A standard estate plan is the use of a “pour over” will with a revocable trust. The will bequeaths the entirety of the residuary of the probate estate to a trust. The will in this scenario is known as a “pour over” will. Ideally, the trust, if created during the life of the settlor (which would be known as an inter vivos trust), would have been funded during the life of the settlor. But this is not always the case. Sometimes, all or a portion of the decedent’s estate stays titled in the name of the settlor instead of being funded into the revocable trust.
In large estates, completing administration can sometimes take a decade or more. Issues such as estate litigation, creditor claims, and estate taxes can delay the resolution of the administration of an estate. Normally, the trustee of a trust that is the recipient of a “pour over” will probate estate does not have an obligation to do anything until the trust is funded by the probate estate. The historic view of a trust is that the trustee only has duties with respect to assets that have funded the trust. But does a trustee of a revocable trust have any duties when the assets that are to be received remain inside the probate estate a decade after the decedent’s death?
A recent Connecticut Supreme Court case, Barash v. Lembo, SC 20676 (Conn. Nov 07, 2023) held that the trustee of an inter vivos trust can have duties to take action against the probate estate even though the assets had not yet been received by the trust. As explained by the Court, “The primary issue in this appeal is whether the trustee of an inter vivos trust that is the residuary beneficiary of the estate of the settlor-decedent has a duty to protect and collect assets that have not yet been transferred to the trust.”
A similar issue often arises where the settlor has created an inter vivos trust, the settlor does not transfer assets to the trust, the settlor becomes incapacitated, and an agent under a power of attorney commences responsibility for the settlor’s assets. Does the power of attorney holder have an obligation to move the settlor’s assets to the trust? Certainly not, in the absence of an affirmative obligation to do so. For starters, the revocable trust has no claim or entitlement to the settlor’s assets. The settlor, during the settlor’s lifetime, is free to fund or not fund the revocable trust, for whatever reason (or lack of reason) the settlor has. The agent could have no obligation to retitle assets greater than the principal’s, in the absence of an agreement to do so.
Further, the settlor’s estate plan might not constitute a unified estate plan. If the settlor has assets with pay on death designations that the settlor never transferred into the trust, that choice may have been a deliberate choice to keep certain assets (or all assets, for that matter) out of both probate and trust administration. In many situations, a settlor will have an estate plan with a “pour over” will and a revocable trust, with no intention that these documents are ever used, preferring to use titling of the assets to pass at death. The estate planning documents serve merely as a “backup” in the event that assets end up going through probate. There could not possibly be, without more, an obligation of a trustee or power of attorney to alter a settlor’s estate plan.
A somewhat similar situation arises, discussed by the Barash Court, where the trust in question is a testamentary trust, which does not get funded and where the trustee does not accept the appointment prior to funding. The Court explained:
In the Barash case, the trust in question most certainly existed and the trustee had accepted appointment. The trust most certainly had a claim on the estate’s assets, as opposed to a trustee who takes over as trustee of an inter vivos trust during the settlor’s lifetime where the settlor has not transferred all of her assets into the trust.
The defendant also contends that she lacked any power-and, therefore, any duty-to take action with respect to the residuary assets because they were in Rubinow’s control and had not been conveyed by him to the trust. This argument misses the point. Although the defendant’s lack of legal title to the residuary assets obviously rendered her powerless to collect any income from those assets or to distribute that income to the trust beneficiaries, these circumstances do not relieve the trustee of her duty to take reasonable steps to protect and collect the trust’s interests in the residuary assets, after appropriate inquiry and investigation, and then to pursue a claim or other relief against the executor if required by the standard of care applicable to her position as trustee. The fact that an executor controls the estate assets while the estate remains open is the very circumstance that triggers a trustee’s duty to take reasonable steps to ensure that the executor exercises that control in a manner consistent with the interests of the trust and its beneficiaries. A trustee has powers coterminous with her duties in this respect.
The Court further explained:
The obligation of the testamentary trustee to take reasonable steps to obtain property improperly detained by an executor is merely a specific application of the more general principle that a trustee has a duty to protect the rights and interests of the beneficiaries of the trust. See, e.g., In re Herrmann, 127 A.D.2d 999, 1000, 512 N.Y.S.2d 942 (1987); see also 3 A. Scott et al., Scott and Ascher on Trusts (5th Ed. 2007) § 17.9, p. 1222 (“a trustee who fails to take reasonable steps to enforce a claim against the executor or a previous trustee, to compel them to turn over property, or to redress a breach of trust, is ordinarily liable for any resulting loss” (emphasis added)). This principle applies with equal force when a will contains a testamentary disposition for the purpose of adding property to an inter vivos trust, such as in the present case. The precise manner in which the trust is created-by will or inter vivos-does not determine whether the trustee has a duty to protect and collect estate assets in which the trust holds a beneficial interest. When an inter vivos trust is a beneficiary of a will, the trustee has a duty to pursue reasonable claims on behalf of the trust against the executor of the estate. See 3 A. Scott et al, supra, § 17.7, pp. 1212-15; id., § 17.9, pp. 1220-24.
A Florida case from 2021 did hold out the possibility that an estate planning attorney had an obligation to fund a settlor’s revocable trust during life. The apparently fluid nature of the obligation to fund a revocable trust bears watching.