When a Trustee is ready to terminate a Trust and make distributions to the Trust beneficiaries, it is important that a written Receipt And Release signed by the beneficiary is obtained. Oftentimes a Trustee will ask why is this necessary as there will be a cancelled check that is evidence of the distribution to the Trust beneficiary and the amount thereof. There are a number of good reasons for the Receipt And Release.
First, a written Receipt And Release signed by the beneficiary will avoid any future dispute as to whether the beneficiary received all that he or she is entitled to under the terms of the Trust agreement. For example, a beneficiary may die shortly after the distribution and the deceased beneficiary’s surviving spouse and/or children may dispute that the decedent received his or her full share. The Trustee will be required to prove that the decedent received all he or she was entitled to, possibly in a court of law. This situation can be avoided with a signed Receipt And Release that states that the beneficiary acknowledges that the beneficiary has received any and all Trust property and assets that he or she is entitled to under the terms of the Trust agreement.
Second, a Trustee does not want a beneficiary to use the distribution to hire an attorney to sue the Trustee for alleged wrongdoing in the administration to the Trust. The Receipt And Release will state that the beneficiary releases the Trustee from any and all claims, damages, legal causes of action, et cetera, known or unknown, regarding the administration of the Trust.
Third, there may be unknown liabilities at the time of the distribution, most commonly income tax. The Receipt And Release should provide that the beneficiary agrees to immediately refund to the Trustee part or all of the distributed Trust property and assets (or the cash proceeds resulting from the sale thereof) that may be requested in writing by the Trustee if it is subsequently determined that: (1) part or all of the distribution should have been paid to someone other than the recipient, or (2) funds are needed for the payment of claims or other obligations entitled to be paid from the recipient’s share of the Trust. Item No. 2 is important in the event the decedent’s final income tax report has not been filed, plus the IRS can audit the decedent’s income tax returns previously filed. Generally speaking, the IRS has three (3) years after a return is filed in which to audit the return. However, there is no time limit if the IRS is claiming fraud.
For these and other reasons, it is always best practice that a Trustee obtain a signed, written Receipt And Release from a beneficiary at the time of distribution.
-Attorney John R. Mugan
In some unfortunate cases, a trustee of a trust may fail to follow the terms of the trust or may take actions inconsistent with their fiduciary duty as a trustee. Fortunately, Nevada law provides several remedies when a trustee beaches his or her fiduciary duty to the beneficiaries:
NRS 163.115 allows a beneficiary or co-trustee to maintain a court proceeding if a trustee (1) commits or (2) threatens to commit a breach of trust. The beneficiary or co-trustee can ask the court to apply the following remedies to correct or rectify any breach of trust:
These tools allow beneficiaries and co-trustee to request the court’s help to remedy any bad actions taken by existing trustees. The tools also provide peace-of-mind to clients who are creating new trusts or have existing trusts as the courts can take action against any future trustee who does not follow the terms of their trust. These laws and many other laws in the state of Nevada help protect you if your trusted trustee has gone bad.
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Donald Sterling and the Los Angeles Clippers have been in and out of the news for several months now. There was some conclusion last week when Mrs. Shelly Sterling was successful in her attempt to take control of the Sterling Family Trust as sole Trustee. This opens the door to Mrs. Sterling being able complete the sale of the Los Angeles Clippers basketball franchise to Steve Ballmer. As an estate planning attorney it is a little bit exciting to have news relevant to our practice.
I obviously haven’t read the Sterling trust, but most trusts allow for a Trustee to be removed upon evidence of incapacity. Our trust’s standard incapacity language requires one doctor’s note regarding a Trustee’s physical or mental incapacity. In the case of the Sterling Family Trust, both Shelly and Donald must have both been Co-Trustees despite their separation. According to news stories that I’ve read, Mrs. Shelly Sterling obtained notes from Donald Sterling’s physician(s) that he was incapacitated and demonstrating symptoms of Alzheimer’s disease. After obtaining these doctors’ notes, Shelly took the position that she could serve as sole Trustee of the Family Trust and was therefore able to control the sale of the Clippers.
The question before the court was apparently whether Shelly Sterling was properly in place as the sole Trustee after obtaining the doctors’ notes. The judge found the doctors’ notes credible and the judge also found that Shelly Sterling was acting in good faith and that she was not secretly trying to take over control of the team and the family trust.
So what are we to learn from the Sterling situation? Well, in the context of estate planning, it may be worth reviewing your own trust and what the incapacity section requires for another person to take over as Trustee. There’s a delicate balance required. You want to allow a Successor or Co-Trustee to take control without too much effort and without great delay, but you also don’t want to make it so easy that someone can take control without determining that there is true incapacity. We usually discuss this incapacity clause with our clients and let them decide whether one doctor’s note is sufficient or if they want to require two doctors’ notes. An interesting alternative is to require a majority or unanimous decision of an “incapacity panel” made up of family members and perhaps a primary physician. This allows some discretion by the panel (usually made up of family members) to remove a Trustee without the formality of a doctor’s note and this could also allow for easy reinstatement of a Trustee if there was only temporary incapacity.
- Attorney Jason C. Walker