Removed Corporate Trustee’s Refusal to Turn Over Trust Assets to Individual Trustee Was Prudent and Appropriate

August 21, 2017

One of the most important considerations in creating a trust is selecting the appropriate trustee. Oftentimes this involves determining whether a corporate trustee is appropriate as either the sole trustee or together with one or more individual co-trustees. A corporate trustee’s experience and sophistication in both investment and administrative matters are commonly cited reasons for appointing such a trustee. A corporate trustee may further provide a level of objectivity that may be difficult for family members or other individual trustees to match.

In Matter of Sinzheimer, 2017 NY Slip Op 31379(U) (Sur Ct, New York County 2017), the Court held a corporate co-trustee that had been “removed” pursuant to the terms of the trust agreement was not required to deliver the trust’s assets to the sole individual trustee where the individual defied the instruction in the trust instrument to appoint a successor corporate co-trustee. The perceived objectivity on the part of the removed corporate trustee figured prominently in the Court’s decision sustaining its decision to withhold delivery of trust assets to the individual trustee until a new corporate trustee had been appointed.

The relevant facts in Sinzheimer are as follows. Ronald and Marsha, husband and wife, established an irrevocable trust which provided for income and principal to be paid to Marsha in the discretion of the trustees for her “health, support maintenance and education.” On Marsha’s death, the trust remainder is payable to a further subtrust which terminates after the death of the last surviving issue of the parents of Ronald and Marsha. The remainder is payable to certain named individuals or their estates.

Ronald died in 1998, about a year after the trust was established. Thereafter, an individual trustee resigned and Andrew, the son of the grantors, Ronald and Marsha, was appointed in his place. Before Andrew’s predecessor resigned, he exercised his power to remove the corporate co-trustee (the “Bank”), but no corporate co-trustee was appointed to serve in its place.

Andrew maintained that a successor corporate co-trustee is not required and declined to appoint one. With respect to the issue before the Court as to the Bank’s turnover of trust assets to Andrew, the Court noted, “[t]he issue is consequential because Andrew has announced his intention to exercise his discretion to distribute all principal to Marsha if permitted to serve alone, thereby terminating the Trust” (id. at 2). The Court further noted that after Andrew became a trustee, but before his refusal to appoint a corporate co-trustee, he and his mother, Marsha, requested a discretionary distribution to Marsha of all the assets in the trust. A Bank officer asked for the standard documentation to initiate the discretionary request process, but Andrew and Marsha refused to provide the information.

The Court found it was clear from the trust instrument that the settlors intended that a corporate trustee would serve at all times after Ronald’s death. The authorities on which Andrew relied were distinguished because none involved a direction in the instrument to replace a corporate trustee with another corporate trustee, as was the case here, which, the Court stated, was “a significant difference because the professional management and independence uniquely afforded by a bank could affect a court’s analysis of such a provision” (id. at 5).

The Court next proceeded to dismiss Andrew and Marsha’s claim that the Bank converted the trust assets by not turning them over to Andrew as trustee. The Court found that the Bank never asserted title to the trust account which is an essential element of a claim for conversion. Rather, the issue was the Bank’s right, under these facts and circumstances, to temporarily withhold delivery of the trust assets to Andrew. The record established that the Bank never unequivocally denied that Andrew, as trustee, had a right to the assets, but asked only that he first appoint a corporate co-trustee to serve with him or obtain a court order determining his right to serve alone. The Court held:

Particularly given Andrew’s stated intent to terminate the Trust without regard to the rights of the remainder beneficiaries – a class that does not include himself, a measuring life – the Bank’s position was reasonable. … The Bank’s uncontroverted conduct here was prudent and appropriate in the circumstances, particularly in consideration of its fiduciary duty to the remainder beneficiaries… (id. at 8)

Although the Bank had been purportedly removed pursuant to the terms of the instrument, it, nevertheless, had an ongoing fiduciary duty to the remainder beneficiaries. The Court found the Bank fulfilled that duty by resisting its removal and not turning the trust assets over to the sole individual trustee.

Notably, the Bank’s withholding of the trust assets from Andrew was found prudent notwithstanding that co-fiduciaries have an equal right to custody of an estate fund (Matter of Slensby, 169 Misc. 292, 295 [Sur Ct, Kings County 1938] (“every estate fiduciary, by virtue of his office, is entitled to the custody of the assets of the estate or fund. When there are two or more fiduciaries, each possesses an equal right in this regard …”); see also Matter of Schwarz, 240 AD2d 268, 269 [1st Dept 1997]). The justification for departing from this rule in Sinzheimer was clear. The Bank faced potential exposure to claims from the trust’s remainder beneficiaries if it delivered property to the individual trustee who may later be found to be without the authority to exercise discretion alone, as he said he would by terminating the trust in favor of his mother.

Having a corporate trustee is not appropriate for all trusts. The cost of a corporate trustee’s services is an important factor to consider in determining if one is appropriate. The personal family knowledge possessed by a family member or dear friend of the grantor usually serves as a compelling basis to select such an individual to administer a trust for his or her family. On the other hand, a corporate trustee is less likely to be influenced by emotions, personal agendas, conflicts of interest and bias, all of which can impair the orderly administration of a trust consistent with the grantor’s intentions.