A Florida probate court and the appellate court have dealt with a number of problems regarding the administration of a trust managed by JP Morgan Chase. The case has been extensively litigated, and the appellate court has recently issued its third opinion on the matter, in the case of Siegel v. Novak (10/19/11 opinion), (4th DCA 2011). The facts of the case, according to the appellate court, included the following.
The settlor of the trust, Dorothy H. Rautbord, established a trust to benefit her for her life, with the remainder to be distributed to her children who survived her, including her sons. The trust permitted the trustee to pay from income and principal, so much “as the Trustee, in its sole discretion, shall deem appropriate or advisable for the support, maintenance, health, comfort or general welfare of the Settlor [Rautbord].”
The trust reserved for Ms. Rautbord the power to amend, modify, or revoke the trust, and excluded a power of attorney holder from exercising these powers.
JP Morgan Chase Bank was the trustee. After Ms. Rautbord became incapacitated, the holder of the power of attorney made large withdrawals from the principal of the trust by signing “revocation” letters, which the trustee honored. The trustee issued checks for many gifts and also spent “considerable” amounts for Ms. Rautbord’s general welfare.
The woman holding a power of attorney used the power of attorney to make gifts from the trust to dozens of people, including the JP Morgan employee in charge of administering the trust.
The settlor passed away. The remaindermen of the trust (those who were to receive what was left in the trust after the death of the settlor), sued because of the gifts and other amounts of alleged excessive distributions.
This decision dealt primarily with the standing of the remainder beneficiaries to challenge the distributions that were made during the life of the settlor. The court ruled that, under New York law, the remainder beneficiaries had standing to pursue their case. Rather than stopping at the standing issue, however, the court made a number of other rulings that are important for trustees administering trusts, especially when the trustee is faced with demands from another person holding a power of attorney.
On the gifting issue, the Court dealt directly with the inconsistencies between the language of the trust instrument and the power of attorney.
The trial court found that the trustee had the power to pay gifts from the trust, because the power of attorney contained a specific power of the attorney-in-fact to make gifts. Because the gifts were within that broad power, the trustee acted appropriately in making expenditures for such gifts as requested or directed by Novak. The gifts were part of a long history of generosity on behalf of the settlor, and they were “appropriate or advisable for the support, maintenance, health, comfort, or general welfare of Ms. Rautbord.” The court was incorrect in its interpretation of the trust instrument.
The trust agreement gives no power to the trustee to make gifts. The trustee does have the power to invade the principal for the welfare of the settlor. Specifically, the trustee had the power to disburse income and principal “for the support, maintenance, health, comfort, or general welfare of the Settlor.” The power of attorney, on the other hand, gives the attorney the power to gift as follows:
To make any gift, either outright or in trust, to any individual (including my Attorney-in-Fact) or any charitable organization,provided that any such gift either (i) shall be reasonably consistent with any pattern of my giving or with my estate plan or (ii) shall not exceed the annual exclusion available from time to time for federal gift tax purposes.(Emphasis added).
Significantly, the power of attorney also prohibited the attorney-in-fact from invading the principal of the trust by stating that the attorney in fact was not granted the power “[t]o amend, modify or revoke, in whole or in part, or withdraw any of the principal of, any trust over which I have reserved or have been granted such power .…”. The trust agreement specifically provided that the power of amendment, modification, and revocation were personal to the settlor and could not b e exercised by her attorney-in-fact. Thus, the power of attorney specifically prohibited the attorney-in-fact from exercising the power Mrs. Rautbord reserved to herself to revoke the trust. The Siegels claim that the attorney-in-fact attempted to do just that by signing letters of partial revocation to the Trustee to withdraw principal. The trial court’s ruling on standing prevented this issue from being litigated.
Despite the lack of power of the trustee to make gifts, the trustee made gifts and permitted Novak to withdraw principal to pay other gifts. The trustee had no authority to make gifts itself. We can find no legal support which holds that gifts to others can constitute payments for the “comfort or general welfare” of the beneficiary of a trust. Nevertheless, such a finding must be based upon a factual record, which the trial court did not have in concluding otherwise.
On the issue of the alleged excessive nature of the distributions that were made, including “lavish” birthday parties, airline tickets for friends, and similar items, the Court ruled as follows.
The trust instrument gives the trustee authority to “pay to or apply for the benefit of the Settlor, at any time or from time to time, so much or all of the net income and principal thereof as the trustee, in its sole discretion, shall deem appropriate or advisable for the support, maintenance, health, comfort or general welfare of the Settlor.” Under New York law, even though the trustee has th e sole discretion to determine the appropriateness of expenditures, it does not foreclose all inquiry by a court of the proper use of such discretion. See In re Lyons’ Estate, 13 Misc.2d 287, 176 N.Y.S.2d 769 (N.Y. Sur. 1958). “[T]he court has the responsibility to ensure that the trustees do not abuse their discretion. Accordingly, the court has the authority to correct abuses in the exercise of absolute discretion that are arbitrary or the result of bad faith.” In re Goodman, 7 Misc.3d 893, 901, 790 N.Y.S.2d 837 (N.Y. Sur. 2005). Where distributions fall within a class of expenditures authorized by the trust, a trustee must still act reasonably and with good faith in carrying out the terms of the trust.
Lesson Learned: When the trustee of a trust makes gifts to persons other than the remainder beneficiaries of the trust, don’t be surprised when those remainder beneficiaries challenge such gifts and sue the trustee.