Trustee Loses Big - New Idaho Case Finds Trustee Breached Fiduciary Duty to Beneficiaries
A new case out of the state of Idaho highlights the duty that a Trustee owes to the beneficiaries of a Trust. The case of Vouk v. Chapman involves a claim for breach of fiduciary duty arising out of the trustee’s decision to retain the death benefit of a life insurance policy owned by a trust. A trustee typically owes the beneficiaries of a trust certain “fiduciary” duties. If a person owes another a “fiduciary” duty, they must act with that person’s best interest in mind. It is a higher standard than just how a hypothetical “reasonable” person must act.
The Chapman siblings are the children of Bill and Margaret Chapman. In 1993, the Chapmans established the Chapman Family Multiple Power Liquidity Trust (“Trust”). The Chapman siblings were named as the Trust’s beneficiaries. One of the siblings, Wade, was also named a trustee. In 2004, the Trust became owner of a life insurance policy on Bill’s life in the amount of $7 million. In August of 2007, it was determined that the Trust was no longer necessary, and an agreement was reached to terminate the Trust and distribute the assets equally among the beneficiaries.
Margaret passed away in June of 2018 and Bill followed shortly thereafter in October of 2018. Wade applied for the death benefit and learned he was the sole beneficiary. Despite telling the insurance company that the Trust should have been the beneficiary, he kept the entire benefit. This is consistent with the normal rule that a beneficiary designation is going to supersede the terms of a trust. Upon learning of this windfall, the other siblings sued Wade for breach of his fiduciary duty, arguing that the insurance policy was a Trust asset. Wade argued among other things that the policy was unambiguous in naming him as sole beneficiary, therefore superseding the terms of the Trust. Further, he argued, as the Trust had been terminated, he no longer owed a fiduciary duty.
The lower court wasn’t having any of that and found that Wade had breached his fiduciary duty to his siblings and awarded judgment against him. The Idaho Supreme Court agreed with the lower court writing: “A trustee owes a fiduciary duty of loyalty to ‘administer the trust in the interest of the beneficiaries alone, and to exclude from consideration his own advantages and the welfare of third persons.’” The Court went on to say that whether the Trustee was acting in good faith or not is irrelevant. In fact, they opine, the Idaho code specifically requires a trustee to obtain court approval before engaging in a transaction where his personal interest conflicts with his duties as a trustee.
The takeaway is clear, always look out for the best interest of the beneficiaries first, even if that conflicts with your own. And, when in doubt, have the court determine in advance what is the right thing to do.
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