JANUARY 13, 2014 VOLUME 21 NUMBER 2
In the past four or five decades there has been a tremendous growth in the use of trusts (usually, but not always, revocable living trusts) for estate planning purposes. Once very rare, they are now very popular. Perhaps as many as half of our estate planning clients choose to create a trust, and to transfer most or all of their assets into the trust’s name. Of course, one of the primary reasons to create a trust is usually to avoid probate court, or (in fact) any court involvement in handling your estate.
In about the same time frame, Americans have become very mobile. In the 1950s and 1960s, it was common — and usually expected — that most people would live, work and die in the same community where they were born. Today it seems rare not to have moved once, twice or even more times, both before and after retirement. In fact, U.S. Census Bureau figures suggest that the average American will move about a dozen times during her lifetime; at age 45, that average drops significantly, but still indicates about three more moves.
What do these two trends have to do with one another? Any lawyer can tell you: it’s often hard to figure out what court will have jurisdiction over trust disputes.
Wait — wasn’t the primary reason to establish a living trust based on a desire to avoid court? Yes, but things happen. Disgruntled family members do sometimes challenge trusts (though probably less often than they challenge wills). Trustees do steal funds, or mismanage them. Beneficiaries sometimes do believe that the trustee has misbehaved, even when she hasn’t. Trusts end up in court.
But which court? And what state’s laws apply to interpreting a trust when there is a dispute?
Here’s a general rule: a trust’s “situs” is usually where the trustee lives, not where the trust was written, or where the beneficiary lives, or even where the trust says it will be interpreted. “Situs” is not precisely the same as jurisdiction, but you can think of it as where the trust “lives.” And that, generally, is where the courts have jurisdiction over the trust and its trustee.
Let’s take a typical case to explain this legal principle. Allen and Melinda, a married couple, live in Alaska. They create a revocable living trust, naming themselves as trustee. The trust says that Alaska law applies. Upon the death of either Allen or Melinda, the surviving spouse remains as trustee. The trust is fully revocable by both of them, or by the survivor upon the death of either. So far, so good: Alaska courts are probably the only ones with jurisdiction — and even Alaska courts probably can’t do much with the trust while Allen or Melinda lives, since the trust is fully revocable.
Upon the death of both Allen and Melinda, though, the trust changes. By its terms, it becomes irrevocable — and their son Dave takes over as successor trustee. Dave lives in Arizona. A share of the trust continues, with Dave as trustee, for the benefit of Deborah and Diane, two of their other children. Deborah lives in Alaska, and Diane lives in Delaware (of course). If Diane thinks Dave is mishandling the trust, where does she hire a lawyer, and where will that lawyer end up filing a lawsuit? Delaware, where she lives? That doesn’t seem right.
But wait — maybe it will be Deborah (the one who stayed in Alaska) who consults a lawyer. It might make more sense for her to initiate any lawsuit in Alaska, since that’s where their parents lived, the trust was written and at least one beneficiary lives. Plus the trust says Alaska law applies.
Those are essentially the facts of a recent Arizona Court of Appeals case (though the names of everyone in the family, and most of the states involved, have been changed). Before we tell you the answer, we’ll pause for a moment for you to decide whether Arizona has jurisdiction over Allen and Melinda’s trust.
You’ve made up your mind? Okay, but hold on to that thought. We’ve misled you, ever so slightly. While Deborah and Diane are unhappy with Dave’s management of the trust, neither of them has filed a lawsuit at all. It’s actually Dave who has filed something with the court — he has filed a request that the Arizona court look over his administration of the trust, and bless the actions he has taken. If it works, it would prevent Deborah and Diane from challenging him later. Dave has done this relying on a provision of Arizona law permitting trustees to affirmatively seek court review of their administration of the trust.
The probate court where Dave filed his trust accounting action dismissed the petition, deciding that Dave should return to the state where the trust was written and Deborah lives. The Arizona Court of Appeals disagreed, ordering the probate court to go ahead and review Dave’s accounting. Arizona courts have jurisdiction, said the appellate judges, because Dave lives in Arizona and the trust is actually administered in Arizona Matter of the Lavery Living Trust, December 10, 2013.
There are still unanswered questions here. If Deborah had filed something in Alaska before Dave filed in Arizona, could the Alaska courts have made Dave go there to defend his actions? It’s not clear from the facts laid out in the opinion, but perhaps. Could Diane have made Dave defend himself in Delaware? Probably not, though that wasn’t an issue being decided in the Arizona court proceeding. In the Arizona court proceeding, whose law will apply? It’s not completely certain, but probably Arizona law will govern trust administration questions and Alaska law will govern any interpretations to be applied to the trust’s terms.
Trust jurisdiction and where to have a trustee’s actions reviewed is a somewhat unsettled area of the law. It is also very dependent on the facts of an individual case. Want to challenge a trustee, or are you a trustee seeking approval of your actions? Talk to your lawyer about situs, jurisdiction, governing law and the difference between those concepts.