In a March 2020 opinion, In Re Estate of Bryant, a trust dispute between three siblings, the Texas appeals court cautioned that a technically permissible transaction may still be a breach of fiduciary duty, if it is not in a beneficiary’s best interest and places the trustee’s self-interest over that of the beneficiaries.
The Facts of In Re Estate of Bryant
Bill, Leslie, and Jane are the three children of Harvey and Joanne Bryant. Joanne died in 2012. Harvey died in 2014. Harvey’s will was admitted to probate, and Bill appointed the independent executor of Harvey’s Texas estate.
Bill also became the trustee of three family trusts that Harvey and Joanne had created during their lifetimes – the Irrevocable trust, the Children’s Trust, and the Family Trust. Under the terms of the trusts, assets were to be distributed equally between the siblings, with the partial exception of the Family Trust assets.
Under the Family Trust, Bill and Leslie were to each receive one million dollars, after which any remaining assets would be distributed equally among all three children. This provision was known as the “Advancement Clause” and was put in the trust because of gifts totaling about one million dollars made to Jane during the lifetime of the settlors.
After Harvey died, Bill received three life insurance checks as follows:
- $500,041 payable to the Children’s Trust;
- Two checks totaling $510,938.82 payable to the Family Trust
The proceeds of all of the checks ended up in the Family Trust. Then, Bill, as trustee, distributed $500,000 from the Family Trust to himself, and $500,000 from the Family Trust to Leslie. Jane received nothing.
Jane sued Bill, alleging breaches of fiduciary duty and seeking to remove Bill as the executor of Harvey’s estate, trustee of the Family Trust, and co-trustee of Jane’s trust.
The Texas probate court determined, among other issues, that Bill misapplied life insurance proceeds to the Family Trust to the detriment of Jane and breached his fiduciary duties and removed Bill as the co-trustee of Jane’s trust.
What Duty Does a Texas Trustee Owe To A Trust Beneficiary?
As the trustee of the three trusts, Bill had a fiduciary duty to Jane, a trust beneficiary. As summarized by the Texas appeals court:
A fiduciary has the duty to avoid self-dealing, bad faith, intentional adverse acts, and reckless indifference about the beneficiary and her best interest, and cannot be relieved of liability for such conduct, even in cases where a trust instrument includes exculpatory language. See InterFirst Bank Dallas, N.A. v. Risser, 739 S.W.2d 882, 888-89 (Tex. App.—Texarkana 1987, no writ) (citing RESTATEMENT (SECOND) OF TRUSTS § 222 (1959)). Moreover, “[a] trustee commits breach of trust not only where he violates a duty in bad faith, or intentionally although in good faith, or negligently[,] but also where he violates a duty because of a mistake.” Ertel v. O’Brien, 852 S.W.2d 17, 21 (Tex. App.—Waco 1993, writ denied).
Here, Bill distributed $500,000 each to himself and to Leslie from life insurance proceeds in the Family Trust. The trial court found that Bill acted with reckless indifference in distributing the insurance proceeds to Leslie and himself through the Family Trust, rather than distributing them under the terms of the Children’s Trust and Irrevocable Trust (which would have required an equal distribution between the siblings). In its conclusions of law, the trial court determined that this action by Bill constituted a breach of his fiduciary duties as trustee to the Children’s Trust and Irrevocable Trust.
Can a Trustee Breach A Fiduciary Duty If The Trust Technically Allows The Conduct?
Yes. One of Bill’s arguments was that his conduct could not have constituted a breach because the express terms of the Children’s Trust permit the trustee to transfer funds from one trust to another. The Children’s Trust stated:
(a) Commingling Trusts: The Trustee may, in its sole discretion, commingle all or any part of the assets of the multiple Trusts created by this Trust Agreement and hold such assets as one fund with each separate Trust having proportionate undivided interests therein.
The court found that this provision does not erase Bill’s fiduciary duty to Jane, stating:
Even if we were to assume that this provision authorized Bill to transfer funds from the Children’s Trust or Irrevocable Trust to the Family Trust, the provision does not relieve Bill of his fiduciary duty to Jane. As a fiduciary, Bill was obligated to act with integrity and fidelity, and to deal fairly and in good faith. See Kinzbach Tool Co. v. Corbett-Wallace Corp., 138 Tex. 565, 160 S.W.2d 509, 512 (Tex. 1942). Even a transaction that is legally permissible can give rise to a breach of fiduciary claim, as such a transaction may not be in the beneficiary’s best interest. As Justice Cardozo put it, “A trustee is held to something stricter than the morals of the market place [sic].” Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545, 546 (N.Y. 1928). Therefore, we overrule this point.
By depositing the funds into the Family Trust, where Jane would not receive the money, the Texas appeals court agreed with the probate court that Bill did not administer the trusts with the good faith and care required of him as a fiduciary and committed a breach of his fiduciary duty. Instead, Bill engaged in transaction that benefited himself at Jane’s expense. Even though legally permissible, the act gave rise to the breach of fiduciary claim under Texas trust law.
Bill was ultimately removed as trustee of Jane’s trust under the “other cause” provision of the removal statute, which we have written about here.