If you are a trustee or represent a trustee in a trust administration, then it is important to determine the qualified beneficiaries and the trustee’s duties to qualified beneficiaries. A recent case illustrates the importance of that determination when a trust is being terminated, modified or reformed.
In Hadassah v. Melcer, Sylvia Gelt created a trust in 1989. Upon her death, the trust created a Credit Shelter Trust (the “Trust”) which benefited her husband during his life and then, at his death, her 3 daughters. Sylvia died first and her husband died in 2016. The Trust provided that, upon a daughter’s death, the remaining trust assets of the deceased daughter are held for the other daughters and then, upon the last daughter to die, certain charities are beneficiaries.
The trustee of the Trust wanted to resign and, in the court proceeding, gave notice to the daughters AND the charities. The daughters filed a summary judgement arguing that the charities were NOT qualified beneficiaries and thus, not required to receive notice as a qualified beneficiary under the Trust Code.
The Trust Code provides that a charity has the rights of a qualified beneficiaryif the charity is (1) a distributee or permissible distributee of trust income or principal; (2) would be a distributee or permissible distributee of trust income or principal upon the termination of the interests of other distributees or permissible distributees then receiving or eligible to receive distributions; or (3) would be a distributee or permissible distributee of trust income or principal if the trust terminated on that date.
The daughters argued that, under the terms of the Trust, at one of the daughter’s deaths, the assets are distributed to the trusts for the other daughters. Thus, when the first daughter dies, the charities are not entitled to distributions and thus, not qualified beneficiaries AT THE TIME of the first daughter’s death. The lower court agreed with the daughters.
The appellate court determined the lower court’s interpretation of the statute was “contrary to the plain language of the statute” as the statute contemplates the “simultaneous termination of the interests of the distributees”, not the termination of only one of the distributee’s interest.
Upon the termination of the last to die of the daughters, the charities ARE beneficiaries. Under the clear reading of the statute, the charities are qualified beneficiaries because the charity WOULD be a distributee upon termination of all of the interests of the other distributees.
ADVICE: As soon as the trustee is appointed as trustee, the trustee must determine the qualified beneficiaries so those beneficiaries are properly informed. If the trustee does not provide notice and accountings (unless waived) to the qualified beneficiaries, then an action can be brought against the trustee.
WORD OF THE WEEK: Distributee means a beneficiary who is currently entitled to receive a distribution. For example, “all income to my spouse” means the spouse is a distributee. A permissible distributee means a beneficiary who is currently eligible to receive a distribution. For example “income, as my Trustee determines, to my spouse” means the spouse is a permissable distributee.
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