ESTATE PLANNING NEWSLETTER – BE CAREFUL WHO YOU MAKE THE TRUSTEE

In the case of Reed vs. Reed, the Court had to interpret and construe a Trust Agreement to determine the extent of the power of the Trustee,  who was the Decedent’s surviving spouse. Husband died and in his Will he designated his wife as Executor. He devised the residue of his  estate to the Trustee of a trust that he and his wife had created together. Husband and wife were the Co-Trustees. After husband died, wife  became the sole Trustee. In regard to settling the estate, the wife, acting in her capacity as Executor, transferred 76 acres of real estate to the  trust. Then a week later, wife conveyed all of the real estate to herself individually. Then she terminated the trust.

Mrs. Reed’s son brought an action several months later alleging that the wife “wrongfully, and without authority, conveyed to herself all of  the real estate in the trust, worth hundreds of thousands of dollars.” The wife responded taking the position that the trust agreement  provided her with the authority to convey the deed to herself. The trial court ruled that the conveyance by wife to herself was executed  without authority by her as Trustee under the terms of the trust and therefore was void and should be set aside. The relevant trust provisions  were that upon the death of the first spouse, the surviving spouse would be designated as Trustee and was required to divide the trust estate  of the deceased spouse into two separate shares being designated as Trust A and Trust B. Trust B was to receive an amount equal to the  Exemption Equivalent of the Unified Credit under the Federal Estate Tax, (which in 2001 when husband died was $675,000.00). Wife  allocated all of the trust assets into Trust B. The Trust instrument provided that Trust B was not to be altered, revoked, or terminated.

The court went through an analysis of several portions of the Trust which wife argued gave her the authority to make the distribution of the  real estate. However, the court found that there were no provisions in the Trust giving the Trustee the authority to distribute the entire  principal of the Trust to wife all at once. Therefore, the Court of Appeals ruled that the conveyance by wife to herself was void and was to be  set aside.

My Recommendation: Trustee selection is important. Many times, spouses will name the surviving spouse as Trustee. Many times that  arrangement is satisfactory, but any time someone is the Trustee for himself or herself, a clear inherent conflict of interest exists.

Yours very truly,
RAINEY, KIZER, REVIERE & BELL, P.L.C.
William C. Bell, Jr., Attorney at Law