Trustee Attorney Fees are Properly Paid from the Trust under Minn. Stat. Sec. 501C.0709, 1004; Breach of Fiduciary Duty Claims Require Proof of All Elements; Removal of Trustee Under 501C.0706 Reviewed

The Court of Appeals issued the long awaited Lund appeal which addressed several issues but this review only touches on 3 issues. The first issue is the right of a trustee to have its attorney fees paid from the trust. The district court found that Minn. Stat. § 501C.1004 supersedes common law and denied the trustee attorney fees but the court of appeals reversed. The common law provides that “a trustee is entitled to reasonable attorneys’ fees, to be paid out of the trust estate, incurred in good faith in defending his administration of the trust.” In re Freeman’s Trust, 75 N.W.2d 906, 907 (Minn. 1956). The court of appeals found that Minn. Stat. § 501C.0709 authorizing a trustee to pay attorney fees from the trust leaves the common law on this point undisturbed. The ability to pay attorney fees to “any party” under Minn. Stat. § 501C.1004 did not alter the common law or section 0709. So trustees can still pay attorney fees from the trust incurred in good faith, and “any party” may also have fees paid from the trust under Minn. Stat. § 501C.1004. The next issue is proving a breach of fiduciary duty. In this case the party asserting the breach of fiduciary duty failed to prove the last element in a breach case, damages. The person asserting a breach must prove duty, breach, causation and damages. But the party bringing the claim failed to prove damages in their brief. Apparently they tried to argue damages in the response brief but that is not allowed. Because one of the elements of breach of duty was not proven the claim fails. The third issue is removal of trustees.  Minn. Stat. § 501C.0706 allows removal of trustees for a substantial change in circumstances. That was apparently found for one trustee but the court also seemed to say that such trustee’s removal was by the consent of all qualified beneficiaries, served the beneficiaries best interests and was not inconsistent with the material purpose of the trust. Since all beneficiaries requested the removal, a substantial change of circumstances ruling was not needed. Another trustee was not removed because there was no substantial change in circumstances.

Posted in 501C.0706, 501C.0709, 501C.1004, Attorney fees, Breach of Fiduciary Duty, Uncategorized

Excluded spouse under slayer statute can still have standing in probate, 524.1-201(33), 2-803(a), (f).

In re: Estate of Sandra Sandland, Deceased, A17-2016; Filed December 10, 2018. In this case the husband killed his wife. Under the Minnesota slayer statute Minn. Stat. § 524.5-803 the husband is no longer an heir of the estate. When a joint tenant owner kills the other owner the joint tenancy is severed and becomes a tenant in common interest. Johnson v. Gray, 533 N.W.2d 57 (Minn. App. 1995). A tenant in common owner can’t exclude a co-tenant in common owner. Petraborg v. Zontelli, 15 N.W.2d 174 (Minn. 1944). The husband was in prison and created a power of attorney to have a person act on his behalf. The POA wanted access to the house but the special administrator of the estate denied access arguing lack of standing for the POA. At issue is whether the POA has the right to enforce property interests for the surviving spouse when that surviving spouse was removed as an heir due to the slayer statute Minn. Stat. § 524.5-803. In this case the court of appeals found that although the husband was removed as an heir, he still had an interest in the estate because he was a co-tenant in common owner of the real estate and could sue the estate to protect his own personal rights of his property. The court also looked to Minn. Stat. § 524.1-201(33) to find that the husband remained an interested person in the estate because he is still a “spouse” under the statute and was included among “any others having a property right.” The POA is allowed to inspect the property and obtain the husband’s property.

Posted in 524.1-201(33), 524.3-803(a), Interested person, probate, Standing

Appointment of guardian and conservator is reversed for insufficient findings of fact.

In re the Guardianship and Conservatorship of Reinhold Struhs, A18-0452. Filed December 3, 2018, (Minn. App. 2018). In a rare case, the court of appeals reversed the appointment of a guardian and conservator because the findings were insufficient to support the appointment. The petitioner was a long-time friend of the respondent. The respondent was seen in town with urinary stains on his pants and seemed confused. He was dribbling all over his clothes. His driver’s license was taken in 2017. His living conditions were dilapidated and unlivable. It was claimed his furnace needed work. It was claimed that he ate mainly bread and sweets but he changed that after being confronted about his diet and he bought better foods. He was renting his farm at below market rents. No medical records were introduced. The problem is that evidence was not introduced to show that the respondent was acting with diminished capacity. For example, they alleged the respondent was confused about trips he had taken but did not offer proof showing the actual days of the trips. They did not introduce evidence that the furnace actually needed repair. They did not produce evidence that finances were in fact being wasted. There was no testimony regarding alternatives. It seems the testimony was thought to be self-evident without additional facts or evidence. The court of appeals found that the evidence did not meet the statutory burden.

Posted in Conservatorship, Guardianship

Guardians have the power to bring a harassment restraining order for a ward.

In the case of Thompson v. Thompson, A18-0309, Filed November 26, 2018 the guardian for a ward sought a harassment restraining order (Minn. Stat. 609.748, subd. 5(b)(3)) on behalf of the ward against the former step-parent/former co-guardian. The court granted a 2 year order. One of the issues raised on appeal was standing. Appellant challenged the guardian’s ability to seek an HRO for a ward. The court noted that guardians have broad powers under Minn. Stat. § 524.5-313(c) and citing to State v. Nodes, 538 N.W.2d 158, 161 (Minn. App. 1995) to find that guardian powers include the power to bring an HRO. In this case the district court had given the guardian all powers under Minn. Stat. § 524.5-313(c) and therefore held that the guardian had power to bring the HRO. The court of appeals upheld the guardian’s standing to bring an HRO.

Posted in 609.748, Guardianship, Harassment Restraining Order, HRO, probate, Uncategorized, Ward

Challenge Revocable Trusts with Undue Influence and Lack of Capacity

In the case of In the Matter of the Trust Created by Eileen Carlson Kasell dated September 10, 2013, as amended, filed November 13, 2018, A18-0340,  the mother created a revocable trust. The mother entered into an agreement that the trust would not be amended without a court order but it seems it was amended on August 11, 2017 without a court order. That amendment disinherited one of two sons. When the trust was before the court on an unrelated issue the amendment was brought up and in September she sought approval of the amendment. The disinherited son objected. The disinherited son, however, did not produce evidence showing incapacity or undue influence. Standing was not ever raised or discussed. He expressed opinions but he did not present facts and did not have medical facts. The court found that the standards for capacity and undue influence for a will were the same as for the revocable trust citing Minn. Stat. § 501C.0601 and Norwest Bank Minn. NA v. Beckler, 663 N.W.2d 571, 579 (Minn.App. 2003).

Posted in 501C.0601, Lack of Capacity, trust, Undue Influence

Settlement Agreement is enforced even when formal agreement is not finalized.

Settlement Agreement and Memorandum of Understanding is an Enforceable Agreement, Minn. Stat. § 572.35 Subd. (1)1, and Personal Representative could settle the claim under Minn. Stat. § 524.3-715(27) without satisfying Minn. Stat. § 524.3-912 even when settlement altered distributions of estate. Estate of: Steven C. Kukowski, Decedent, A18-0217 August 27, 2018. Mom died and her estate was opened. After mom died, her son, Steven died. Mom’s estate sought to recover about $200,000 from Steven’s estate. It alleges Steven took many guns, a boat, motor, diamond ring, Indian Artifacts and other items from their mother before she died. The mother’s estate and Steven’s estate entered into a mediated settlement agreement. The agreement explicitly laid out several binding points in the memorandum of understanding and specifically said the agreement was binding although it did acknowledge that other details would be finalized in a separate agreement. The parties could not get to a final separate agreement. Steven’s estate returned much of the property but did not complete all terms of the contract. Steven’s estate sued to enforce the agreement. First, the court noted that this is a valid agreement under Minn. Stat. § 572.35 Subd. (1)1. The terms of the memorandum of understanding were sufficient enough to be enforceable. One of the heirs to the mother’s estate continued to object arguing that she was not a party to the settlement agreement so it is not enforceable under Minn. Stat. § 524.3-912. The court noted that this was an agreement between the two estates and not an agreement between the heirs. The personal representative had authority to “settle matters for the estate and its heirs” under 3-715(27) and whether that settlement affects the ultimate distribution of the mother’s estate is not before the court at this time. If the heirs try to settle the estate that is governed by 3-912, but when a PR settles a claim that is governed by 3-715 even if part of the settlement alters distribution of the estate.

Posted in 524.3-715(27), 524.3-912, 572.35 subd. 1, Memorandum of Understanding, Settlement Agreement, Uncategorized

UPDATE: US Supreme Court Denies Review of the Minnesota Supreme Court Decision Holding that the Minnesota Resident Trust Statute is Unconstitutional; Minn. Stat. 290.01, Subd. 7b(a)(2)

The United States Supreme Court denied review of the Minnesota Supreme Court decision that found Minnesota’s long arm tax statute unconstitutional. The decision came shortly after the United States Supreme Court issued its decision in Rice Kaestner 1992 Family Trust v. North Carolina Department of Revenue, (see blog on that case) regarding the state’s inability to tax a trust where the only connection is that the beneficiary is a resident of the state.

The Minnesota Attorney General had filed a Petition for Writ of Certiorari asking the US Supreme Court to review the decision of the Minnesota Supreme Court that struck down the Minnesota Resident Trust Statute. The Petition is attached as Minn Cert Petition to Supreme Court. In the Petition the Attorney General argued that Minnesota’s tax revenue is imperiled by the Supreme Court decision. It argued that Minnesota collected $117.1 million in trust tax revenue in 2016 and is facing more than 300 refund claims due to the recent decision. The Petition argues that there is a split in jurisdictions in how the due process clause is interpreted in tax cases. The Petition argues that 5 states deny taxation on trusts administered outside the jurisdiction and that 4 states allow taxation on trusts administered outside the jurisdiction. They argue that split should be reconciled by the Supreme Court.

In the case of Fielding v. (Minnesota) Commissioner of Revenue, filed July 18, 2018, A17-1177; 916 N.W.2d 323 (Minn. 2018), the Minnesota Supreme Court found the Minnesota Resident Trust income tax statute Minn. Stat. § 290.01 Subd. 7b(a)(2) unconstitutional  under the Due Process Clause of the United States and Minnesota Constitutions as applied to this case. In this case, the grantor created an irrevocable trust that was a grantor trust because the grantor retained a power of substitution over the trust property. The Trust was created in 2009 with a California Trustee.  On January 1, 2012 a Colorado Trustee was appointed and finally on July 24, 2014 a Texas Trustee was appointed. For the first 30 months, the Trust remained a grantor trust subjecting the grantor to tax on all trust income. However, on December 31, 2011 the grantor relinquished his power of substitution and the Trust was no longer a grantor trust. The Trust owned S-Corporation stock of a Minnesota based company. In 2014 the Trust sold the company stock and incurred more than $250,000 in income taxes and invested the sale proceeds at an institution outside of Minnesota. The Trust filed the 2014 income tax return under protest and filed for a refund. The Tax Court found the Minnesota tax unconstitutional and the matter was appealed to the Minnesota Supreme Court.

Minn. Stat. § 290.01 Subd. 7b(a) defines two forms of a resident trust, (1) a trust created by will (not reviewed in this case), and (2) a resident trust as “a trust, except a grantor type trust, which …is an irrevocable trust, the grantor of which was domiciled in this state at the time the trust became irrevocable” and that the trust became irrevocable after January 1, 1996. This second definition is of a resident trust is the matter subject to review. An initial issue for the Court’s constitutional analysis is whether the Court should consider all facts and circumstances regarding the trust or whether the only issue is the grantor’s connection to the trust. While the statutory definition looks to the grantor’s domicile, the constitutional analysis requires the Court to examine all the facts and circumstances surrounding the trust. The facts and circumstances approach is consistent with prior cases examining the constitutionality of a tax statute.

When turning to the facts and circumstances of this case, due process is satisfied if (1) there is a “minimum connection” between the state and the person, property, or transaction subject to the tax, and (2) the income subject to the tax is rationally related to the benefits conferred on the taxpayer by the state. There is no argument whether the state can tax Minnesota sourced income. That is not disputed. The question is whether Minnesota can tax all income including income not sourced in Minnesota. The state points to the following facts to justify the tax: the grantor was a Minnesota resident and domiciled here when the Trust was created and became irrevocable, the Trust owned stock in a Minnesota company, the Trust was created by a Minnesota law firm and the original documents were held by the Minnesota law firm, the Trust provides that Minnesota law controls the Trust, and one beneficiary was a Minnesota resident. The taxpayer points to the following facts opposing the residency status: no trustee has been a Minnesota resident, the Trust is not administered in Minnesota, the records are maintained outside of Minnesota, other Trust income is derived outside of Minnesota, and 3 of 4 beneficiaries live outside of Minnesota. The Court found that the state’s arguments are either irrelevant or too attenuated to satisfy the due process arguments. The state arguments do not look to the party paying the tax. The Trust is paying the tax, not the grantor. The fact that the stock owned by the Trust was in a Minnesota company is irrelevant to the fact that the stock is an intangible asset located outside of Minnesota and there is no connection to the grantor. The Trust owns the stock not the grantor. While a Minnesota law firm created the Trust, the law firm did not represent the trustees and storing an original document by the Minnesota firm was a convenience to the grantor not the Trust. The pre-2014 facts that show a connection to Minnesota are irrelevant to the analysis because the Trust is the taxpayer and what is relevant is the facts in 2014 and thereafter. “The direct link between the activities that generated the income in the year at issue and the protections provided by the State in that same year establishes the necessary rational relationship that justifies the tax.” Historical contacts unrelated to the tax year are not relevant. The tax was found to be unconstitutional.

This case does not decide the constitutionality of a tax upon a resident trust “created by a will of a decedent who at death was domiciled in this state” (Minnesota). The Court noted that testamentary trusts created by a will probated in Minnesota under the statute may be analyzed differently than this case. The Court cited to District of Columbia v. Chase Manhattan Bank, 689 A.2d 539, 544 (D.C. 1997)(finding it constitutional to tax a trust from a will probated in that state), and In re Swift, 727 S.W.2d 880, 882 (Mo. 1987)(probating the will in Missouri was not a sufficient nexus to tax the trusts) to highlight two possible conclusions if and when this second definition of a resident trust is analyzed. Thus it seems the taxation of a testamentary trust created under a will probated in Minnesota is still an open question.

Implications: This case rejects domicile as a justification for taxation and looks to minimum contacts to justify taxation. This creates obvious concerns for Minnesota trustees who administer trusts created in other states and whose grantor was not from Minnesota. Those trustees may need to start filing Minnesota tax returns because the trustee lives in Minnesota or administers the trusts in Minnesota. For trusts that are not administered in Minnesota and have no connection to this state, the trustees may want to strongly consider amending prior tax returns to seek refunds where the only connection to Minnesota was the domicile of the grantor. But the most compelling implication is the anticipated legislative response to this case. It is firmly anticipated that Minnesota will respond to this case with legislation that adopts a minimum contacts and benefits received approach to taxation. Such a definition of resident trust may cast an even wider net than the current definition of a resident trust under the statute. While this case is a victory for these parties, Minnesota attorneys, accountants and trustees may find that trusts begin an immediate exodus from the state to sever all minimum connections with the state to keep the trust from falling under a new resident trust statute. If minimum connections becomes the new tax test, local professionals may find themselves watching their clients sever all ties to save taxes. That is good for the trust but bad for Minnesota professionals.

Posted in 290.01 Subd. 7b(a)(2), Constitution, Due Process, Fiduciary Income Tax, Grantor Trust, Irrevocable Trust, MacDonald, Minnesota Supreme Court, Resident Trust, Trust Income Tax, Uncategorized