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Beneficiary Suit Time-Barred by Effect of Trustee Notice
Posted in Estate Planning

Many states, including Kentucky, have adopted the Uniform Trust Code (“UTC”).  The UTC is a comprehensive statutory schemework governing the administration of trusts. 

One of its provisions, Section 1005, bars legal actions against a trustee by the trust beneficiaries more than one year after the date a beneficiary (or his or her representative) was sent a report which adequately discloses the existence of a potential claim for breach of trust and informs the beneficiary of the one-year time limit allowed for commencing a proceeding. (Iowa’s version of Section 1005 does not require that the accounting or report inform the beneficiary of the one-year time limit.)  Under this statute, a report begins the running of the statute if it provides sufficient information so that the beneficiary or representative knows of the potential claim or should have inquired into its existence.  Absent this disclosure, the beneficiary has five (5) years to sue under the UTC.

In a recent Iowa case, its Supreme Court ruled on whether or not correspondence from the trustee to the beneficiaries’ lawyer was sufficient to commence the one year statute of limitations.  The grandchildren beneficiaries had their lawyer write a letter to the trustee asserting that the distribution of the grandchildren’s share of the trust assets based on date of death values was improper, and should have used the date of distribution values when made a year later.  This letter was written four (4) years after the grandchildren had both received the trust distribution and signed a release and waiver regarding the distribution so made.

The trustee responded to the beneficiaries’ lawyer that the distributions were based on the language of the trust directing that the date of death valuation was to be used for purposes of making distribution.  The letter from the trustee was also accompanied by a full disclosure of the valuation of the trust assets for purposes of the distribution, as well as full accountings of the trust for the years of trust administration to that date.  The grandchildren’s lawyer acknowledged receipt of this letter and enclosures from the trustee. 

It was not until another 18 months later that the grandchildren sued, claiming that their distribution had been based on an improper calculation of the trust asset values.  The Supreme Court of Iowa ruled that the letter and enclosures from the trustee sent to the beneficiaries’ attorney 18 months earlier had been sufficient notice of the grandchildren’s claim to commence the running of the one year statute.  Under Iowa’s version of the UTC, the letter and enclosures constituted a “report” to the beneficiaries for purposes of starting the statute.    

Had the Court not found the suit time-barred, it is entirely possible that the beneficiaries’ releases and waivers would have been a separate legal ground to dismiss their suit.

Other states have grappled with the issue of what constitutes adequate notice to the beneficiaries as well.  In the Ohio case of Zook v. J.P. Morgan Chase Bank (Ohio Ct. App. 2017), the Court held that the trustee’s account statements which dropped a business as a trust asset after it had failed, combined with the family’s direct knowledge of the failure of the business, were sufficient notice to commence the statute of limitations.  In Tennessee, the legislature enacted a statute that also commences the statute to run once a beneficiary has actual knowledge of the grounds for the claim, whether or not such information is provided by the trustee.  It is likely that the issues raised by the UTC provision will lead to further litigation and legislative action clarifying the requirements for adequate trust disclosure in this regard.

Konrardy v. Vincent Angerer Trust dated March 27, 1998 (Iowa S.Ct. 2019)

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