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Why You Don’t Want to Be a Trustee
I once saw a bumper sticker on a car that said “Smile. You Could Be a Trustee.” I thought it was great because it’s true.
Being a trustee can be a challenging, and often litigious, job. In estate planning, the role may fall to a family member or trusted friend who is typically not well versed in the law but who must now navigate the complexities of the trust’s provisions in service of the grantor’s wishes. I’ve seen many trustees become mired in litigation as they battle to follow the trust’s provisions while keeping the beneficiaries happy.
Still, if you are a current or prospective trustee, you may be willing to put up with all that. You may also believe that you can’t be held personally liable for any mistakes made in your role as trustee. Right?
Wrong. Today I want to look at a case from the South Carolina Court of Appeals, filed in April 2019, in some detail. It covers this exact topic and is a warning to any trustee out there that when he/she takes on the role, he/she is at risk.
The Background of Deborah Dereede Living Trust v. Karp
Eight months before she died, Deborah Dereede executed a revocable trust naming herself as trustee and her daughter, Courtney Feely Karp, as successor trustee. The only asset in the trust was Dereede’s home in Lake Wylie, SC, which Karp sold several months after her death, netting $356,242.86.
People with interest in the sale included Karp’s stepfather, Hugh Dereede (Hugh), and his company, Tyre Dealer Network Consultants, Inc. (Tyre).
An important provision in the trust essentially said the following:
- After Dereede’s death, sell the house “as soon as practicable”
- Proceeds from the sale should be distributed in this manner:
- First, pay off the mortgage
- Then pay off the promissory note to Tyre, which is currently $250,000
- Then half of remaining net sale to Hugh
- Finally, the remainder to the following Articles…
The disagreement that took Karp to court stemmed from that provision.
After the house was sold, Hugh demanded immediate payment to himself and to Tyre, in accordance with the trust’s provision.
But Karp didn’t pay him immediately. She was also the personal representative for her mother’s estate, and she believed she could not yet distribute proceeds. She wanted to be sure of the net assets of the trust and estate and give time for creditors’ claims, if any.
Hugh filed action in probate court for declaratory judgment for immediate payment. Hugh and Karp battled over the issue but Karp still refused to pay and also claimed that by suing her, Hugh and Tyre had triggered the no-contest clause and were therefore giving up their claim to the money owed them. (Incidentally, if Hugh and Tyre did forfeit that money, it would instead go to Karp and her siblings.)
Enter the Trust Protector
After ten months of litigation, Karp appointed Catherine H. Kennedy as trust protector. A trust protector is someone who watches over the trustee as the trustee watches over the trust. In some cases, it may be an individual who actually knew the grantor (the person who set up the trust), while the trustee did not (if, for example, the trustee is a bank).
If the protector believes the trustee is not doing their job or is engaged in misconduct, they can terminate the trustee. Depending on the trust, the protector may have different powers, but this is the essential one. The role actually has its origins in offshore trusts but has become more popular in domestic trusts in recent years.
As trust protector, Kennedy reviewed Karp’s actions and determined that Karp was justified in waiting for creditors’ claims before disbursement. She further said that issues regarding the no-contest clause – whether Karp exercised good faith in bringing it up, and whether Hugh and Tyre had probable cause – should be decided by a court.
After a bench trial, the court ruled that:
- Karp had breached her fiduciary trust by not distributing the proceeds of the house sale to Hugh and Tyre in a timely manner
- Hugh did have probable cause to bring the action and therefore the no-contest clause was not invoked
- Tyre was a creditor, so the no-contest clause wouldn’t have applied anyway
- Tyre and Hugh were entitled to attorneys’ fees and costs, payable by Karp
Karp appealed and the case went to the South Carolina Court of Appeals. (Read its decision here.)
Good Faith Isn’t Enough to Protect a Trustee
South Carolina Trust Code says that a trustee “shall administer the trust in good faith, in accordance with its terms and purposes and the interests of the beneficiaries…” A breach of trust is “violation by a trustee of a duty the trustee owes to a beneficiary…”
Karp stated that she wanted to wait until she was certain of the net assets of the trust and estate before making disbursements. The Court of Appeals states that such a delay is “common” and “often required” in the probate of an estate, but rules are different for trusts. Also noted is that if Karp had followed the trust exactly and made the distributions quickly, she would have risked no personal liability.
Though Karp’s actions were understandable and appeared to have been done in good faith, she was nevertheless found in breach of trust. The Court of Appeals says “There is no evidence Karp acted in bad faith” and goes on to cite a District Court case, saying that good faith “counts for nothing” when it comes to breach of trust.
Ultimately, the Court of Appeals affirmed the lower court’s decision and found that Karp was personally liable, as well as liable in her capacity as trustee. “Although Karp acted in good faith, a trustee is nevertheless personally liable for breach of trust.”
Additionally, the Court of Appeals affirmed the lower court’s finding that Hugh did have probable cause, therefore the no-contest clause did not come into effect.
Think Twice Before Becoming a Trustee
If you are already a trustee, or if someone has asked you to be a trustee, consider the responsibility – and the liability – of the role. It’s easy to believe that you’re doing someone a favor and that if you’re doing your best, you can’t get into trouble. As you’ve seen illustrated in the case above, that’s not true. As a trustee, you can be held personally liable – meaning money can come out of your pocket – for your actions with respect to the trust, even if everything you do is in good faith and the courts recognize that.
For questions on creating a trust, managing a trust, or other issues of estate planning, contact estate planning attorney Gem McDowell. He and his associates at the Gem McDowell Law Group in Mt. Pleasant, SC work with many individuals and families to create estate plans to provide peace of mind. Call today to schedule a free consultation at 843-284-1021.