Limitations of Trustee’s Sole Discretion in Arizona
In Re E. Caplan Trust, 265 P.3d 364 (2011), the Arizona Court of Appeals considered this issue.
Facts of the Case
E. Caplan died in 1983. Her will created two trusts. One trust was for the benefit of her daughter, Ms. Sova. The other for the benefit of her son. E. Caplan’s grandchildren, Mr. Bistrow, Laurie Shapiro, and L. Bistrow, are the remainder beneficiaries of the trusts. This case concerns only Ms. Sova’s trust.
Ms. Sova and Citigroup are co-trustees of this Trust. Ms. Sova is entitled to all Trust income during her lifetime. However, Citigroup has sole discretion to allow for principal distributions if Ms. Sova shows need.
In December 2006, Ms. Sova requested that Citigroup begin making principal distributions to her of $35,000 per year. Citigroup asked Ms. Sova to provide it with financial information. Based on that information, it began making distributions from the Family Trust corpus to her.
E. Caplan’s grandchildren are the Remainder Beneficiaries, set to inherit the trust when Ms. Sova dies. They asked Citigroup to consult the Remainder Beneficiaries before releasing principal to Ms. Sova. They also wanted to see Ms. Sova’s financial information. Citigroup declined to do any of these things.
In July 2009, Citigroup asked the superior court to approve the principal distributions it had made to Ms. Sova. It also asked for instructions about any future distributions. Citigroup told the court that it had made principal payments to her totaling $73,403.35.
Trustee’s Discretion in Arizona.
The superior court heard the argument, then it approved the past principal disbursements. For future principal distributions, it directed Ms. Sova to provide financial information annually to Citigroup. It ordered Citigroup to apply the policies and procedures it has in place to determine whether to give Ms. Sova principal payments.
The court denied the Remainder Beneficiaries’ request for Ms. Sova’s financial information. The court ordered Citigroup to send the Remainder Beneficiaries statements of all Trust disbursements. It also established a procedure for resolving future challenges that involved court review of financial documents.
The Remainder Beneficiaries may challenge a distribution within the proper statute of limitations by filing a petition of objection with the Court. The Court shall review the items relied upon by Citigroup when the discretionary distribution was made. The Court shall review all personal financial information “in camera.”
The Remainder Beneficiaries appealed.
Past Principal Distributions
According to the remainder beneficiaries, A.R.S. § 14-10813(A) required Citigroup to notify them before making principal distributions from the Trust. However, that statute became effective after the distributions were made.
The statute in effect at the time the distributions were made was different. It only required a trustee to “keep the beneficiaries of the trust reasonably informed of the trust and its administration.” The Court found that Citigroup complied with these relatively minimal requirements.
Future Distributions
The Court next considered whether the procedure adopted by the superior court for resolving future disputes was appropriate.
A.R.S. § 14-10813(A) provides:
Unless the trust instrument provides otherwise, a trustee shall keep the qualified beneficiaries of the trust reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests.
The superior court’s order is consistent with keeping the Remainder Beneficiaries reasonably informed about the administration of the trust.
The Remainder Beneficiaries claim that the superior court should have ordered Citigroup to inform the Remainder Beneficiaries of all the material facts necessary for them to protect their interests. But the Court found that the Remainder Beneficiaries overstated their role, rights, and interests. The clear Trust language gives Citigroup “sole discretion” to pay out principal to a lifetime beneficiary.
Under the Trust, the Remainder Beneficiaries have no say about principal distributions to a lifetime beneficiary. Their only interest is in ensuring that Citigroup acts within its discretion.
The Restatement (Second) of Trusts § 187 lists six factors to determine whether a trustee abused its discretion. They are:
(1) the extent of the discretion conferred upon the trustee by the terms of the trust;
(2) the purposes of the trust;
(3) the nature of the power;
(4) the existence or non-existence, the definiteness or indefiniteness, of an external standard by which the reasonableness of the trustee’s conduct can be judged;
(5) the motives of the trustee in exercising or refraining from exercising the power;
(6) the existence or nonexistence of an interest in the trustee conflicting with that of the beneficiaries.
Other courts have adopted these factors in determining whether a trustee has abused its discretionary powers. Here, the Arizona Court of Appeals also adopted those factors for determining whether a trustee abused discretionary authority. It ordered the superior court to apply these factors to any future disputes that might arise over principal distributions to Ms. Sova.
The Court rejected the Remainder Beneficiaries’ objections to the in camera review procedure. It found that an in camera review is appropriate for weighing competing interests and determining appropriate disclosures.
The Court found that the superior court’s order struck a good balance between the competing interests. It took into account Ms. Sova’s interest in keeping her financial information private. It also took into account the Remainder Beneficiaries’ interest in ensuring that Citigroup acted within the discretion conferred by the Trust.
The order gives the Remainder Beneficiaries due process by offering a review of Ms. Sova’s financial information by a disinterested judge.
Disposition
The Arizona Court of Appeals affirmed the judgment of the superior court, as modified in this opinion.
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