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Beneficiary Challenges Distribution of Trust Assets in Tennessee Estate Case
Posted by Martin Heller Potempa & Sheppard, PLLC on February 27, 2018
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Establishing a trust may be advantageous for Tennessee estate planning purposes in some situations. However, it is important to understand the limitations of revocable living trusts. In a February 13, 2018 case, the Tennessee Court of Appeals considered a challenge filed by the beneficiary of a living trust against a trustee for exceeding her authority under the terms of the trust agreement.
The defendant in the case and her husband had executed a removable living trust agreement. They conveyed approximately 200 acres of real property to the trust. Upon the death of the husband, the trust was the sole residual beneficiary of his will. The defendant, as the successor trustee, distributed all of the real estate in the trust to herself by way of a quitclaim deed. She then terminated the trust. Her son, who was a beneficiary of the trust, filed an action alleging that she had exceeded her authority under the trust. He requested an accounting of the trust’s assets and sought the return of any wrongfully distributed assets.
In Tennessee, trusts are interpreted by looking at the language, context, purpose, and scope of the trust agreement to determine the grantor’s intent. In addition, a trust must be interpreted in order not to frustrate the intent of the grantor.
In the case, the trust agreement provided that upon the death of one of the spouses, the surviving spouse will be designated as the trustee and shall divide the trust estate of the deceased spouse into two separate trusts. Trust A would hold the deceased spouse’s community and separate property for the purposes of the marital deduction, and the balance of his separate and joint property would be placed in Trust B. The trust agreement provided an irrevocable provision, which stated that only the surviving spouse would have the power to amend, revoke, or terminate Trust A, while Trust B may not be altered, revoked, or terminated. The trust agreement did allow the spouses to withdraw their separate property and share of the joint property at any time, even after the death of one. The principal, however, could only be invaded in the event of the surviving spouse’s illness or need of funds for her reasonable health, support, and maintenance.
The appeals court noted that the defendant did not allege that she had an illness or that her income was insufficient to provide for her well-being. The defendant argued that since she had the authority to draw down the entire amount of principal over time, she could, therefore, do it all at once. The court disagreed, finding that the agreement expressly precluded her from distributing more than 5% or $5,000 of the value per year. Furthermore, the court held that no other provision in the trust allowed the trustee to distribute the entire principal of the trust to herself at once. As a result, the court ruled in favor of the plaintiffs and voided the quitclaim deed.
The Nashville estate planning attorneys at Martin Heller Potempa & Sheppard can help you prepare for the settlement of your property and assets after you pass away. If you need guidance regarding an estate issue or family law matter, contact our office at (615) 800-7096 or online to schedule a personalized consultation with one of our trusts and estates attorneys.
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