Wednesday, August 10, 2011

Family Trust

Estate of Nancy Alden v. Alden, 2011 VT 64

Oh what a tangled web we weave for the SCOV to unravel.  Today’s case is a fascinating take on the old story of kids versus second mom.  As with most variations on this theme, this case plays out against the trust dad created either to ensure a fair and equitable distribution of his wealth or to have a few post-mortem chuckles at the expense of his family. 

Dad, William Alden, had three children with his first wife.  Todd and Julia are the only two who make an appearance in this case and we can only speculate what kept child number three from making an appearance in this litigation

In the 1970s Dad marries second mom, and they have two kids (Cornelia and Seth).  Dad creates a trust to benefit second mom and the five kids during her lifetime with the residual to the kids. 

Dad departs this mortal coil in 1980.  Todd is 16.  Julia is 17.  Second mom is 36.  Cornelia is 6, and Seth is almost 3.  By the terms of the trust, second mom, the State Street Bank, and Greaves are named co-trustees.  The purpose of the trust is for the “comfort, support, education and happiness” of second mom and the five kids during second mom’s lifetime.  Second mom can participate in any trust decision except a vote to pay money to her.  Kids are entitled to an annual accounting from the trust for any distributions over $100.  It is unclear whether the kids started receiving these right away, but by 1993, the kids had begun receiving such reports on an annual basis.

Included in the trust is a 1/3 interest in 65 acres of land in Williamstown, Massachusetts.  In 1982, second mom purchases the other 2/3 interest in her individual capacity and holds it separate from the trust.  As early as 1993, second mom began making proposals to the trustees and beneficiaries for the trust to transfer the remaining interest in the parcel to her.

For the next seventeen years, all is quiet on the trust front.  In 1999, Greaves announces his retirement from the trust, and the need for a successor co-trustee arises.  Second mom’s attorneys propose a friend of theirs, a CPA named Smith.  The family agrees, except for Todd who dissents because he thinks Smith is in second mom’s pocket.  The issue goes to court in Massachusetts and Smith is appointed.

At the same time, second mom’s attorneys discover an error in the trust that through a choice of law gives second mom an unrestricted power of appointment.  Second mom does not want this power because it had tax implications.  She seeks to reform the will and remove the issue.  The Massachusetts court denies the request.  Second mom then asks the trust to pay her for a life insurance policy to cover the tax liability, which Smith and State Street Bank approve.  Payments begin shortly thereafter.

In 2001, second mom asks the other trustees to give her the 1/3 interest in the Williamstown property along with $300,000 to develop it.  The trustees grant the transfer, but they deny the request for capital. 

In 2006, second mom files the present action to have Smith and the State Street Bank removed, making her sole trustee.  Todd and Julia oppose and file counterclaims in 2007 alleging breach of fiduciary duty and fraudulent transfers by second mom.  They amended it in 2008 to include fraud.  In return, second mom filed a request for the trust to be terminated with 1/3 going to her and 2/3 to be divided up evenly amongst the kids. 

The trial court accepted this last request and broke up the trust accordingly.  In 2009, second mom passed away.  In her place Seth and Cornelia have stepped up as executors of her estate to continue second mom’s defense.  With much of the factual issues resolved, the parties then filed motions for summary judgment.  The trial court ruled in favor of second mom’s estate.  Todd and Julia appealed.

At the SCOV, Todd and Julia’s arguments are as follows:

1.         It was a breach of second mom’s fiduciary duty in 1982 for her to engage in self-dealing and arrange for the purchase of the remaining interests in the Williamstown property for herself.

2.         It was a breach of fiduciary duty for mom and co-trustees to transfer the 1/3 interest in the property to second mom.

3.         It was a breach of fiduciary duty to pay second mom for her life insurance policy.

4.         It was fraud to promote Smith as a trustee because he was not independent. 

The SCOV starts its analysis of these claims with a brief discussion about the basics of a trustee’s fiduciary duties (loyalty, disclosure, impartiality, and prudence to the beneficiaries) and the potential impact the new Vermont Trust Code might have on the outcome, but the actual analysis is far more prosaic. 

Todd and Julia’s first claim fails because it was not timely.  Under the general civil law, you have six years to bring a claim.  Todd and Julia knew about second mom’s acquisition of the property as early as 1982, and certainly no later than 1993.  Their issue with acquisitions is too late.  They needed to raise it in the 1990s.  Sitting on the claim for 25 years is too long, and so the SCOV dismisses this without even touching upon the possible merits.

As to Todd and Julia’s second and third claims, the SCOV is equally dismissive.  Like the first argument, these challenges are also bared by the statute of limitations.  But practitioners take note: because these claims centered on distributions from the trust an even shorter timeframe for objecting was in place—sixty days from the annual report.  Todd and Julia were obliged to file their objections and complaints each year these payments were made and within sixty days of receiving the annual report.  Because Todd and Julia waited well beyond this period, their claims are barred, even though they might have fit under the general six year statute used above.  This limitation has since been codified in the new Vermont Trust Code and is worth reviewing if you practice in this area.

That leaves the claim of fraud stemming from Smith’s appointment.  This time, the claim is not time barred.  But it does not stand up to much scrutiny.  The SCOV finds that there was neither fraudulent misrepresentation in Smith’s appointment nor harm from it.  Smith’s connection to second mom’s attorney was disclosed to the family prior to his appointment.  There was no evidence to show that Smith lacked independence or failed to uphold the tasks of his office.  With such openness and no harm resulting from Smith’s appointment, the SCOV has little choice but to reject Defendants’ theory.

That leaves Todd and Julia with no other claims, a fully distributed trust, and an ever dwindling cast of main characters.  Case is affirmed and dismissed. 

In related news, though, the William Alden family reunion for 2011 has been postponed indefinitely.  

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