Court tackles timeliness of trust distribution

A recent Indiana Court of Appeals decision offers guidance to those working in trust and estate matters regarding how long a trustee should wait before turning to a probate court for guidance on distributing money to beneficiaries when a dispute exists over the amount that will be received.

In a June 27 decision in In the Matter of the Trust of Harrison Eiteljorg, No. 49A02-1005-TR-485, a three-judge appellate panel disagreed on whether trustees acted reasonably and with care when deciding not to distribute money because of concerns they had about potential future tax liability. Attorneys practicing in this area say the ruling highlights an issue they often face and must advise on.

“This seems like a pretty common sense decision to me,” said Indianapolis trust attorney Suzanne Katt, who chairs the Indiana State Bar Association’s Probate, Trust, and Real Property Section. “I really believe in the timeliness of distribution, and anytime a lawyer or trustee has a concern about distribution the simplest remedy is to get a court order and ask for guidance immediately.”
 

Katt

The case involves two sons whose late father, Harrison Eiteljorg, founded the Eiteljorg Museum of American Indians and Western Art in downtown Indianapolis in 1989. The case doesn’t involve or have any impact on the museum, dealing only with the family trust matter that has been in dispute for six years.

Brothers Harrison “Nick” Eiteljorg II and Jack Eiteljorg were the remainder beneficiaries of a trust their father set up effective upon his death, which occurred in 1997. Their mother, Sonja, was their father’s second wife, and she was designated sole beneficiary at the time of her death in 2003. Nick, his stepson Roger, and accountant John Lienhart were co-trustees of the trust.

In October 2004, the parties met to discuss the distribution of trust property, which consisted of $6.5 million, including $3.2 million in liquid assets. Nick wanted he and his brother to receive $2 million total, but Lienhart disagreed because he was worried about any remaining estate tax that may be owed. Roger and Lienhart suggested distributing only $1 million total, which Nick rejected; he later indicated the brothers would seek legal counsel.

The parties tried unsuccessfully to negotiate further, and the brother’s lawyer sent a letter asking Roger and Leinhart to resign as trustees; their attorney wrote back proposing an additional distribution similar to the first amount. In January 2005, the brothers filed a petition in Marion Probate Court to remove the trustees and filed notice raising 13 claims of breach of trust. Judge Charles Dieter wouldn’t remove the trustees, but he issued a preliminary order in July 2005 that they distribute $1.5 million, which the trustees did along with $300,000 in non-liquid assets. When he issued a final ruling nearly two years later, Judge Dieter found the trustees didn’t promptly distribute the funds and that they should have sought court authority to deviate from the trust terms in retaining the trust property.

Judge Dieter died before he could rule on the issue of damages, so then-Marion Superior Judge Tanya Walton Pratt concluded that the relevant damages period lasted from October 2004 to October 2007, when the trust was wrapped up. She awarded Nick more than $150,000 representing lost earnings from an investment opportunity and awarded Jack more than $110,000 in lost profits from a missed real estate deal. She also awarded the brothers more than $353,000 in attorney fees.

On appeal, Judges Nancy Vaidik and Michael Barnes upheld Judge Dieter’s finding that Leinhart and Roger breached their duty to administer the trust according to its terms but found Judge Pratt erred in her damages assessment. They should not have been allowed to recover damages for their lost investment opportunities under Indiana Code 30-4-3-11(b)(3) because that section applies to profits lost to the trust corpus due to a trustee’s misuse, not to allow beneficiaries to recover for individual profits they would have allegedly generated on their personal shares but for the trustee’s failure to timely distribute, Judge Vaidik wrote. The brothers were deprived of the $1.2 million ordered by Judge Deiter for only 9 months, so they are only entitled to interest for those months. Any assessment of compensatory damages beyond that point is erroneous, she wrote. The majority also reduced the attorney fees to $150,000 based on the record.

Judge John Baker disagreed that Lienhart and Roger committed a breach of the trust, and he noted that Nick originally rejected the $1 million distribution proposal. The judge pointed to Lienhart’s many years of experience as a certified public accountant as justifying his belief that the $2 million he wanted to hold back for taxes was appropriate. When the court dispute materialized, Lienhart and Roger petitioned for instructions from the probate court, and once instructed they immediately made the distributions as ordered.

“In my view, to penalize John and Roger for doing that which we consistently direct trustees to do — and which they are statutorily entitled to do — is misguided and contrary to law,” he wrote.

Attorneys involved in the case declined to comment on the issue because the appeal is ongoing. A transfer request is pending before the Indiana Supreme Court, but the justices haven’t issued a decision on whether they’ll accept it.

Trust attorneys watching this issue generally say that if Eiteljorg stands, it’s an important ruling that emphasizes what many advise their clients: don’t wait to seek court guidance if there’s a dispute with beneficiaries. Oftentimes, disputes can arise and the parties may disagree on what might be considered “reasonable” or “timely,” they say. Some lawyers might hold off on advising trustees to get immediate advice in order to foster more negotiation, but the line is unclear about when that should be required.

“A few weeks would have been reasonable, but this took (three) months before the guidance was asked for … I agree with the court that that’s just too long,” Katt said.

While the time it takes for a probate court to issue guidance varies between counties, she’s found that most courts would likely provide an order on distribution within a few weeks or a month. Katt described the Eiteljorg ruling as a “common sense decision,” but she noted that each probate matter is fact-sensitive and other factors can influence what might be considered “reasonable” or “timely” in each situation. That can get complicated for trustees who face those disputes, she and other lawyers say.

Indianapolis attorney Jeffrey Dible said the Eiteljorg case is going to be useful in determining how quickly one must act, though he agrees no blanket rule should be established because each case varies. An important aspect that could have protected trustees from breach-of-trust claims came with the enactment of a state statute in 2005, which wasn’t available at the time of this dispute.

Essentially, now trustees have more discretion and can “smoke out” objections by setting a deadline – unless a trust document specifically doesn’t allow that. But trust-drafting attorneys can make sure that discretion is included to ensure continued and timely discussion, even if no money is distributed before court guidance is sought.

“But in this kind of trust dispute, context, and the ability of a trustee or a beneficiary to claim and to hold the moral high ground is important,” he said.

In larger trust matters, Katt said she often encourages the use of professional fiduciary companies to avoid any confusion by trustees on what might be required to reasonably and timely distribute trust money.

“With a professional fiduciary, you know everything is taken care of and you can be pretty confident something is happening as it should be,” she said.•