by Ericka J. Thomas (Spring 2017)
Although not a new concept, the issue of trustee impartiality frequently arises in trust matters. Despite being many decades old, the case of Northern Trust v. Heuer, 202 Ill.App.3d 1066 (1st Dist. 1990) still provides the leading rule of the law on this issue and is worthy of being revisited.
In Heuer, the grantor died, leaving a trust that provided for alternate distributions. One of these alternate distributions involved an equalization clause, which set limits on distributions made to one beneficiary (Heuer). The trustee filed a complaint for instruction. Regarding the equalization clause, the trustee submitted in the complaint that it was subject to two different interpretations. Thereafter, the trustee and Heuer filed cross motions for summary judgment.
In the trustee’s motion for summary judgment, it argued for an interpretation of the equalization clause that was contrary to Heuer’s interests. Heuer, of course, argued the opposite position. The trial court determined that the trustee was correct and that the equalization clause should be given effect in a manner contrary to Heuer’s interests. Heuer claimed that the trustee had breached its duty of impartiality by advocating for construction of the trust in a manner that was unfavorable to him. The trial court ordered that the trustee’s attorney’s fees and costs be paid out of the trust and that Heuer’s attorney’s fees and costs be paid out of his share of the trust. Heuer appealed that order.
In the Heuer opinion, the First District noted that a trustee has the duty to deal impartially with all beneficiaries and to protect their interests. A trustee’s fiduciary duty to each beneficiary precludes it from favoring one party over another, unless the trust document provides otherwise.
When there are conflicting claims to trust funds, a trustee should file a court action to avoid breaching its fiduciary duty to remain impartial. The costs of litigation to construe a trust in which there are adverse claims are generally paid by the trust. However, if the trustee breaches its duty to be impartial and performs in a manner that favors one beneficiary, then a trustee is not entitled to attorney’s fees and costs.
The trustee asserted that its argument did not favor one beneficiary over the other, but, rather, was a commentary on the grantor’s intent. In considering this argument, the First District noted that the beneficiaries presented their own conflicting arguments to the trial court and that the trial court never requested the trustee’s interpretation of the trust. The court noted that the complaint set forth sufficient relevant information and outlined the different possible interpretations of the trust.
Ultimately, the court determined that when the trustee argued for interpretation of the trust in a manner that was beneficial to one beneficiary and detrimental to another, it exceeded its role as trustee and breached its duty of impartiality. The First District vacated the award of attorney’s fees and costs to be paid out of the trust to the trustee.
Cases that have interpreted the Heuer case since 1990 have commented that trustees can avoid the peril of the type presented in Heuer by filing a petition for instructions from the court as to their duties under certain circumstances. This will allow the trustee to avoid breaching its fiduciary duty of impartiality by acting according to court instructions, while at the same time carrying out the trust according to its terms. Because each case is individual and fact dependent it is important to consult with your counsel before taking any action.