Case Law Update: Trustee’s Duties
After payment of federal estate taxes, a trust that was included in the life-income-beneficiary’s gross estate held approximately $6.5 million dollars in assets, one-half of which was liquid. The remainder beneficiaries demanded a distribution of $2,000,000, and the trustees offered $1,000,000 because they estimated the estate could be liable for a further $2,000,000 in federal estate taxes. Litigation followed and ten months after the original demand, the trial court ordered a distribution of $1,500,000.
The court held that the trustees had breached their duty to administer the trust according to its terms by failing to make a timely distribution. The court ordered the trustees to pay damages to the beneficiaries based on the profits the beneficiaries would have earned during the period from their first request to the winding up of the trust three years later on investments they testified they would have made.
In In re Eiteljorg, 951 N.E.2d 565 (Ind. Ct. App. 2011), the intermediate appellate court, over a dissent, affirmed the finding of a breach of duty, holding that “when there is no question that a substantial portion of a trust corpus is ripe for distribution,” a failure to distribute is a breach of trust. However, the court reversed the finding on damages, holding that the beneficiaries were entitled only to interest on the cash portion of the court ordered distribution for the period from their demand to actual payment (minus interest or income accrued during that period). The court reasoned that an award of lost profits is appropriate only where the trustee has failed to make trust property productive.
Special thanks to William P. LaPiana (Rita and Joseph Solomon Professor of Wills, Trusts,and Estates, New York Law School) for sending me this case law update.