As most probate attorneys know, probate litigation oftentimes arises as a result of decisions made by a decedent during life time. Sometimes, however, the decisions of a third-party touching on business law and consulting functions can also lead to litigation. This point is demonstrated by this recent decision:
In the Matter of the Stuart Cochran Irrevocable Trust; Chanell and Micaela Cochran v. Keybank, N.A.
No. 71A04-0806-CV-384
This matter involved an irrevocable trust established by a settlor for the benefit of his two children. The trust was initially funded with life insurance policies and the settlor was assisted by an insurance advisor. The settlor subsequently divorced and his wife received full custody of the settlor’s children who were the beneficiaries of the trust. Some ten years later, the bank serving as the trustee resigned because of the settlor’s insistence that certain third parties – namely the settlor, the settlor’s sister and the settlor’s insurance advisor – be involved in the trustee’s decisionmaking process. KeyBank was then named as the successor trustee.
In this same time period, the Settlor's insurance advisor recommended to the children’s mother that the assets of the trust (three life insurance policies and an annuity then valued at $4.7 million) be replaced with two variable life polices with a death benefit of $8 million. When KeyBank assumed its duties, the underwriting for the exchange of policies had been approved and the settlor had already submitted to the physical exams. KeyBank approved the transaction and the exchange of policies took place in early 1999. Following September 11, 2001, however the stock markets took a dramatic decline and the downward trend in the markets had an adverse effect on the value of the mutual fund investments contained in the policies held by the trust. In 2001, the policies lost money because the cost of insurance and the carriers’ administrative charges were greater than the income generated by the investments. The losses were even greater in 2002.
In the spring of 2003, KeyBank hired an independent outside insurance consultant to audit the policies held by the trust. This review indicated that the policies would lapse before the settlor reached his life expectancy. The settlor was also experiencing financial difficulties and did not have the financial wherewithal to supplement the trust with additional resources or purchase additional policies of life insurance. The Settlor's insurance advisor conducted his own review and eventually recommended that the two variable life policies be replaced with a different policy that offered a lump sum death benefit of $2.7 million that was guaranteed until the settlor reached the age of 100. KeyBank had its own to consultant review the proposal and. after confirming the settlor’s desire to make the exchange, the consultant made its own qualified recommendation of the transaction. Thereafter, KeyBank made the exchange in June 2003 and the following January of 2004, the settlor died unexpectedly.
The trust was then docketed by the beneficiaries who sought an accounting from KeyBank. KeyBank responded by filing a petition to reform the trust and for approval of its accounting. The beneficiaries then filed a counterclaim and a claim for surcharge arguing, among other things, that KeyBank had breached its fiduciary duties as Trustee. A bench trial was held on the issues raised in the Beneficiaries’ counterclaim and claim for surcharge and the trial court entered findings of fact and conclusions of law, ruling in KeyBank’s favor.
On appeal, the Beneficiaries argued that the trial court erroneously concluded that KeyBank’s actions leading up to the exchange in 2003 did not violate the Indiana Uniform Prudent Investor Act. Ind. Code § 30-4-3.5-1 et seq. In particular, the Beneficiaries argued that KeyBank violated the act by imprudently and improperly delegating certain decision making functions, by disregarding its consultant’s recommendations and by failing to investigate alternatives. The Court of Appeals rejected each of these arguments and pointed out that “[c]ompliance with the prudent investor rule is determined in light of the facts and circumstances existing at the time of a trustee’s decision or action and not by hindsight” citing Indiana Code § 30-4-3.5-8. In this instance, based on the facts and circumstances that existed in 2003, the Court of Appeals concluded that “KeyBank’s decision to exchange the [variable life] policies for the [lump sum] policy was eminently prudent, reduction in death benefit notwithstanding. That a “wait and see” approach may also have been a prudent course of action does not alter the propriety of the exchange.”
The Court of Appeals also rejected the Beneficiaries’ arguments that KeyBank breached a number of its duties to them. Most importantly, however, the Court of Appeals concluded that “Even if we were to find that KeyBank’s actions herein constituted a breach of its duty to the Beneficiaries, we cannot countenance the Beneficiaries’ argument that the lack of receipt of an annual report or failure to provide information about the exchange, without more, supports an award of compensatory damages.” The trial court had concluded that “financial trends outside of the control of the Trustee or the Beneficiaries were the direct and proximate cause of the problem facing the Trust in 2003” and the Court of Appeals agreed, adding that the settlor’s tragic, untimely death was also a contributing problem beyond everyone’s control.
Additional issues were addressed (and rejected) by the Court of Appeals including the argument that the 2003 exchange was inconsistent with the intent of the Settlor. The opinion was handed down on March 2, 2009 and the full text of the opinion can be found here.
In the Matter of the Stuart Cochran Irrevocable Trust; Chanell and Micaela Cochran v. Keybank, N.A.
No. 71A04-0806-CV-384
This matter involved an irrevocable trust established by a settlor for the benefit of his two children. The trust was initially funded with life insurance policies and the settlor was assisted by an insurance advisor. The settlor subsequently divorced and his wife received full custody of the settlor’s children who were the beneficiaries of the trust. Some ten years later, the bank serving as the trustee resigned because of the settlor’s insistence that certain third parties – namely the settlor, the settlor’s sister and the settlor’s insurance advisor – be involved in the trustee’s decisionmaking process. KeyBank was then named as the successor trustee.
In this same time period, the Settlor's insurance advisor recommended to the children’s mother that the assets of the trust (three life insurance policies and an annuity then valued at $4.7 million) be replaced with two variable life polices with a death benefit of $8 million. When KeyBank assumed its duties, the underwriting for the exchange of policies had been approved and the settlor had already submitted to the physical exams. KeyBank approved the transaction and the exchange of policies took place in early 1999. Following September 11, 2001, however the stock markets took a dramatic decline and the downward trend in the markets had an adverse effect on the value of the mutual fund investments contained in the policies held by the trust. In 2001, the policies lost money because the cost of insurance and the carriers’ administrative charges were greater than the income generated by the investments. The losses were even greater in 2002.
In the spring of 2003, KeyBank hired an independent outside insurance consultant to audit the policies held by the trust. This review indicated that the policies would lapse before the settlor reached his life expectancy. The settlor was also experiencing financial difficulties and did not have the financial wherewithal to supplement the trust with additional resources or purchase additional policies of life insurance. The Settlor's insurance advisor conducted his own review and eventually recommended that the two variable life policies be replaced with a different policy that offered a lump sum death benefit of $2.7 million that was guaranteed until the settlor reached the age of 100. KeyBank had its own to consultant review the proposal and. after confirming the settlor’s desire to make the exchange, the consultant made its own qualified recommendation of the transaction. Thereafter, KeyBank made the exchange in June 2003 and the following January of 2004, the settlor died unexpectedly.
The trust was then docketed by the beneficiaries who sought an accounting from KeyBank. KeyBank responded by filing a petition to reform the trust and for approval of its accounting. The beneficiaries then filed a counterclaim and a claim for surcharge arguing, among other things, that KeyBank had breached its fiduciary duties as Trustee. A bench trial was held on the issues raised in the Beneficiaries’ counterclaim and claim for surcharge and the trial court entered findings of fact and conclusions of law, ruling in KeyBank’s favor.
On appeal, the Beneficiaries argued that the trial court erroneously concluded that KeyBank’s actions leading up to the exchange in 2003 did not violate the Indiana Uniform Prudent Investor Act. Ind. Code § 30-4-3.5-1 et seq. In particular, the Beneficiaries argued that KeyBank violated the act by imprudently and improperly delegating certain decision making functions, by disregarding its consultant’s recommendations and by failing to investigate alternatives. The Court of Appeals rejected each of these arguments and pointed out that “[c]ompliance with the prudent investor rule is determined in light of the facts and circumstances existing at the time of a trustee’s decision or action and not by hindsight” citing Indiana Code § 30-4-3.5-8. In this instance, based on the facts and circumstances that existed in 2003, the Court of Appeals concluded that “KeyBank’s decision to exchange the [variable life] policies for the [lump sum] policy was eminently prudent, reduction in death benefit notwithstanding. That a “wait and see” approach may also have been a prudent course of action does not alter the propriety of the exchange.”
The Court of Appeals also rejected the Beneficiaries’ arguments that KeyBank breached a number of its duties to them. Most importantly, however, the Court of Appeals concluded that “Even if we were to find that KeyBank’s actions herein constituted a breach of its duty to the Beneficiaries, we cannot countenance the Beneficiaries’ argument that the lack of receipt of an annual report or failure to provide information about the exchange, without more, supports an award of compensatory damages.” The trial court had concluded that “financial trends outside of the control of the Trustee or the Beneficiaries were the direct and proximate cause of the problem facing the Trust in 2003” and the Court of Appeals agreed, adding that the settlor’s tragic, untimely death was also a contributing problem beyond everyone’s control.
Additional issues were addressed (and rejected) by the Court of Appeals including the argument that the 2003 exchange was inconsistent with the intent of the Settlor. The opinion was handed down on March 2, 2009 and the full text of the opinion can be found here.
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Comments for Probate Litigation Update – March 2, 2009