AUGUST 24, 2015 VOLUME 22 NUMBER 31
One of the best things about establishing a living trust is that you are helping to minimize the likelihood that any court will ever be involved in the administration of your estate. That can save costs, avoid conflicts and give you peace of mind. But sometimes courts do get involved, even when that’s not what you wanted. Then you might face a question that, frankly, even lawyers don’t think about enough: in what court does one sue a trust (or its trustee)?
If you have established a trust, or are a trustee, it’s likely that the trust document itself tells you that the law of a particular state applies. But that’s a different question. Just because a trust is governed by the law of, say, Arizona — it does not necessarily follow that the Arizona courts are the ones to resolve a given trust dispute.
That dichotomy was on full display in a recent Arizona Court of Appeals case, and its outcome might surprise you (and, not incidentally, a fair number of lawyers). The dispute started as a simple lawsuit against an individual, and ended up deciding an important trust principle.
Richard Henderson (not his real name) established three charitable remainder trusts between 1990 and 1994. The trusts were, for our purposes, similar. Each involved Richard putting a fixed dollar amount into a trust that named a charity as beneficiary, but each provided that Richard would receive a percentage of the trust’s value each year until his death.
Why did Richard establish these trusts? The record is not clear, but we can assume that at least one purpose was to benefit the charitable beneficiaries, and to receive an income tax deduction for a portion of the amount he put into trust each year.
But we can figure out a number of the elements of Richard’s charitable remainder trusts: he was the trustee of each trust at the time the underlying litigation began, and he had control over where the annual payments were sent. He had no ability to reach the principal of his own trusts — they had to be irrevocable under federal tax law. But he still received an annual benefit from each trust.
Then Richard got into financial trouble. In 2014, Wells Fargo Bank secured a judgment against Richard for $2.5 million, and began to collect some of that judgment from him and from his revocable living trust. But it couldn’t reach the charitable trusts, since Richard himself could not reach the principal of those accounts. Wells Fargo then initiated proceedings to collect enough information so that it could seize the annual distributions due to Richard from the trusts — before they ever got to Richard.
Richard responded by resigning as trustee. He traveled to Florida (this turns out to be a key part of the story) and met with a representative of a Bahamian company named International Benefits Management Corporation (IBMC). While in Florida, Richard exercised his authority under the trust to name his own successor, and he turned over all the books and records to IBMC.
Under the terms of the trust, IBMC now paid most of Richard’s living expenses directly, and it even paid his ex-wife the spousal maintenance he owed her. Only after most of his bills were paid did IBMC send any money to Richard.
Wells Fargo Bank cried foul, and sued Richard and IBMC. Once it had been served with the complaint, however, IBMC objected that it had no business in Arizona. It did not have offices in the state, it had not sent representatives to meet with Richard, and it did no business directly in Arizona. IBMC’s only connection to Arizona was that the beneficiary of three trusts it administered lived in the state, and it sent checks to him, his ex-wife, the Maricopa County Assessor (for Richard’s property tax bills) and a handful of other Arizona vendors. IBMC moved for dismissal of the complaint against it.
The Arizona probate judge overruled IBMC’s objections, and found that it had conducted business in Arizona. The Court of Appeals, however, reversed that holding and ordered dismissal of the complaint against IBMC.
In its opinion, the court of appeals explained that IBMC did not administer the trusts in Arizona. It did not have offices in the state, and it did not agree to jurisdiction by taking over a trust that had been administered in Arizona prior to its acceptance. By traveling to Florida, turning over all the books and records and naming IBMC as successor, Richard had managed to involve the new trustee without its ever acceding to Arizona’s jurisdiction. Hoag, et al v. Hon. French/Wells, August 18, 2015.
Would the answer be different if Richard’s trust documents declared that they should be interpreted pursuant to Arizona law? Actually, they might have said just that — such language would be common in trusts written in Arizona by an Arizona attorney, and the court opinion is silent about whether there is a similar provision in any or all of the trusts Richard established. But the language of the opinion makes clear that the question is not about Richard’s behavior but the personal jurisdiction over IBMC.
The court would likely have reached a different conclusion if the trusts had expressly indicated that any trustee was subject to the jurisdiction of Arizona courts. Language like that would be uncommon, but not rare. Arizona law permits the settlor of a trust to direct that the trustee will be subject to Arizona courts, but Richard’s trusts did not.
What does this mean for more common circumstances, including those where a trust beneficiary wants to sue the trustee? In general, this opinion stands for the proposition that any lawsuit against a trustee probably needs to be brought in the state (or country) where the trustee resides and/or administers the trust. That will usually be true regardless of where the beneficiary lives or where the trust was written. Of course, slight changes in facts may lead to major changes in outcome, so anyone facing this issue should consult competent legal counsel — but don’t be too surprised if the legal result is not the intuitive one.