneficiary.‖ But when the
as such must have information to do so. This                  trustee has reason to believe that the information
information would include the living expenses                 is incomplete or inaccurate then the trustee
of the beneficiary and under the general rule of              should request additional information.
construction what other resources are reasonably
available to the beneficiary for his support.                      2.    INFORMATION PROVIDED BY
Information that is commonly requested by                     THE TRUSTEE
trustees include the following:                                    Information regarding distributions is a two-
     Income and cash flow information;                       way street.      Just as a trustee may seek
     Financial statements;                                   information to support a distribution, a
     Copies of all trust documents under                     beneficiary is entitled to information in order to
which the beneficiary has an right to funds or                request a distribution or justify a trustee‘s
request a distribution ;                                      decisions whether to make a distribution. The
     Copies of tax returns;                                  Restatement (Third) of Trusts provides that
     Copies of all tuition and similar                       among a trustee‘s fiduciaries duties is the (i)
agreements relating to the beneficiaries‘                     general duty to act, reasonably informed, with
education and maintenance;                                    impartiality among the various beneficiaries and
     Copies of receipts or invoices as to                    interests (Section 79) and (ii) duty to provide the
any amounts to be reimbursed;                                 beneficiaries with information concerning the
     Information regarding a beneficiaries                   trust and its administration (Section 82). The
employment status and efforts to obtain such                  Restatement concludes ―this combination of
employment;                                                   duties entitles the beneficiaries (and also the
                                                              court) not only to accounting information but
     Status of the beneficiaries‘ housing,
                                                              also to relevant, general information concerning
medical insurance, and any other information
                                                              the bases upon which the trustee‘s discretionary
regarding their support that the trustees deem
                                                              judgments have been or will be made. See
relevant; and
                                                              RESTATEMENT (THIRD) OF TRUSTS § 50 cmt g
     Notification of any significant
                                                              (general observations on relevant factors in the
changes in any beneficiary‘s housing,
                                                              interpretation of discretionary powers).Comment
education, development or medical needs.
                                                              on Subsection (1) b. Judicial review and control
    While the preceding is not intended to be an
                                                              of trustee’s discretion.
exhaustive list or necessary in all situations, it
provides a general listing of the information that



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     C. Judicial Review                                         The lack of clarity in this area does not make life
     There are two basic principles that can be                 any easier for a trustee that is faced with a tough
derived from the case law in Texas. They allow                  decision. On the other hand the entire purpose
courts the latitude to take whatever action they                for having a trustee in a ―discretionary trust‖ is
deem necessary according to the facts in each                   to burden the trustee with the responsibility of
situation. The first principle is that courts will              making decisions based on future events, and to
not second guess the trustee unless there is an                 have the benefit of the trustee‘s judgment and
―abuse of discretion.‖ Coffee v. William Marsh                  discretion. In Re Shea’s will, 254 N.Y.S. 512
Rice University, 408 S.W.2d 269 (1966). This                    (1931). The lack of clarity also explains why
rule is still valid today; ―Texas courts are                    the case law is so sparse. Trial courts have wide
prohibited by law from interfering with the                     latitude under the rules as they stand now, and
discretion of the trustee absent a clear showing                appellate courts have not as of yet devised any
of fraud or other egregious conduct.‖ In re Bass,               better guidance than what has already been laid
171 F.3d 1016 (5th Cir. 1999). The second                       out in the few cases discussed
principle is that any decision by the trustee that
subverts the ―intent of the settlor‖ will be
overturned. State v. Rubion, 308 S.W.2d 4 (Tex.
1957).
     The logical conclusion to be drawn from
these two principles is that the ―intent of the
settlor‖ is the paramount consideration when a
trustee is exercising its discretion. However, 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 in 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 reading the
actual cases that settlor‘s intent is often in reality
second fiddle to trustee discretion. See Coffee
(discussed below). While this line of thinking
does not serve those of us who would like better
guidance in this area, it does allow the courts the
freedom to elevate either principle on a case-by-
case basis. Thereby granting the courts a
position of authority whether they uphold the
trustee‘s decision, or the complaining plaintiff‘s
allegation of foul play.
     This leaves trustee‘s with only one clear
mandate. Any action taken should conform to
the settlor‘s intent. Unfortunately, determining
the settlor‘s intent, or rather what the court will
accept as the settlor‘s intent, is a difficult
undertaking. As discussed below, the primary
source for determining settlor intent is the trust
instrument. However, the courts will consider a
number of factors outside of the instrument
when (in the determination of the court) the
instrument itself is not clear.



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    within this outline. Unless a eureka moment                bank which uses a ―shelf‖ trust it may be
comes there will likely never be clear guidance for            presumed that it was improper to exculpate
trustees of discretionary trusts.                              themselves especially when the beneficiaries are
                                                               not represented by counsel.
    1.    CONTEXT OF REVIEW
    Generally the review arises either in the                       B. Environmental Liability
context of a beneficiary seeking to compel or                       Where as liability to third persons is imposed
prohibit distributions (see generally, Rubion,                 upon a person, not as a result of the contract made
supra) or a creditor seeking to reach the assets of            by him or a tort committed by him but because he
the trust. See, Penix v. First National Bank of                is the holder of the title to property, a trustee as a
Paris, 260 S.W.2d 63 (1953) (discussed below).                 holder of the title to the trust property is subject to
                                                               personal liability, but only to the extent to which
     2.   EXTENT OF REVIEW                                     the trust estate is sufficient to indemnify him.
     The extent that courts are willing to intervene           Restatement § 265.
in the administration of a trust is dictated by the
two principles of law discussed above. Courts in               1. Unless and to the extent otherwise provided by
Texas are free to intervene in the administration of              the trust instrument, a trustee is entitled to
trusts under Rubion, and free to wash there hands                 indemnity from the trust property for expenses
of trust administration when they see fit under                   properly incurred in the administration of the
Coffee. Therefore, it can reasonably be inferred                  trust. Restatement § 244. Liabilities incurred
that courts are likely to intervene when the facts of             by reason of the trustee‘s holding title to
a particular case offend the court‘s sensibilities,               property are within the scope of the right to
and likely to cite Coffee or its progeny when the                 indemnity. Restatement § 248.
courts are agreeable to the decisions the trustee has
made.                                                          2. However, unlike the unlimited personal
                                                                  liability to third parties for the trustee‘s
     a.    ―fraud, misconduct, or clear abuse of                  contracts and torts, the trustee‘s liability to
discretion.‖ Fraud, and misconduct are fairly easy                third parties arising from holding title to trust
terms to understand. ―Clear abuse of discretion‖ is               property is generally limited to the extent to
a fuzzier term. However, as discussed above, the                  which the trust estate is sufficient to indemnify
courts have consistently intervened when they feel                him. Restatement § 265, Comment a.
that the ―intent of the testator‖ has been subverted.
                                                               a. This rule applies to property                taxes.
    b.    Note that the Restatement also includes                 Restatement § 265, Comment b.
intervention to prevent a ―misinterpretation‖ of the
trust. In comment b. to Subsection (1) the                     b. It also applies to assessments on shareholders,
Restatement provides:                                             if the shares are registered in the name of the
                                                                  person as trustee. Restatement § 265,
    Court intervention may be obtained to                         Comment c.
    rectify abuses resulting from bad faith or
    improper motive, and to correct errors                     c. The most financially devastating area in which
    resulting from mistakes of interpretation.                    this type of liability is not limited to the value
    Absent language of extended (e.g.                             of the trust estate has recently arisen is
    ―Absolute‖ or ―uncontrolled‖ discretion                       environmental         liability     under      the
    (Comment c), a court will also intervene if                   Comprehensive Environmental Response,
    it finds the payments made, or not made, to                   Compensation, and Liability Act of 1980, 42
    be unreasonable as a means of carrying out                    USC §§ 9601 et seq (―CERCLA‖). See
    the trust provisions.‖                                        generally Packer, Thomas A. & James W.
                                                                  Miller, Jr., ―Inheritance of Contaminated
     XII. EXCULPATORY PROVISIONS                                  Property: Blessing or Curse?,‖ 10 Prob &
     A. In General                                                Prop 13 (Oct/Nov 1996) [hereinafter cited as
     Exculpatory clauses are also sometimes                       ―Packer‖]; Note, ―The Expansive Reach of
referred to as ―immunity‖ clauses or ―get out of                  CERCLA Liability: Potential Liability of
jail free‖ clauses. These clauses provide that no                 Executors of Wills and Inter Vivos and
liability will arise when a Trustee does or does not              Testamentary Trustees,‖ 55 Albany L Rev 143
take a specific act. Texas strictly construes                     (1991).
exculpatory clauses. Moreover, if the Trustor is a
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(1) Under CERCLA § 9607(a), liability is                        (3) The new negligence standard fails to clarify
    imposed on four classes of persons:                             the extent to which a trustee must investigate,
                                                                    discover,      and    remediate      suspected
(a) Current owners or operators of contaminated                     contamination of trust property to be relieved
    property;                                                       from personal liability. Under 42 United
                                                                    States Code section 9607(n)(4), there are safe
(b) Owners or operators of the property at the time                 harbors, which will protect the fiduciary from
    when hazardous waste disposal occurs;                           personal liability:

(c) Persons who arrange for disposal or treatment               (a) Undertaking or directing another person to
    of hazardous substances at the property; and,                   undertake a cleanup.

(d) Persons who accepted hazardous substances                   (b) Responding to an agency enforcement order.
    for transport to the property.
                                                                (c) Terminating the fiduciary relationship.
(2) ―Just as an executor or conservator‘s
    CERCLA liability is typically limited to estate             (d) Incorporating        special     environmental
    assets, a trustee‘s liability is typically limited              provisions (including indemnification of the
    to trust assets. See Restatement §§ 264, 265.                   fiduciary) into the trust agreement.
    The trustee‘s personal liability will turn on
    whether the trustee is a ‗responsible person‘               (e) Inspecting the trust property.
    under 42 United States Code section 9607(a).
    Some courts have required no more than a                    (f) Providing financial or other advice to the trust
    confirmation that the trust assets include                      grantor or beneficiaries.
    contaminated property to impose liability.
    Other courts have sought more significant                   (g) Administering trust property which was
    indicia of ownership, such as control of the                    contaminated before the fiduciary relationship
    contaminated property. A review of trustee                      began.
    cases reveals that trustee liability under
    CERCLA appears to be expanding.‖ Packer at                  (h) Declining to take any action listed in 42
    17-18, followed by analysis of cases arising                    United States Code section 9607(n)(4).
    from trustee status and on indicia of
    ownership.                                                  3. UPC section 7-306(b) significantly limits the
                                                                   trustee‘s liability arising from ownership of
d. In September 1996 Congress limited a                            property: ―A trustee is personally liable for
   trustee‘s personal liability under CERCLA by                    obligations arising from ownership of property
   enacting the Asset Conservation, Lender                         of the trust estate … in the course of
   Liability, and Deposit Insurance Protection                     administration of the trust estate only if he is
   Act of 1996, §§ 2501-2505 of the Omnibus                        personally at fault.‖
   Consolidated Appropriation Act, Pub L 104-
   208, 110 Stat 3009.                                          C. Equitable Apportionment
                                                                    1.   TAXES
(1) Under current law, a trustee‘s personal liability               Under Texas law, the general rule is that death
    under CERCLA is limited to the value of the                 taxes are apportioned among both probate and
    assets in the trust estate.                                 non-probate assets unless the will specifically
                                                                provides a contrary result. In Patrick v. Patrick,
(2) A trustee may still be personally liable under              182 S.W.3d 433 (Tex.App. 2005), equitable estate
    CERCLA to the extent that the trustee‘s own                 taxes were apportioned against the decedent‘s
    negligence caused a release of a hazardous                  IRA, which was a non-probate asset.
    substance. Environmental case law highlights
    the difficulty of identifying the scope of the                  2.   Adjustments to Principal
    trustee‘s liability caused by his own                           The allocation of principal and income is made
    negligence. See discussion in Matter of Bell                by a fiduciary based on the instrument or the
    Petroleum Services, Inc., 3 F 3d 889 (5th Cir               Texas Probate Code. Charges to income include:
    1993).                                                          (a) Ordinary expenses incurred in the
                                                                administration, management or preservation of the
                                                                corpus;
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    (b) recurring taxes;                                         the attorney‘s part. The first element of breach of
    (c) insurance premiums                                       fiduciary duty is that a fiduciary relationship must
    (d) ordinary repairs;                                        exist.
    (e) reasonable depreciation allowance;                            As discussed previously, an attorney for
    (f) court costs and fees for judicial                        fiduciary generally represents only the fiduciary.
accountings; and                                                 It is possible, however, that the attorney for an
    (g) management expenses.                                     executor or trustee could, intentionally or
                                                                 unintentionally, undertake to perform legal
    See TEX. PROB. CODE § 113.111.                               services as an attorney for one or more
                                                                 beneficiaries, therefore creating an attorney-client
    D. Equitable Recovery                                        relationship, whether expressly or impliedly. See
    1.    LIFE INSURANCE                                         Id. For example, in Moran, supra, the fiduciary
    A constructive trust may be imposed on life                  engaged a law firm to advise them in such
insurance proceeds if the funds used to pay the                  capacity. The beneficiaries subsequently sued the
premiums were to misappropriated and the money                   law firm for legal malpractice claiming that it also
to pay the premiums was wrongfully taken by the                  undertook to represent their interests.          The
insured. Pagehal v. Great Western, 215 S.W.3d                    beneficiaries claimed that the law firm had
437 (Tex.App.—Midland 2006).                                     periodic meetings with the beneficiaries, provided
                                                                 them tax and other advice, had direct mailings to
    XIII. CLAIMS RELATED TO TRUSTEES                             the beneficiaries, stated that they represented ―the
AND PERSONAL REPRESENTATIVES                                     Moran family, the Moran Estate, the Moran Estate
    An attorney hired by the executor or trustee to              family, [and] Moran Estate interests,‖ and did not
advise them in administering the estate or the trust             advise the beneficiaries that they did not represent
represents the executor or trustee and not the                   the beneficiaries. Vinson, 946 S.W.2d at 403.
beneficiaries. See Huie v. DeShazo, supra, at 922                They also testified that the law firm sent them
(―under Texas law at least, the trustee who retains              documents to review and sign. Id. The law firm
an attorney to advise him or her in administering                claimed that the beneficiaries were never clients,
the trust is the real client, not the trust                      were hired only by the fiduciaries, that some of the
beneficiaries); See also Vinson & Elkins v. Moran,               beneficiaries had their own counsel, and they
946 S.W.2d 381, 396 (Tex. App.—Houston [14th                     suggested that the beneficiaries consult with their
Dist.] 1997, writ dism‘d by agr.). Neither a trust               own counsel. Id. at 404. The jury, however,
nor an estate is a legal entity and, therefore, neither          found that an attorney-client relationship existed
should be considered the client. See Chapman                     and awarded damages in excess of $35 million.
Children’s Trust v. Porter & Hedges, L.L.P., 32                  Most attorneys representing the fiduciary advise
S.W.3d 429, 441-42 (Tex. App.— Houston [14th                     the beneficiaries in writing that the firm or
Dist.] 2000, pet. denied) (because the trusts were               attorney only represents the fiduciary and advises
not clients, the trusts have ―no right of recovery,              the beneficiary to have his or her own attorney
under any cause of action,‖ as a matter of law, for              review anything that is forwarded for approval or
conduct in connection with its representation of                 signature.
trustee). But see discussion of unintentional                         Likewise, even absent a clear attorney-client
clients infra.                                                   relationship, the attorney for the executor or
    An issue exists, however, whether a successor                trustee may be held negligent for failing to advise
trustee or personal representative would have                    a beneficiary that he does not represent the
privity with the attorney for his or her                         beneficiary if circumstances could lead the
predecessors. See discussion infra.                              beneficiary to believe that they are represented by
                                                                 attorney. See Querner v. Rindfuss, 966 S.W.2d
    XIV. CLAIMS                  BY             THE              661 (Tex. App.—San Antonio 1998, writ denied).
“UNINTENTIONAL” CLIENT A/K/A THE                                 In Querner, the beneficiaries claimed that the
BENEFICIARIES                                                    attorney for the executor claimed to be the attorney
    While it is clear that a client can bring a claim            for the estate. Id. at 666. The attorney also stated
for legal malpractice, what is often a issue of                  in writing that the attorney ―will keep the
contention is who is the client. As discussed                    beneficiaries fully apprised of both [the
previously, the existence of an attorney-client                  executor‘s] position and the other beneficiary‘s
relationship may be either express or implied from               position on the interpretation of the will.‖ Id. The
the parties‘ conduct. See Perez, 822 S.W.2d at                   beneficiaries sued the attorney for civil
265.      Once established, the attorney-client                  conspiracies, fraud, unlawful conversion, unjust
relationship gives rise to corresponding duties on               enrichment, DTPA, constructive fraud, and breach
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of fiduciary duties and the court granted summary                In the drafting of an 867 trust, the terms of the
judgment for the attorney on all these claims. The          trust often included a limited exculpation provision
appellate court upheld a portion of the summary             that exonerated the trustee from actions resulting
judgment, but reversed on the claims of whether             from ordinary negligence that would otherwise be
attorney for the estate engaged in fraud and                a breach of its fiduciary duty. Due to alleged
converted estate‘s assets through conspiracy with           concerns (and in certain cases a contorted reading
executrix and whether the beneficiaries had                 of) the Texas Supreme Court opinion of Texas
standing to sue the attorney. Id. at 668. In                Commerce Bank, N. A. v. Grizzle, 96 S. W. 3d 240
reaching its decision, the court stated that:               (Tex. 2002), exculpation clauses in 867 trusts
     [e]ven      absent    an     attorney-client           existing on or created after September 1, 2003,
     relationship, an attorney may be held                  will become unenforceable unless the court
     negligent for failing to advise a party that           presiding over the guardianship makes a new,
     he is not representing the party. Burnap,              specific finding that the exculpation provision is
     914 S.W.2d at 148. ―If circumstances                   justified. Furthermore, under no circumstances
     lead a party to believe that they are                  may an exoneration clause exculpate the trustee
     represented by an attorney,‖ the attorney              for actions done in (i) in bad faith, (ii)
     may be held liable for such a failure to               intentionally; or (iii) with reckless indifference to
     advise. Id. Furthermore, the Texas                     the interest of the beneficiary. See TEX. PROB.
     Supreme Court has recognized the                       CODE ANN. § 868 (Vernon 2003 & Supp. 2004);
     difficulty in formulating a comprehensive              See TEX. PROP. CODE ANN. § 113.059 (Vernon
     definition of ―fiduciary‖ sufficient to                2003 & Supp. 2004). Also, note every new 142
     encompass all cases. General Resources                 Trust must have the following notice: Notice: The
     Organization, Inc. v. Deadman, 907                     Beneficiary and Certain Persons Interested in the
     S.W.2d 22, 31 (Tex. App.—San Antonio                   Welfare of the Beneficiaries May Have Remedies
     1995) (citing Crim Truck & Tractor Co.                 under Section 142.005, Property Code.
     v. Navistar Intern. Transp. Corp., 823                      Also, new subsection (k) allows the parent of a
     S.W.2d 591, 593 n. 3 (Tex. 1992), writ                 beneficiary to ask the court to appoint a guardian
     denied, 932 S.W.2d 485 (Tex. 1996).                    ad litem to investigate and report to the court
     Informal fiduciary relationships or                    whether the trustee should be removed for failing
     confidential relationships may arise                   to or refusing to make distributions for the health,
     where one person in trust relies upon                  support, maintenance and education of the
     another or where influence has been                    beneficiary.      Reimbursement for the person
     acquired and abused or confidence has                  making such request is more than $1,000.00 in
     been reposed and betrayed. Id. The                     attorney‘s fees.
     existence of such an informal fiduciary
     relationship or confidential relationship is               B. Duties by and to Trustees by
     a question of fact. Id.                                Guardian
                                                                With regard to the ward's assets placed in a
                                                            valid trust, as discussed supra, the guardian of a
    A. 867 Trustee and 142 Trust                            ward's estate does not have the right to revoke a
    Enacted in 1993, Section 867 of the Probate             revocable trust created by a ward prior to the
Code authorizes a court with jurisdiction over a            adjudication of incapacity. See Weatherly, 566
guardianship to create a trust for the management           S.W.2d at 293. Upon the appointment of the
of guardianship funds either in lieu of or in               permanent guardian of the estate of a totally
addition to a guardian of the estate and appoint a          incapacitated person, the trustee continues to have
financial institution as trustee. See TEX. PROB.            fiduciary duties to the ward, however, those duties
CODE ANN. § 867 (Vernon 2003). The terms of                 may be enforced by the guardian. When a limited
the trust are similar to a 142 Trust created under          guardianship is granted, the scope of the guardian
the Section 142 et seq. of the Texas Property               versus the ward‘s rights as it relates to the trust
Code. See TEX. PROP. CODE ANN. § 142.005                    will depend on the order of appointment. If the
(Vernon 1995) (setting out terms of 142 trusts). A          guardian believes that the trustee has failed to
Section 867 Trust and a 142 Trust may be drafted            properly carry out its duties to the ward, as a
to qualify as a special needs trust under 42                beneficiary or settlor, the guardian should take
U.S.C.A. § 1396p(d)(4)(A). See TEX. PROB. CODE              such actions as are necessary to protect the ward
ANN. § 868 (Vernon 2003 & Supp. 2004) and                   and his or her estate.
legislation effective September 1, 2007, made                   The trustee should provide any information,
changes to § 142.005.                                       accountings and other information to the ward via
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the ward‘s guardian. To the extend a beneficiary                 HUM. RES. CODE ANN. § 48.052(b) (Vernon
can pursue actions against a trustee, so can the                 2001).
beneficiary‘s guardian, subject to the scope of the
guardian‘s appointment and court authority to do                      XV. DAMAGES AS THEY RELATE TO
so. If the guardian believes that the trustee has                TRUST LITIGATION
failed to properly carry out its duties to the ward,                  A. Overview of Trust Litigation
as a beneficiary or settlor, the guardian should take                 1.    ACTUAL DAMAGES
such actions as are necessary to protect the ward                     a.    Statutory
and his or her estate. For a further discussion of                    Section 114.001 of the Texas Trust Code
such potential duties, see Cenatiempo, Executors                 provides various measures of liability for breach of
and Trustees, SBOT Fiduciary Litigation 2004,                    fiduciary duty. These include the following:
Ch. 8 (2004).                                                         (1) Profit made by the trustee through or
                                                                 arising out of the administration of the trust, even
    C. Fiduciary Duty to Report Abuse,                           though the profit does not result from a breach of
Neglect or Exploitation                                          trust.
    To the extent that a trustee or other becomes                     (2) Loss or depreciation in value of the trust
aware of any specific acts of abuse, neglect, or                 estate as a result of a breach of trust.
exploitation, he or she is required to report it to the               (3) Profit made by the trustee through the
Texas Department of Human Services and                           breach of trust.
Department of Protective and Regulatory Services.                     (4) Profit that would have accrued to the
See TEX. HUM. RES. CODE ANN. § 48.051 (Vernon                    trust estate if there had been no breach of trust.
2001). Section 48.051(c) provides that the duty                        It may be possible to avoid damages even in
imposed to report the abuse, neglect, or                         the case of breach of fiduciary duty if the fiduciary
exploitation, include a person ―whose knowledge                  can show that the same loss to the trust would have
concerning possible abuse, neglect, or exploitation              occurred without the breach.             Whitfield v.
is obtained during the scope of the person‘s                     Lindemann, 853 F.2d 1298 (5th Cir. 1988), cert.
employment         or       whose        professional            denied, 490 U.S. 1089 (1989).
communications are generally confidential,
including an attorney, clergy member, medical                         b.    Appreciation Damages
practitioner, social worker, and mental health                        Section 114.001(c)(3) appears to authorize
professional.‖ See Id. Therefore, not only is a                  appreciation damages, since that allows for a
guardian required to report such abuse, neglect, or              beneficiary to recover profit which would have
exploitation, but also an attorney ad litem,                     accrued to the trust but for the breach of fiduciary
guardian ad litem, employee of the ward‘s 867                    duty. An example of this can be found in In re
trust, etc.                                                      Rothko’s Estate, 372 N.E.2d 291 (N.Y. 1977). In
    The required report may be made orally or in                 that case, the court held that the beneficiaries were
writing but must include the following:                          entitled to the profits which would have accrued to
    (1) the name, age, and address of the elderly                the trust had the executors not sold to Rothko
or disabled person;                                              paintings owned by the estate in violation of their
    (2) the name and address of any person                       fiduciary duties. The court held that appreciation
responsible for the elderly or disabled person‘s                 damages are permissible if a fiduciary was under a
care;                                                            duty to retain an investment and failed to do so or,
    (3) the nature and extent of the elderly or                  alternatively, if the breach of trust is a serious
disabled person‘s condition;                                     conflict of interest. Id.
    (4) the basis of the reporter‘s knowledge;
and                                                                  c.    Depreciation Damages
    (5) any other relevant information.                              The Texas Trust Code authorizes depreciation
    See TEX. HUM. RES. CODE ANN. § 48.051(d)                     damages that result from a trustee‘s breach of
(Vernon 2001).                                                   trust. Section 114.001(c)(1) states that a trustee
    A guardian or other person is subject to                     who commits a breach of trust is chargeable with
criminal charges if he or she fails to report the                any damages resulting from such breach of trust
abuse, neglect, or exploitation as required by                   including but not limited to ―any loss or
Texas Penal Code Section 48.051. See TEX. HUM.                   depreciation in value of the trust estate as a result
RES. CODE ANN. § 48.052(a) (Vernon 2001 &                        of a breach of trust.‖ TEX. PROP. CODE ANN.
Supp. 2004). If discovered, he or she may be                     § 114.001(c)(1) (Vernon 1995); see Corpus Christi
charged with a Class A misdemeanor. See TEX.                     Bank & Trust v. Roberts, 587 S.W.2d 173 (Tex.
                                                                 Civ. App.—Corpus Christi 1979), aff’d, 597
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S.W.2d 752 (Tex. 1980). In a recent and highly                 incurred while administering or protecting the
publicized case in Harris County, the jury found               trust. Section 11.4064 also allows a court to award
that the trustee had breached his fiduciary duty by            costs, including fees, as may seem equitable and
failing to sell property. The damages assessed                 just in any proceeding under the Texas Trust Code.
against the trustee were the difference between the            Case law in this area holds that the attorney fee
value of the property had the trustee sold it when             obligation is a personal obligation of the fiduciary,
the market price was high and the value of the                 who then has a right of reimbursement against the
property today.                                                estate to the extent the fees were reasonable and
                                                               necessary. See Corpus Christi Bank & Trust v.
     2.     PUNITIVE          OR      EXEMPLARY                Cross, 586 S.W.2d 664 (Tex. Civ. App.—Corpus
DAMAGES                                                        Christi 1979, writ ref‘d n.r.e.). This is different
     The standards governing punitive damages in               than the perception of most fiduciaries and
the trust context are essentially the same as in any           practitioners that the attorney is hired by the estate.
other context. One of the most controversial                        Under Texas case law, trustees who act
aspects of the Risser decision is its affirmance of            reasonably and in good faith in defending their
$2,678,750 of the original $10,000,000 punitive                actions are entitle to have their attorneys‘ fees paid
damage award in that case. See InterFirst Bank v.              out of the trust, even if they are found to have
Risser, 739 S.W. 882 (Tex. App.—Texarkana                      breached their trust. See Gray v. First Nat’l Bank,
1987, no writ). In its discussion of exemplary                 393 F.2d 371 (5th Cir.), cert. denied, 393 U.S. 961
damages, the Risser court noted that punitive                  (1968). American Nat’l Bank v. Biggs, 274
damages are awardable when the defendant                       S.W.2d 209 (Tex. Civ. App.—Beaumont 1954,
committed a ―willful, malicious or fraudulent                  writ ref‘d n.r.e.); see also duPont v. Southern Nat’l
wrong,‖ which would include either self-dealing                Bank, 771 F.2d 874 (5th Cir. 1985), cert. denied,
or another ―intentional breach of fiduciary duty,‖             475 U.S. 1085 (1986). As a practical matter,
and would not require malice. Id. at 907. The                  however, if a trustee loses any part or all of a
concurring opinion went out of its way to point                breach of fiduciary duty lawsuit, it may be difficult
out that the punitive damages were excessive. The              to prove reasonableness and good faith, at least in
dissenting opinion further argues that the activities          the same proceeding. For example, a trustee may
of InterFirst Bank-Dallas were not such as would               have acted reasonably in defending its actions if it
justify punitive damages because the wrongful                  offered a reasonable settlement proposal and
acts were not willful, malicious or fraudulent, and            proceeded to trial only when the plaintiff refused
because there was no gross negligence. The                     to settle. However, such settlement offers are not
dissent specifically stated the following:                     generally admissible before the jury. In at least
      It is unfortunate that the majority does no              some jurisdictions, courts appear willing to allow
more than pay lip service to Learned Hand‘s                    the trustee to apportion the fees and charge a part
belief, ―[t]he law ought not to make                           of the fees to the trust when the trustee is found to
trusteeship so hazardous that responsible                      have breached its duties as to some but not all of
individuals and corporations will why away                     the allegations. See, e.g., First Interstate Bank v.
from it.‖ Dabney v. Chase Nat’l Bank, 196                      Lindberg, 746 P.2d.
F.2d 668 (2nd Cir. 195-2), [cert. dismissed,
346 U.S. 863 (1958)].            The majority‘s                     b.    Beneficiary‘s Attorneys‘ Fees and
decision achieves precisely what it says the                   Expenses
law ought not.                                                      Because the recovery of attorneys‘ fees and
     Id. at 914.                                               expenses must either be allowed by statute or
                                                               related to contract, attorneys for beneficiaries often
     3.   ATTORNEYS‘ FEES AND EXPENSES                         try to frame their causes of action against a trustee
AS DAMAGES                                                     as a breach of contract. Courts have generally
     One of the most significant factors for both a            viewed fiduciary liability cases a predominantly
beneficiary and a trustee in connection with breach            tort actions for which there is no recovery of
of fiduciary duty litigation is who pays the cost of           attorneys‘ fees. A beneficiary may, however, be
the attorneys‘ fees.                                           able to seek the recovery of his or her attorneys‘
                                                               fees under the Texas Trust Code. Section 114.064
    a.    Fiduciary‘s Attorneys‘ Fees and                      provides that the court may award as cost, such
Expenses                                                       ―reasonable and necessary attorneys‘ fees as may
    Section 114.063(b) of the Texas Trust Code                 seem equitable and just.‖ TEX. PROP. CODE ANN.
provides that a trustee has a lien against trust               § 114.064 (Vernon 1995). Note that, to date, no
property to secure reimbursement of expenses                   Texas court has awarded attorneys‘ fees and
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expenses pursuant to this section, and the only                    2.    DAMAGES FOR BREACH OF DUTY
published case under this section deals with an               OF LOYALTY
award to the trustee. Lyco Acquisition 1984 Ltd.                   The duty of loyalty to the trust and to the
Partnership v. First Nat’l Bank, 860 S.W.2d 117               beneficiaries is one of the most important duties of
(Tex. App.—Amarillo 1993, writ denied). Cases                 a fiduciary, and its violation is a fertile ground for
decided prior to the enactment of Section 114.064             litigation. The duty of loyalty covers both
held that the power of a court to surcharge a                 statutory self-dealing and instances of conflict of
trustee is not a statutory authorization to award             interest where the trustee obtains a benefit for
attorneys‘ fees to the plaintiff/beneficiary. See             itself or another at the expense of the trust. In
Epperson v. Greer, 626 S.W.2d 884 (Tex. App.—                 Interfirst Bank Dallas v. Risser, the court stated
San Antonio 1981, no writ); see also Jernigan v.              that a trustee‘s duty of loyalty relating to any sale
Jernigan, 677 S.W.2d 137 (Tex. App.—Dallas                    of trust property imposes on the trustee a duty to
1984, no writ) (settlement of a breach of fiduciary           ―fully employ the trustee‘s care, skill and
duty lawsuit which provided for payment of the                judgment toward obtaining a fair market value for
plaintiffs‘ attorneys‘ fees from the trust was set            such property.‖ Risser, 739 S.W.2d at 888-89. A
aside on complaint from other beneficiaries).                 determination of fair market value is based on the
                                                              information available to the trustee at time of the
    c.    Attorneys‘ Fees Related to Exemplary                sale not on hindsight. Id. at 889. In Risser, the
Damages                                                       trial court awarded the beneficiaries actual
    Attorneys‘ fees can be considered in                      damages equal to the difference between the fair
connection with punitive damage awards. See                   market value determined by the jury and the value
Risser, 739 S.W.2d at 908.                                    received by the trustee. Id. at 887. The court also
                                                              awarded damages equal to the amount of interest
    B. Specific         Damages      for    Certain           which would have been earned by the trust, but for
Breaches of Trust                                             the trustee‘s beach of duty. Id.
    1.     DAMAGES            FOR        IMPROPER
INVESTMENTS                                                       3.     DAMAGES FOR BREACH OF DUTY
    For obvious reasons, most of the cases                    TO DISCLOSE MATERIAL INFORMATION
concerning fiduciary liability involve problems                   A fiduciary has the duty to keep the
with investments. The ―prudent man‖ standard is               beneficiary fully and fairly informed of matters
the primary standard against which a trustee will             relating to the trust. Shannon v. Frost Nat’l Bank,
be measured in these cases. See RESTATEMENT                   533 S.W.2d 389 (Tex. Civ. App.—San Antonio
(SECOND) OF TRUSTS § 174 (1959). See also                     1975, writ ref‘d n.r.e.). This obviously includes a
UNIF. PROB. CODE §§ 7-302, 3-703, 5-209 (1993).               duty to keep complete and accurate trust records.
The prudent man standard has been codified in the             Beaty v. Bales, 677 S.W.2d 750 (Tex. App.—San
Texas Trust Code and the Texas Probate Code,                  Antonio 1984, writ ref‘d n.r.e.); Corpus Christi
although it may be modified by the terms of the               Bank & Trust v. Roberts, 587 S.w.2d 173 (Tex.
trust agreement.        While allegedly improper              Civ. App.—Corpus Christi 1979), affirmed 597
investment activity can occur in a myriad of                  S.W.2d 752 (Tex. 1980). See also 12 C.F.R. § 9.8.
situations, the most common problems for which a              A trustee is also required to advise beneficiaries of
breach of fiduciary duty is usually alleged are               withdrawal rights, such as Crummey powers.
speculative or risky investments, failure to                  Karpf v. Karpf, 481 N.W.2d 891 (Neb. 1992).
diversify assets, failure to review instruments, and
making improper sales and purchases.             See              4.    DAMAGES DUE TO ACTIONS OF
Neuhaus v. Richards, 846 S.W.2d 70 (Tex. App.—                OTHERS
Corpus Christi 1992, no writ); Langford v.                        Section 114.002 of the Texas Trust Code
Shamburger, 417 S.W.2d 438 (Tex. Civ. App—                    provides that a successor trustee is liable for
Fort Worth 1967, writ ref‘d n.r.e.). In Langford,             breach of trust of a predecessor only if he knows
the court stated that a trustee‘s failure to make             or should know of a situation constituting a breach
trust funds productive could result in damages                of trust committed by the predecessor, and the
assessed against the trustee, personally, equal to            successor trustee:
the lost interest. Langford, 417 S.W.2d at 444. In                (1) improperly permits it to continue;
addition, the increasingly more sophisticated                     (2) fails to make a reasonable effort to
investment climate is resulting in controversy, and           compel the predecessor trustee to deliver the trust
possible changes in the law, regarding determining            property; or
what is a prudent man for investment purposes.

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     (3) fails to make a reasonable effort to                   to the trust‘s last amendment, the trust estate
compel a redress of a breach of trust committed by              should belong to the beneficiaries that the last
the predecessor trustee.                                        valid amendment designated. Id. If recovery of
     TEX. PROP CODE ANN. § 114.002 (Vernon                      the trust assets from the incorrect distributees is
1995).                                                          not possible, the trustee may be liable. If the
     Although this section may be an attempt to                 trustee made the distributions under a court order
protect successor trustees, the reference to ―should            and in the absence of extrinsic fraud, the trustee
know‖ as well as to actual knowledge causes some                should not be liable. Id. However, if the trustee
problems and subjects the successor to second-                  did not obtain judicial instructions before making
guessing. As a result, it is a good idea for a                  the distributions, the trustee could be liable. Id.
proposed successor trustee to review the trust
instrument to ensure that there is a provision                       XVI. CONCLUSION
relieving it of the duty to review actions of a                      Remember, you would not have a job as
predecessor. It does appear that exculpatory                    trustee if your clients were not incapacitated or
language in an instrument designed to relieve a                 dysfunctional or if someone did not think you
successor from the liability of a predecessor – and             could do it better.         Thus, going into the
thus the duty of inquiry – will be enforced. Steph              relationship you know that future difficulties will
v. Scott, 840 F.2d 267 (5th Cir. 1988). The                     be inherent in the relationship. Trustees, lawyers
proposed successor trustee may want to take the                 and tow truck drivers are unlikable defendants
trust only after a judicial settlement of the accounts          who generally avoid the courthouse at all costs.
of the predecessor or, alternatively, after releases            If there is uncertainty, the trustee should ask for
by the beneficiaries of the predecessor‘s acts or               equitable construction. More corporate fiduciaries
omissions.      Such releases should specifically               are utilizing arbitration clauses as they believe the
include a provision relieving the predecessor                   will receive a more favorable outcome.
trustee of any additional duty to account and
relieving the proposed successor of the duty to
require an accounting or to inspect the books and
records of the trust to determine possible past
breaches of fiduciary duty.

    5.    DAMAGES RELATING TO LIFE
INSURANCE TRUSTS
    If the trustee has a duty to preserve the trust
res and he fails to do so, the question arises as to
what extent the trustee is liable? The measure of
damages in a life insurance trust depends on
whether the insured is still alive and insurable. If
the insured is still alive and insurable, the measure
of damages would be the difference between the
cost of the lapsed insurance policy and the new
insurance policy. If the insured is no longer alive
and insurable, then the measure of damages is the
value of the lapsed policy. Conlew, Inc. v.
Kaufman, 199 N.E. 767 (N.Y. 1936).

     6.    DAMAGES RELATING TO AN
INVALID TRUST
     What happens if a trust is determined to be
invalid? Courts generally require the recipients of
distributions from the invalid trust to disgorge
their windfall. See Terence S. Nunam, Trustee
Liability:    The Ghost of Distributions Past,
PROBATE & PROPERTY, Nov./Dec. 1995, at 9.
Any trust assets still under the control of the
trustee will be held in a resulting trust. Id. The
trust assets will then pass to the probate estate of
the deceased trustor, or if the invalidity is limited
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                 EXHIBITS




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TRUST ESTATE EVALUATION CHECKLIST
Completion
  Date
I.       Real Estate
         A.      Determine necessity of obtaining environmental risk evaluation.
         B.      Evaluate casualty and liability insurance on property.
         C.      If any real estate is leased, review lease terms and tenants compliance with lease terms.
         D.      Personally inspect property.
         E.      Review property tax appraisals for each property. Take steps to reduce overstated values,
                 insure that property taxes are paid current, obtain appropriate exemptions.
II.      Mineral Interests
         A.      Review division orders to insurance that trust is reflected as owner.
         B.      Notify operators and lessees of name and address of trustee.
III.     Business Interests
         A.      Evaluate viability of business.
         B.      Evaluate business structure. Are changes necessary?
         C.      Subchapter S filing requirements, if applicable.
         D.      Review buy-sell agreements associated with business as well as business continuation
                 agreements and/or shareholder agreements.
IV.      Cash Accounts
         A.      Determine if cash in banks is adequately insured.
         B.      Insure all funds maintained in interest bearing accounts. Utilize sweep accounts where
                 appropriate.
         C.      Evaluate alternatives to cash.
V.       Stocks and Bonds
         Evaluate individual stocks and bonds.
VI.      Life Insurance
         A.      Investigate company.
         B.      Determine appropriateness of life insurance as trust investment.
         C.      Determine if beneficiary correctly designated.




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VII.     Notes
         Insure payments are current, or if in default, determine appropriate action.
VIII.    Portfolio Review
         A.      Review investment policy.
         B.      Review asset allocation of trust
         C.      Evaluate performance of assets, advisors and money managers.




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                           DISCRETIONARY DISTRIBUTION CHECKLIST

Date of request

Beneficiary                                              Trust Name

Trustee

Is this a request for discretionary distribution                or loan

Funds needed for

Date needed

Total amount requested

          From income                          Principal

How will income generated be affected by this payment, if principal distribution made?



What other trust accounts, or outside funds, does the beneficiary have which could be used instead of
those requested?

List any other potential beneficiaries of this trust and their interest:


Distributions to this beneficiary in prior 12 months:


Distributions to all beneficiaries in prior 12 months:


Income: Attach list

Principal: Attach list

Review income and principal provisions: and attach copy of language


What are the income tax consequences of this distribution, if authorized?


What are the estate tax or generation-skipping tax consequences of this distribution, if any?

Attach Distribution Request and copies of all relevant information.

Distribution approved:                              Rejected:

Date:

Signature of Trustee:


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DOCUMENT INFO
Description: Texas Statute of Limitations in Trust Litigation document sample