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An Indiana Supreme Court case provides information about a trustee’s fiduciary duty in the context of a revocable trust.
The case is Fulp v. Gilliland decided by the Court on November 22, 2013.
The facts were that an individual “Grantor” created a revocable trust for estate planning purposes. She named herself as trustee and one of her three children as successor trustee. The revocable trust could be revoked or amended by the Grantor at any time, and during the life of the Grantor, the income and principal of the trust were to be used solely for the benefit of the Grantor. At the Grantor’s death, the assets remaining in the revocable trust would be distributed in the manner directed by Grantor under the terms of the trust, which essentially was to her three children, in equal shares. The use of a revocable trust is a common estate planning technique.
Grantor had a farm that she transferred to the revocable trust. As trustee of the revocable trust, Grantor sold the farm to one of her children at a bargain price. Another of Grantor’s children objected to the sale of the farm at the bargain price and contended that the sale breached the Grantor’s fiduciary duty, in the Grantor’s capacity as trustee of the revocable trust. The objecting child contended that the fiduciary duty ran to the Grantor’s children as the contingent remainderman beneficiaries of the revocable trust, which is to say, the persons and who would receive the assets of the revocable trust at the death of the Grantor. Assuming the Grantor did not further revise her revocable trust during the Grantor’s life.
The Indiana Supreme Court held that because the Grantor retained the right to revoke or amend the revocable trust at any time, and because Indiana has a statute that states that while a grantor of a revocable trust is living and has the capacity to revoke a revocable trust, the duties of the trustee are owed exclusively to the Grantor of the revocable trust, the sale of the farm by the Grantor, as trustee of the revocable trust, to one of Grantor’s children at a bargain sale price was not a breach of fiduciary duty.
If the Grantor were to lose the capacity to amend or revoke the revocable trust,
and the sale were to be made by a successor trustee, the outcome would almost certainly have been different in the absence of a prior written instruction from the Grantor to make the sale at a bargain price.
Likewise, if the revocable trust had been created as an irrevocable trust instead of as a revocable trust, the outcome would also likely have been different.
As a general rule, a trustee has a duty to deal fairly and impartially and take into account the interests of all beneficiaries of a trust, and sale of assets of a trust at a purchase price less than fair market value in the absence of a specific authorization or direction to do so under the terms of the trust agreement will almost certainly constitute a breach of fiduciary duty by the trustee.
If you are the trustee of a trust, you should have a good understanding of the nature and extent of your duties as trustee. If you are a beneficiary or contingent beneficiary of a trust, you should understand your rights as a beneficiary as well as the duties of the trustee.
The duties of the trustee and the rights of the beneficiaries of the trust must be taken into account in designing the terms of the trust agreement creating the trust.