O’Riley v. United States Bank, N.A. - 412 S.W.3d 400 (Mo. Ct. App. 2013)

Rule:

The duty to act impartially does not mean that a trustee must treat the beneficiaries equally. Rather, the trustee must treat the beneficiaries equitably in light of the purposes and terms of the trust.

Facts:

Donald and Arlene O'Riley married in 1956. They had two children, Terrance and Gerald. In January 1978, Donald, as Grantor, executed a Trust Agreement establishing a revocable trust and naming American National Bank, U.S. Bank's predecessor, as the trustee. Donald passed away in March 1982. Pursuant to the Trust Agreement, the trustee divided the trust estate into two shares upon Donald's death—a Marital Trust and a Non-Marital Trust. The Marital Trust "consist[ed] only of assets that qualify for the marital deduction under federal estate tax law." It directed the trustee to pay Arlene all of the net income of the Marital Trust and also distribute to her part or all of the principal of the trust as she may request. The Non-Marital Trust directed the trustee to distribute to Arlene so much or all of the net income of the trust as it deemed advisable to provide for her care, support, maintenance and welfare. It also directed the trustee to distribute to any one or more of Donald's descendants so much or all of the net income of the trust not paid to Arlene as it deemed advisable to provide for their respective care, support, maintenance, education and welfare. The Trust Agreement also authorized the trustee to "invade" and pay to the Grantor, his wife, or his children from the principal of either trust estate if it determined that the aggregate of the income and principal payable under the trusts and the funds available from all other sources were insufficient to provide adequately for their care, support, maintenance, education, comfort and medical or other attention or emergency. Finally, the Non-Marital Trust directed the trustee to distribute the remainder of the trust estate to Grantor's then living descendants upon the death of Arlene.

Once fully funded after Donald's death, the Non-Marital Trust had an account balance of $369,604.92. Arlene made annual requests to Trustee for all of the income generated from the Non-Marital Trust to help cover her living expenses. Trustee approved Arlene's requests and distributed the income from the Non-Marital Trust until 2007 when it ceased serving as the trustee. Terrance made occasional requests for income distributions from the Non-Marital Trust in 1989, 1991, and 2000 to cover living expenses, health insurance, and an unpaid x-ray bill. Trustee approved one distribution to Terrance of $600 in 1989 and denied the other requests. Gerald never made any requests for distributions from the Non-Marital Trust. In 1987, Arlene requested a distribution of approximately $9200 from the principal of the Non-Marital Trust to reimburse her for amounts she provided to Terrance and Gerald for college expenses, auto insurance, and divorce-related expenses. Trustee denied this request by Arlene. Between 1983 and 1995, Trustee invested the Non-Marital Trust assets in bonds, bond funds, certificates of deposit, and other fixed income assets. The Trust held no equities, common stock, or mutual funds during this period. At the end of 2007 when Trustee ceased serving as trustee of the Non-Marital Trust, the Trust had a balance of $413,405.46.

In May 2010, Beneficiaries filed their first amended petition against Trustee seeking compensatory and punitive damages and attorney's fees for breach of duty of impartiality and breach of duty to properly invest trust assets. They alleged that Trustee refused to make any distributions to them and favored the interests of Arlene over theirs and failed to provide them with account statements to advise them of the nature and extent of their interests in the Non-Marital Trust. They also alleged that Trustee invested solely in cash accounts or income producing bond funds but not in equity investments and did not sufficiently diversify the assets resulting in no appreciation of the Non-Marital Trust assets. Following a bench trial, the trial court entered judgment in favor of Trustee on all counts.

Issue:

Did the trustee bank abuse its discretion or breach its duty of impartiality when it distributed all of the income to Arlene?

Answer:

No.

Conclusion:

The Non-Marital Trust contained provisions that give the trustee absolute discretion as to how much it should pay for the care and support of Arlene and the descendants. The Trust Agreement also provided the trustee with "the power of invasion" of the principal when it determined, in its sole judgment, that the aggregate of the income and principal payable under the trusts and the funds available from all other sources were insufficient to provide adequately for the Grantor, his wife, or his children's care, support, maintenance, education, comfort and medical or other attention or emergency. Although the Trust Agreement in this case used the term "absolute discretion" and "sole discretion" regarding the trustees' discretionary powers to distribute income and principal, it also provided objective external standards with which to judge the reasonableness of the trustee's actions. Specifically, the Trust Agreement authorized the trustee to make distributions of income from the Non-Marital Trust to Arlene as it "deems advisable to provide for her care, support, maintenance and welfare." It further allowed the trustee to distribute income not paid to Arlene to Donald's descendants as it "deems advisable to provide for their respective care, support, maintenance, education and welfare." Additionally, the trustee was authorized to distribute principal to Arlene or to Donald's children if it determined that other funds were insufficient to provide adequately for their care, support, maintenance, education, comfort and medical or other attention or emergency. With these support standards, the reasonableness of the trustee's judgment can be tested, and a court will control the trustee if it acts beyond the bounds of reasonable judgment. The language used in and with these support standards further defined the trustee’s discretionary distributory powers. Thus, under these terms and purposes of the Trust Agreement, Trustee had the discretion to distribute to Arlene income that was reasonably necessary to support her standard of living. If any income remained after distributions to Arlene, Trustee had discretion to distribute income to Terrance and Gerald. In exercising its discretionary distribution powers, Trustee could, but was not required to, consider the beneficiaries' other resources.