In a notice released last week, the Minnesota Court of Appeals dismissed a motion to change the terms of a trust to allow early distribution of trust assets to beneficiaries. The court also dismissed the petitioner’s claim for legal fees from the trust, concluding that the litigation was neither necessary nor in the best interests of the trust as a whole. The notice serves as yet another reminder of the high bar that must be overcome any time beneficiaries seek to change the distribution terms of a trust.
In Skarsten-Dinerman v. Milton Skarsten Living Trust, 2021 WL 6109571 (Minn. Ct. App. December 27, 2021), the settlor of the trust created a revocable trust naming his six children as primary beneficiaries upon his death. The trust’s assets consisted primarily of income-producing farmland, and the trust agreement ordered the trustee to distribute that income at least once a year to beneficiaries until three of the six children died. At that point, the trustee was to terminate the trust and distribute the capital equally to the three surviving children and the descendants of the three deceased children. Notably, the terms of the trust generally prohibited the sale of farmland under any circumstances.
Three years after the settlor’s death, one of the children applied to the court to amend the trust to allow the sale of the farmland and the distribution of the proceeds to the six children. According to the petitioner, the amendment was justified for three reasons: (1) the value of farmland held by the trust had decreased; (2) this decrease in value would result in a decrease in the income of the beneficiaries of the trust; and (3) the terms of the trust requiring distribution after the death of the first three children would unfairly penalize deceased children while arbitrarily benefiting the surviving children. Although all of the beneficiaries of the trust consented to the proposed amendment, the trustee opposed the request. In the opinion of the trustee, an early sale or distribution of farmland would violate a clear material purpose of the trust. Although the district court concluded that the trust was ambiguous with respect to the sale of the farmland, it nonetheless agreed with the trustee that the proposed amendment was unjustified and dismissed the petitioner’s corresponding request for attorney’s fees. of the trust.
The Minnesota Court of Appeals upheld the trial court’s decision and refused to allow any modification to the trust. The court first considered whether an amendment to the trust was appropriate under Minnesota statutes § 501C.0411 (b), which authorizes a court to amend an irrevocable trust if: (1) all beneficiaries consent to the amendment requested; and (2) the requested modification is not inconsistent with an important objective of the trust. On this issue, the court held that although all the beneficiaries consented to the requested modification (satisfying part 1), an undeniable objective of the trust was to keep the farmland as a continuous source of income for the settlor’s six children. until three of them died. As the court observed, the settlor’s specific perspective on how best to provide for the needs of the beneficiaries of the trust was critical, even though the beneficiaries of the trust disapproved of this choice and believed that a better return could be obtained. obtained in a different way.
The court then considered whether a modification of the trust might be appropriate under Minnesota statutes § 501C.0412 (a), which allows judicial modification of a trust if, due to circumstances not intended by the settlor , the modification would promote the objectives of trust. According to the petitioner, two unforeseen circumstances arose after the death of the settlor which justified the modification of the trust: (1) three of the children formed special needs trusts and transferred their interests in the trust to these needs trusts. special; and (2) agricultural land has lost value. The court concluded that neither of the two circumstances warranted a modification of the trust. Regarding the first, the court found that the applicant’s concern – that the trust assets would eventually flow to the state as reimbursement for medical expenses if the three children with special needs were the surviving children to receive farmland at the end of the trust – was both speculative and not a real change in circumstance, as the assets would pass to the state even if the change was allowed. As to the second, the court observed that, as a farmer himself, the settlor of the trust would have been familiar with fluctuations in the value of farmland. Therefore, neither of the two circumstances justified modifying the trust.
Finally, the court upheld the district court’s decision to dismiss the petitioner’s claim for reimbursement of the trust’s attorney fees. Recognizing that the district court has statutory authority under Minnesota Statutes § 501C.1004 to award reasonable attorney fees in any legal proceeding involving the administration of a trust, the court observed that the recent decision in Lund ex rel. Lund revocable trust v. Lund, 924 NW2d 274 (Minn. Ct. App. 2019) left open the possibility that the traditional common law standard for awarding attorney fees in these types of cases could also apply. Under this standard, a beneficiary can recover attorney’s fees from a trust when the dispute is: (1) necessary to resolve ambiguous language in the trust document; (2) essential to the proper administration of the trust; and (3) conducted in good faith, without unnecessary expense or delay, for the primary benefit of the trust as a whole.
In reviewing the record of the case, the appellate court found that the district court had discretion to find that justice and equity did not require payment of the applicant’s legal fees from the trust and, under the common law standard, the litigation was neither essential to the proper administration of the trust nor for the primary benefit of the trust. In particular, the court noted that the trust agreement unambiguously prohibited the sale of farmland and therefore litigation was not necessary to establish the meaning and effect of the document as a whole.
Key points to remember
Settlers, Trustees and Beneficiaries should take note of the decision by Skarsten-Dinerman. Although this is an unpublished opinion, which means that it is not technically binding on future decisions, the case provides several important lessons:
- Trustees have a duty to administer a trust as the settlor intended, even if this conflicts with the wishes of the beneficiaries of the trust. A sin Skarsten-Dinerman, this duty may sometimes require a trustee to take legal action to defend the plain language of the trust against an action by the beneficiary to modify the trust agreement.
- Although the Minnesota Trust Code provides several mechanisms that can be used to modify an irrevocable trust, the universal touchstone is the pursuit of the settlor’s intention. Where a proposed modification is contrary to the clearly expressed wishes of the grantor, the courts of Minnesota will refuse to approve the modification.
- A trust settlor is free to use their best judgment in determining how the trust assets are to be invested and distributed, although another option may produce a higher rate of return for the trust. Trustees – and the courts – must respect these wishes in the absence of material changes in the circumstances.
- The case leaves the question open – unanswered since Lund – whether courts in Minnesota can apply the old common law standard to claims by beneficiaries for payment of attorney’s fees from the trust, in addition to the new legal standard. For now, litigants should continue to refer to both standards when requesting (or opposing) the award of attorney fees.
Changes to trusts and fiduciary duties are complex, and litigation involving trusts and trustees is increasing. Hiring a lawyer to help you overcome these potential pitfalls can be essential.