by Dan Conlisk
Trusts often contain provisions that seek to limit the trustee’s liability for violations of his or her duties. These “exculpatory clauses” provide, for example, that a trustee may act in her “sole and absolute discretion” and/or that her actions are not be subject to review by any court absent fraud or other intentional misconduct. Courts generally disfavor these provisions and are hesitant to enforce them. The core of a trustee’s duty is to act in good faith, with the utmost loyalty and integrity, solely in the interest of trust beneficiaries, and prudently. Integral to these duties is the trustee’s obligation to provide to trust beneficiaries the information necessary for them to understand and protect their interest.
In Rafert v. Meyer, 859 N.W.2d 332 (Neb. 2015), the Nebraska Supreme Court recently applied these long established rules – which are rooted in well-accepted trust law and common to virtually every state – to hold a trustee of a life insurance trust liable despite strong exculpatory language. In Rafert, Meyer was the attorney who prepared the trust and appointed himself trustee. Id. at 221-22. The trust’s primary asset was $8.5 million of life insurance to be administered on Rafter’s death for the benefit of his four daughters. Id. at 221. Meyer (as drafting attorney) included language in the trust instrument that excused him from liability (as trustee) for failing to pay premiums on the insurance policies and, he contended, failing to inform the beneficiaries of such non-payment. Id. Mayer thereafter failed to pay the premiums. Id. at 221.
While the trial court relied on the exculpatory clause to dismiss the case, the Nebraska Supreme Court reversed. It explained that a trustee’s authority is governed by not only the trust instrument, but also statutes and common law. Id. at 224; see also Wahrman v. Wahrman, 502 N.W.2d 95 (Neb. 1993). The Court emphasized that “‘[a] trustee owes beneficiaries of a trust his undivided loyalty and good faith, and all his acts as such trustee must be in the interest of the [beneficiary] and no one else.’” Id. at 337; quoting Karpf v. Karpf, 481 N.W.2d 891 (Neb. 1992). In turn, “[e]very violation by a trustee of a duty required of him by law, whether willful and fraudulent, or done through negligence, or arising through mere oversight or forgetfulness, is a breach of trust.” Id. at 337. While exculpatory clauses may limit the liability of a trustee in certain situations, they cannot “excuse the trustee from liability for acts performed in bad faith or gross negligence.” Id.; see also Vest v. Bialson, 293 S.W.2d 369, 373 (Mo. 1956).
Against this background, the Court held that the most fundamental aspect of administering a trust solely in the interest of beneficiaries is protecting trust property. Id. at 227; see also Estate of Luyties v. Scudder, 432 S.W.2d 210, 214-215 (Mo. 1968); John R. Boyce Family Trust v. Snyder, 128 S.W.3d 630, 636 (Mo. App. E.D. 2004). Meyer could not escape liability for violating this basic obligation by relying on the trust’s exculpatory language, especially where he (as drafting attorney) had included the language it in the trust documents in the first instance. Rafert, 859 N.W.2d at 227-28.
The Court in Rafert was equally concerned with Meyer’s failure to provide the beneficiaries with material information. Meyer did not give the beneficiaries notice that the insurance policies were in jeopardy of, and did, lapse for nonpayment of premiums. Id. at 226 – 27. He again sought to rely on exculpatory language to escape liability for this failure. The court rejected his argument. It held that under the Nebraska Uniform Trust Code – the same as that enacted by most states – trust provisions cannot excuse violations of a trustee’s fundamental duty to apprise beneficiaries of the information they need to protect their interests in the trust. Id.; see also Mo. Rev. Stat. § 456.8-813; Restatement (Second) of Trusts, § 173 cmt. c (1959). The court reasoned that the breach of this duty was especially serious where providing such information “would have profoundly affected [the beneficiaries’] actions to protect the policies from lapsing.” Rafert, 859 N.W.2d at 227.
Finally, underlying the court’s decision was the fact that the trustee was also the drafting attorney. The court emphasized that “[t]his is not a situation where a gratuitous trustee, who had no involvement in the drafting of the trust or the administration of the insurance policy, undertook only to distribute insurance proceeds after the insured’s death. The trustee’s duties must be viewed in the light of the trustee’s alleged involvement in these matters. If there was none, the result might well be different.” Id. at 340
The Nebraska Supreme Court’s decision in Rafert is not groundbreaking. It is based on well-established trust law common to most states, including Missouri. But it is a reminder that trust language is not always what it seems, and for good reason. Trustees are given extensive powers over (and, technically, legal title to) property of another solely for the purpose of administering it in the interest of the beneficiaries. As a result, trustees’ duties are the highest recognized by law. Allowing trust language to dilute those obligations undermines the very core of the trust relationship. Fortunately, courts generally recognize this. Beneficiaries should also. Even the strongest exculpatory language does not excuse breaches of fundamental trust obligations and, in turn, does not preclude beneficiaries from seeking to hold trustees responsible for their misconduct.