Avoiding Liability in Trust Terminations Following Estate of Worrall

The Kentucky Supreme Court’s recent decision in Estate of Worrall v. J.P Morgan Bank, N.A. demonstrates the dangers to a trustee seeking a release from liability when distributing trust assets upon termination without following the statutory requirements.

In Estate of Worrall, a corporate trustee sought to liquidate the trust assets of a terminating trust and conditioned the subsequent distribution of the assets on the beneficiary signing a release and indemnification agreement. The beneficiary refused to sign and objected to the liquidation of trust assets because the trust’s terms called for an in-kind distribution. The trustee filed a motion in district court to order the liquidation and release over the beneficiary’s objection, which the court granted. On discretionary review, the Supreme Court not only invalidated the release, but also held that the trustee breached its fiduciary duties by not distributing the assets in kind as required by the trust. As a result, the trustee faces a variety of damages despite the court order.

A trustee can ensure insulation from liability for its administration of the trust by following the procedures in KRS 386B.8-180 when distributing assets upon trust termination. This procedure requires the trustee to provide sufficient information and notice of the ability to object to the beneficiary. By doing so, the trustee can obtain a release from liability either by (i) distributing the assets after 45 days if the beneficiaries fail to object or (ii) resolving any objection to the distribution through an agreement with the beneficiaries or court intervention. But if, as in Estate of Worrall, the trustee fails to provide the necessary information and notice, the statute of limitations never starts running and the trustee cannot then seek a court order to distribute the assets.

The remedies recommended by the court make clear that requiring a release in exchange for forgoing a trust accounting, which is prohibited by KRS 386B.8-180(5), will not be tolerated. At a minimum, the court urged the district court on remand to (i) require a trust accounting for the five years prior to the decedent’s death and the years following, (ii) consider monetary damages for capital gains paid upon liquidation; (iii) consider denial and reimbursement of the bank’s trustee’s and attorney’s fees for the years of litigation; (iv) consider reimbursement of any commissions received by the bank from the liquidation; and (v) consider payment of the beneficiary’s attorney’s fees. In addition, the beneficiary is entitled to reimbursement for any loss in the value of investments to which he was wrongfully deprived. This could require the trustee to pay the difference between the investment’s current value and the value at the time of liquidation.

There was a bit of good news for trustees in the Estate of Worrall opinion. In a footnote, the court noted that if a trustee provides five years of trust statements, it likely satisfies the accounting requirement in KRS 386B.8-180. While providing five years of statements is the common practice, it was not previously known whether a court would find that five years of statements was equivalent to “a trust accounting for the prior five years.” In Estate of Worrall, the trustee simply listed the name and quantity of securities held in the trust and provided that trust statements were available upon request. The court held that this limited information failed to satisfy KRS 386B.8-180(1)(a)’s requirement to provide “the fair market value of the net assets to be distributed, a trust accounting for the prior five years and an estimate for any items reasonably anticipated but not yet received or disbursed, the amount of any fees, including trustee fees, remaining to be paid, and notice that the trust is terminating.” If instead, the trustee had provided five years of trust statements “detailing assets held, bought and sold, and itemizations of receipts and disbursements,” it likely would have been enough.

Please do not hesitate to contact a Dinsmore attorney to assist in complying with the statutory procedures under KRS 386B.8-180 to ensure an effective and efficient distribution of trust assets upon trust termination.