The Kentucky Supreme Court recently determined that a trustee of a revocable living trust holds an affirmative duty to notify trust beneficiaries when the trust/grantor modifies beneficiary designations, at least when the modification may have been the result of undue influence. The estate of the grantor claimed the trustee, J.P. Morgan Chase Bank, breached the duty owed to the grantor by informing trust beneficiaries of their removal in place of new beneficiaries and that the removal may have been unduly influenced. The Kentucky Supreme Court, relying on Kentucky Revised Statute 386.715, which obligates trustees to keep beneficiaries reasonably informed of the trust administration, concluded that the duty was not expressly limited to irrevocable trusts.

The Supreme Court acknowledged that lay persons creating revocable living trusts “might be shocked to learn that a trustee has a duty to inform contingent beneficiaries of their potential interest” even though the grantor retains control of the assets and may change his or her mind about beneficiary status. The Court also recognized that the modern trend, including the Uniform Trust Code, only imposes duties to the grantor from the trustee of a revocable trust and not to beneficiaries. But according to the Court, the Kentucky statute and the distinctions from a trust and a will, with the trust involving other parties, including a trustee and beneficiary, warranted the announced result.

The egregious facts undoubtedly influenced the outcome. J.P. Morgan Chase Bank was the trustee of a revocable living trust that provided a lifetime income to the grantor with substantial monetary benefits to charities and a church. Approximately ten years later, when the grantor was 93 years old and in declining health and nearly bedridden, she was taken by her caregiver to an attorney selected out of the Yellow Pages to prepare a new trust document. The new trust made the newly located attorney the sole trustee with his trustee compensation set at approximately $100,000 annually. The bequest to the caretaker was increased from $20,000 to $500,000. The only medical doctor examining the grantor at the time of the new trust was the newly retained attorney’s brother-in-law.

After the grantor died, the bank learned of the change in trustee and beneficiaries. The new trustee entered into an investment agency agreement with the bank for the bank to continue to invest the funds for a period of time. The new trustee then terminated the investment agreement and transferred the funds to another investment firm. Shortly thereafter (but not until the investment agency agreement was terminated and the bank had no role), the bank obtained a legal opinion letter advising that the bank had an obligation to notify the former trust beneficiaries of the beneficiary revisions and the dubious circumstances involved. At least one of the former trust beneficiaries had already learned of its removal through other sources.

A will contest action was filed against the grantor’s estate by the former beneficiaries claiming undue influence. That suit was settled for $1.875 million. The subsequent trustee then brought suit against the bank to recover the $1.875 million the estate paid to settle with the former beneficiaries. The new trustee claimed the bank breached duties owed to the grantor and estate when it disclosed confidential information about the trust to the former beneficiaries. The Supreme Court rejected that claim, holding that the bank’s actions to inform the former beneficiaries they had been removed from the trust and that there may have been some undue influence, did not violate any obligation it owed to the grantor. In fact, the bank was legally obligated to provide the charities and church the disclosed information. The Supreme Court did note that the bank was much delayed in taking action until after it was removed as both trustee and then as investment agency. But even so, the Supreme Court rejected a “sour grapes” motivation and looked to the applicable standard, finding that even a former trustee remained under the obligation to make the disclosures and there was no claim for damages from the delay in the disclosure.

The extent or reach of the opinion in circumstances without any evidence of undue influence is open for future debate. Absent legislative modification limiting KRS 386.715 to irrevocable trusts, trustees must weigh carefully the need to disclose beneficiary changes. Further legal analysis may be required to protect a trustee from exposure in future circumstances.