Nicholas Holland and Joseph J. Viviano, of McDermott Will, have published their article, Trustees of Revocable Trusts May Owe Duties to Contingent Beneficiaries. Their article concludes with the following lessons:
• Trustees of revocable trusts should exercise caution before following an instruction given by a settlor or the settlor’s agent that may be contrary to the terms of the trust. If the settlor’s capacity is diminished or otherwise questionable, the trustee should review applicable law to determine the rights of the contingent remainder beneficiaries before following the instruction. A trust instrument may eliminate any rights the contingent remainder beneficiaries may have upon the settlor’s incapacity. Therefore, if the default provisions of applicable law grant rights to the contingent remainder beneficiaries upon the settlor’s incapacity, the trustee should determine whether the trust instrument eliminates such rights. Lastly, if such rights are not eliminated, the trustee should obtain a release from the contingent remainder beneficiaries or refuse to follow the instruction.
• Conversely, a trustee of a foreign revocable trust owes enforceable obligations to the objects (beneficiaries) of the trust forthwith regardless of the settlor’s capacity. Trustees of even revocable trusts must have an irreducible core of discretionary obligations, and while they should consider the wishes of the settlor, they cannot merely follow her instructions. In the absence of these obligations enforceable by the beneficiaries (except Cayman STAR trusts) there is no trust, and there may be innumerable complications arising from whatever form of legal relationship the court will impose on the structure.
Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.