Contact: Dan C. Young, Member Rose Law Firm

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1 Contact: Dan C. Young, Member Rose Law Firm

2 Dan Young, Member Legal Developments of Interest to Trustees September 26, Zook v. JPMorgan Chase Bank Nat l Ass n, 85 N.E.3d 1197 (Ohio Ct. App. 2017) Validity of Beneficiary s Release of Trustee. John Zook Sr. executed a will and created a trust in October of Zook named his wife, Sharon, as the income beneficiary of the trust and Chase s corporate predecessor as the trustee upon Zook s death. The trust terminated on Sharon s death with all remaining assets distributed to the remainder beneficiaries, Zook s five adult children by a previous marriage. Zook died in 1995, and Chase became successor trustee. A significant portion of the trust assets consisted of a controlling interest in Zook Advertising, Inc. ( Zook Advertising ), a business founded and operated by Zook during his lifetime. At the time of Zook s death, his controlling interest in Zook Advertising was valued at $1,036, The trust gave Sharon the right to operate Zook Advertising or designate a third party to manage the business. Sharon took over operation and control of Zook Advertising immediately after Zook died. However, Sharon and Chase did not enter into a management contract that was required by the trust agreement. Zook Advertising rapidly declined under Sharon s management, and Chase sold the controlling interest to Sharon for $ in After Sharon purchased the interest from Chase, Zook Advertising ceased business entirely. Sharon died in 2010, which triggered termination and distribution of the trust. The remainder beneficiaries signed a release ratifying and approving Chase s acts and discharging Chase as trustee. Chase then distributed the remaining trust assets. The remainder beneficiaries filed a lawsuit against Chase alleging breach of fiduciary duty and negligence. The trial court granted summary judgment in favor of Chase because there were no genuine issues of material fact regarding release the remainder beneficiaries signed. There were no genuine issues of material fact that the remainder beneficiaries releases were valid. Ohio law provides two alternative methods for a trustee to conclude its role as trustee: (1) a judicial proceeding, or (2) the trustee may obtain a release from the beneficiaries. Page 2 of 6

3 A release removes a trustee s liability for breach of trust. A release is valid unless it (1) was induced by improper conduct of the trustee, (2) the beneficiary did not know of the beneficiary s rights, or (3) the beneficiary did not know of the material facts relating to the breach when the beneficiary signed the release. R.C (c). A person has knowledge of a fact if the person has actual knowledge of the fact, the person has received notice or notification of the fact, or, from all the facts and circumstances known to the person at the time in question, the person has reason to know the fact. R.C (A). Thus, knowledge includes constructive knowledge. Constructive knowledge may be imputed from matters freely available in the public record. Lawyers Title Ins. Corp. v. MHD Corp., 6 th Dist. No. E , 2010 Ohio 5174, P 25. After the trustee presents an executed release, the burden of proof shifts to the party challenging the release to show an exception invalidates the release. Thus, the remainder beneficiaries held the burden of proving one of the three release exceptions apply. The remainder beneficiaries did not contest the releases based on the first two exceptions. They alleged that they did not know of the material facts relating to the breach when they signed the release. The court held that the remainder beneficiaries had constructive knowledge of the alleged breach when they signed the release because Zook s will was public record and disclosed the total value of the estate, $1.47 million, and the value of Zook Advertising, $1 million. In addition, the remainder beneficiaries knew, generally, that Zook Advertising had failed and closed, and the trust statements the remainder beneficiaries received after Sharon s death indicated that Zook Advertising was no longer a trust asset. Thus, the remainder beneficiaries had constructive knowledge of the alleged breach and there was no genuine issue of material fact regarding the validity of the release. 2. Matter of Ingraham, 2017 NYLJ Lexis 1641 (2017) Release of Trustee Cynthia P. Ingraham ( Grantor ) established two separate inter vivos trusts in 2003 and funded them with approximately $180 million. Grantor named Diana Schwatka as a co-trustee of both accounts. Lewis Linn, an accountant, was a co-trustee with Schwatka from 2006 to 2011, when Schwatka resigned. When Schwatka resigned as co-trustee, Grantor executed a release releasing all claims related to Schwatka s role as trustee and/or administration of the trust, except for claims arising from any fraud or willful misconduct. Linn executed a similar release in favor of Schwatka as the sole trustee of the two trusts. Linn resigned in Affinity Trust Limited succeeded Linn and served as the sole trustee of both trusts. Affinity Trust Limited filed accounting petitions against both Linn and Schwatka. Linn filed an accounting for both trusts; Schwatka objected to the petitions based on the releases from Grantor and Linn and on provisions of the trust instrument. Schwatka was not fully released from her duty to account to the trust. The releases were not full releases because they reserved the releasors rights to seek relief for fraud or willful misconduct. Even if the releases would have been a full release, Grantor s release only foreclosed Grantor from seeking an accounting, and Linn s release was not clear and Page 3 of 6

4 unambiguous because it referred to the prospect of accountings from Schwatka. Furthermore, the trust instrument did not release Schwatka from her duty to account because the trust instrument waived only periodic accountings, and not the final accounting requested from Schwatka here. Thus, the court directed Schwatka to file an accounting of her proceedings for each trust. 3. The Kimberley Rice Kaestner 1992 Family Trust v. North Carolina Department of Revenue, 814 S.E.2d 43 (N.C. Sup. Ct. 2018) State Income Taxation of Trusts Joseph Lee Rice created the Joseph Lee Rice, III Family 1992 Trust (the JLR Family Trust ) in 1992 in New York for the benefit of his children. William B. Matteson served as the initial trustee of the JLR Family Trust, and in 2005 was replaced as trustee by David Bernstein, who was a resident of Connecticut. Bernstein was trustee during the entire period of time relevant to the case, and he was a resident of Connecticut during that time. The JLR Family Trust is governed by the laws of the State of New York, where Mr. Rice was a resident. In 2002, the JLR Family Trust was divided into three share sub-trusts for the benefit of each of Mr. Rice s children, and in 2006, the three shares were divided into three separate trusts. The separate share created for the benefit of Mr. Rice s daughter and her three children is the Kimberley Rice Kaestner 1992 Family Trust (the KRK Family Trust ). All beneficiaries of the KRK Family Trust resided in North Carolina during the tax years at issue. During the tax years at issue, assets of the KRK Family Trust consisted of various financial investments, and the custodians of those assets were located in Boston, Massachusetts. Documents and financial records related to the KRK Family Trust were kept in New York, and tax returns and accountings were prepared in New York. Distributions of income and assets from the KRK Family Trust were solely at the trustee s discretion, and no distributions were made to the beneficiaries during the years at issue. Kimberley Kaestner borrowed $250,000 from the KRK Family Trust during the years at issue, but the loan was repaid. During tax year 2005 through 2008, the North Carolina Department of Revenue (the Department ) taxed the KRK Family Trust on income accumulated each year, regardless of whether any of that income was distributed to any of the North Carolina beneficiaries. The KRK Family Trust sought a refund of those taxes, totaling more than $1.3 million. The Department denied the request for a refund, and the KRK Family Trust filed suit asserting the request for a refund had been wrongfully denied because N.C.G.S was both unconstitutional on its face and as applied to the KRK Family Trust. The KRK Family Trust asserted that the taxes collected pursuant to N.C.G.S violated the Due Process Clause because the KRK Family Trust did not have sufficient minimum contacts with the State of North Carolina. The KRK Family Trust also claimed the taxes violated the Commerce Clause on several grounds, including that the tax was not applied to an activity with a substantial nexus to the taxing state. Page 4 of 6

5 The North Carolina Business Court ruled in favor of the KRK Family Trust, holding that application of N.C.G.S violated the Due Process Clause and the Commerce Clause as applied to the KRK Family Trust. The Court of Appeals affirmed the Business Court, and the Department appealed on Due Process Clause but not Commerce Clause. Issue: Whether the North Carolina Department of Revenue could tax the income of the KRK Family Trust pursuant to N.C.G.S solely based on the North Carolina residence of the beneficiaries during the tax years 2005 through A trust and its beneficiary are legally independent entities and property by a trust that is not with the State, does not belong to the [beneficiary] and is not within her possession or control (citing Brooke v. City of Norfolk, 277 U.S. 27, 29 (1928)). The KRK Family Trust and its North Carolina beneficiaries have legally separate, taxable existences. The KRK Family Trust did not have sufficient minimum contacts with the North Carolina to satisfy the Due Process clause, and the taxes imposed on the Family Trust were collected unconstitutionally. 4. Shriners Hospitals for Children v. First United Methodist Church of Ozark, 2018 Ark. App. 216 L.G. Foster executed a will in 2008 that designated Shriners Hospitals for Children ( Shriners ) as the residuary beneficiary of his estate. In 2012, Foster executed a codicil directing Frederick Romo, the named executor, to sell Foster s residence and distribute the net proceeds to Shriners if Foster still owned the residence at the time of his death. In 2013, Foster executed a durable power of attorney naming Romo as his attorney-in-fact and authorizing Romo to sell Foster s real property at any time and under any terms Romo deemed appropriate. The power of attorney did not give Romo the authority to make a gift of Foster s real property. Sometime before executing the power of attorney, Foster told Romo he wanted First United Methodist ( FUMC ) to receive his residence. After exploring the possibility of gifting the residence to FUMC, Foster decided to sell his residence and gift the proceeds to FUMC. Before he could sell the residence, Foster became ill and moved to a nursing home. Foster executed the power of attorney while in the nursing home. Foster had Romo contact Jim Mainard, Foster s attorney, to transfer his residence to FUMC in a way that did not require Foster to execute a new will. Mainard suggested Romo sell the residence to FUMC under the power of attorney, and Foster agreed to sell the residence to FUMC for $10. Romo executed a deed transferring the residence to FUMC in exchange for $10. Foster died on May 22, Page 5 of 6

6 Shriners filed a declaratory judgment seeking to set aside the transfer as a gift based on nominal consideration, asserting that FUMC was not a good faith purchaser for value. After the first appeal, the circuit court granted FUMC s motion for summary judgment and dismissed Shriners case with prejudice finding FUMC was a bona fide purchaser for value, and that Shriners claims were barred by wavier and accord and satisfaction. Shriners appealed, arguing that FUMC was not a good faith purchaser for value and that there was no waiver or accord and satisfaction. The Court upheld the Circuit Court s summary judgment in favor of FUMC. The Court did not determine whether FUMC was a bona fide purchaser because no one can call into question a man s disposition of his property absent fraud, accident, or mistake. Inadequacy of consideration is insufficient to set aside a deed without acts of fraud or deception. Furthermore, Romo was specifically authorized by the power of attorney to sell the residence on any terms he deemed appropriate. Therefore, summary judgment for FUMC was affirmed and the Court did not need to reach the waiver and accord and satisfaction arguments. Page 6 of 6