The trustee has brought a reformation action to reorder the equitable property rights of the trust’s beneficiaries: Spotting the fiduciary issues

Charles E. Rounds, Jr. - Suffolk University Law School
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Section 415 of the Uniform Trust Code provides that even in the absence of ambiguity the court may reform the terms of a trust to conform the terms to the settlor’s intention if it is proved by clear and convincing evidence that both the settlor’s intention and the terms of the trust were affected by a mistake of fact or law, whether in expression or inducement. Thus, the UTC would sweep away time-honored equitable restraints on the introduction of extrinsic evidence, such as the plain meaning rule. That UTC § 415 is available not only in the absence of ambiguity but also to members of the public generally ought to keep scriveners of trust instruments up at night. Standing is not the obstacle it once was, at least when it comes to representing plaintiffs in trust-reformation actions. See generally §8.15.22 of Loring and Rounds: A Trustee’s Handbook (2024) (hereinafter “the Handbook”). The section is reproduced in the appendix below. Also considered in the section are the doctrinal and institutional stresses such “reform” is inflicting on the trust relationship itself. Assume the terms of an inter vivos trust provide for three named beneficiaries, all children of the deceased settlor. The trustee brings a mistake-based action to reform one of the beneficiaries out of the trust altogether. Implicated is the trustee’s duty of undivided loyalty, see §6.1.3 of the Handbook; the trustee’s duty of impartiality, see § 6.2.5 of the Handbook; the trustee’s duty to defend the trust, see § 6.2.6 of the Handbook; and the trustee’s duty not to attack the trust, see § 6.2.6 of the Handbook. Endeavoring to void via reformation material dispositive provisions of a trust as they currently exist is to seek to eviscerate the particular trust. To seek to eviscerate is to attack/contest what would be eviscerated. Equity looks to the substance of an undertaking, not to its form. Depending upon the particular facts and circumstances, the court at minimum might give consideration to appointing a Trustee ad Litem or Special Fiduciary to administer the trust impartially pending resolution of the litigation, or maybe just to handle prosecution of the reformation action. See generally § 7.2.3.8 of the Handbook. Whether the incumbent trustee should be removed as trustee altogether would depend upon the particular facts and circumstances as well. In all cases equitable principles would govern. In Baldwin v. Baldwin, 667 S.W.3d 199 (Missouri 2023), whose facts were similar to those of our hypothetical, reformation was granted. It appears none of these fiduciary-based issues were considered by the trial court, nor was any administrative action taken by the trial court to neutralize the trustee’s facial conflict of interest. The focus on appeal was solely on whether the reformation action had been time barred, the victim of the reformation having accepted the trial court’s findings that the trustee had established grounds for reformation. It will not always be the case, however, that the grounds for reformation are self-evident, or that the trustee does not stand to gain economically from having a beneficiary reformed out of a trust. The latter would have been the case in our hypothetical had the trustee also been one of the three co-beneficiaries. As an aside, one can imagine a reformation scenario where some stranger comes out of the woodwork. The court proceeds to grant him standing pursuant to UTC § 415 to assert, say, that there is clear and convincing extrinsic evidence that the settlor intended that the stranger, not the settlor’s three children, enjoy the entire equitable interest. The settlor and the stranger bonded on a cruise last year. Correspondence between them is brought forth as evidence. The stranger seeks to have all three children reformed out of the trust instrument, whose provisions are patently and latently unambiguous, and the stranger reformed into it. Let the settlement discussions begin.

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Charles E. Rounds, Jr. - Suffolk University Law School
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