Alden v. Aldem Lessons on Vermont Trust Code
| Jurisdiction | Vermont,United States |
| Citation | Vol. 2011 No. 06 |
| Publication year | 2011 |
Summer 2011-#7. Alden v. Aldem Lessons on Vermont Trust Code
Volume 37, No. 2
Summer 2011
To my knowledge. Estate of Nancy B. Alden v. Julia Dee and Todd Alden, et al.(fn1) Is the first case in which the superior court has ruled on trust administration issues following the adoption of the Vermont Trust Code (hereafter "VTC"). Five out of six issues concerning trust administration were decided on cross motions for summary judgment by a published decision on March 4, 2010. In late May 2010, a final count in the case was dismissed, and a notice of appeal on all summary judgment counts was filed on May 28, 2010. On July 8, 2011, a unanimous Supreme Court affirmed Judge Wesley's holdings in the superior court action,(fn2) essentially on the simple holding that all relevant causes of action were filed beyond the internal time period for bringing a claim in the trust agreement or beyond the statute of limitations set in the Vermont Trust Code.(fn3)
This article will focus primarily on Judge Wesley's decision because it contains the more interesting discussion of Vermont trust law. The article will conclude with a few summary points for consideration by the trust and estate bar.
Reduced to its simplest configuration, the Alden case involves allegations by two beneficiaries of the 1973 William C. AldenTrust (the "Trust") that Nancy B. Alden, wife of William Aldenand one of three co-trustees of the Trust, committed one or more breaches of her fiduciary responsibility as trustee.
The Trust at issue in the case was a revocable trust settled by Nancy Alden's deceased husband and funded by his pour-over will in 1982 or 1983. Although the 1973 Trust was drafted by a Massachusetts lawyer when William Aldenwas a resident of Williamstown, Massachusetts, Mr. Aldenmoved to a farm in southern Vermont during a short period. For some reason (perhaps to facilitate funding the Trust with Vermont real property), the Massachusetts attorney amended the terms of the Trust to provide that "the laws of the State of Vermont shall govern the interpretation of this instrument."
The Trust was a typical Massachusetts trust for a high-net-worth individual. William Aldenappointed his wife as a co-trustee, with his brother-in-law and an independent financial institution to act as the two other co-trustees. After William Alden's death, the terms of the trust specified that the trustees could make distributions to a group of beneficiaries (Nancy Alden and the five William Aldenchildren) "for their comfort, support, education, and happiness" [emphasis added].
Under longstanding Internal Revenue Service regulations, if a co-trustee is able to distribute principal of a trust to herself and such distribution is not restricted by an ascertainable standard based on health, education, maintenance, and support, the co-trustee/beneficiary is deemed to own the corpus of the trust for federal estate tax purposes unless one of the other co-trustees is a person with an adverse interest. To quote the Treasury Regulations, "[a] power to use property for the comfort, welfare or happiness of the holder of the power is not limited by the requisite standard."(fn4) The Trust at issue allowed Nancy Aldento distribute principal to herself for her "happiness," and no co-trustee had an adverse interest in the corpus of the Trust. As such, certain of Mrs. Alden's attorneys concluded that there was a substantial risk that the corpus of the Trust potentially could have been included in Nancy Alden's federal gross taxable estate at her death were Vermont law to be found to apply to this power.
The Massachusetts Supreme Judicial Court (the highest court in legal matters in the state of Massachusetts) has held that, when a beneficiary is also a trustee holding such a power as that created by the terms of the William AldenTrust, the trustee is bound by Massachusetts fiduciary law principles so as to restrict distributions to herself pursuant to an ascertainable standard based on health, education, maintenance, and support.(fn5) Expressed more directly, the Massachusetts Supreme Judicial Court saves Massachusetts trust scriveners from the IRS regulations by imposing an ascertainable standard on powers held by trustee/beneficiaries of trusts subject to its rules of construction.
TheVermontSupreme Court had not ruled on whether it would follow Massachusetts in so restricting the co-trustee/beneficiary under such trust arrangement by the time the 1973 AldenTrust was terminated in a separate action from that discussed here. The Vermont Supreme Court now is not likely to have to so rule after the adoption of the VTC because its savings clause (section 814(b)(1)) makes such a beneficiary trustee's power over a trust for her benefit subject to an "ascertainable standard," as a default rule.
Because she had been advised by her Massachusetts attorney on what Judge Wesley's decision termed the Estate Tax Problem and for other reasons, Nancy Aldenhired the Kenlan Schwiebert law firm to represent her with regard to her beneficial interest in the Trust and to advise her with regard to certain fiduciary issues. In the context of this representation, the financial institution that acted as a cotrustee and the brother-in-law/trustee decided:
* to increase trust distributions to Nancy Aldenfor her support;
* to initiate a court action to reform the Trust to eliminate the Estate Tax Problem;
* to distribute a one-third interest in land held by the Trust to Nancy because she owned the other two-thirds and could thus sell or develop the land and thereby better contribute to her own support; and
* to increase Trust distributions again so that Nancy Aldencould afford to make contributions to an Irrevocable Life Insurance Trust ("ILIT') to pay for premiums on a life insurance policy that could cover the potential federal estate tax costs of the Estate Tax Problem until the Trust was reformed.
Other than urging, as a beneficiary, that these distributions be made to her, Nancy Aldendid not participate in making any of these fiduciary decisions as a trustee of the Trust. These fiduciary decisions did not give rise to substantial litigation until the corporate fiduciary decided to resign and one of the complaint/child-beneficiaries decided not to consent to the trustee replacement. This lack of consent resulted in a court action in Vermont to release and replace the corporate fiduciary. Nancy Aldenmoved to Vermont in 2007, and so the Vermont courts took jurisdiction over the Trust.
After releasing the corporation fiduciary and the independent individual fiduciary (who had replaced the brother-in-law trustee), two of William Alden's children from a prior marriage filed a counter claim alleging that the above distributions to Nancy Aldenconstituted a breach of her fiduciary responsibility. Perhaps because the counter claimants had released the two independent trustees before filing their counter claims, the counter claim also alleged that Nancy Aldenhad fraudulently failed to disclose to the beneficiaries facts that could have led to the discovery of counter claims against these two independent trustees.
After extensive discovery, the parties filed cross motions for summary judgment, and Judge Wesle/s rulings on these motions comprise the bulk of his decision.
Additional facts will be discussed below, as relevant, and the entire case should be read to obtain the full flavor of the complex legal and fiduciary issues that may arise in such cases.(fn6) As an example of the complexity of the legal issues involved, the counter claim alleged that Nancy Alden's 1982 purchase of a two-thirds interest in land behind her personal residence represented a trust opportunity that she should have presented to the Trust for acquisition. The Court found this claim clearly beyond any statute of limitations, but we discuss this aspect of the case in detail because of the light it sheds on the application of the VTC to post-enactment allegations of breaches of the duties of loyalty and care.
The first issue confronting Judge Wesley in making his legal analysis on the cross motions for summary judgment was what statute of limitations applied. The court had essentially four options before it.
A. The sixty-day internal statute of limitations written into the actual trust instrument. As the court pointed out in its footnote 8, "[t]he trust requires that beneficiaries make any objections to trust...
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