One of the more significant decisions from the New Hampshire Supreme Court as it relates to the area of Trusts and Estates was decided this year. On January 22, 2018, the Court denied the Defendant’s Motion for Reconsideration or Rehearing, thereby finalizing its decision in the case of Hodges v. Johnson.
Hodges presented an issue of first impression in New Hampshire: whether a trustee may use decanting to remove beneficiaries from a trust. Decanting is the process by which a trustee is given the authority to appoint assets from a first trust into a second trust, thereby modifying an irrevocable trust. Decanting is authorized by statute in New Hampshire, and the removal of beneficiaries is specifically authorized by RSA 564-B:4-418(b)(2). However, the New Hampshire Supreme Court, in a 2-1 decision, affirmed the probate court’s ruling that the decantings at issue in this case should be overturned because the trustees had improperly removed beneficiaries without considering all of the beneficial interests under the trusts.
Background
While the circumstances of the Hodges case are rooted in a multi-year collapse of family relationships, the basic facts are as follows. In 2004, the husband, a founder of a family-owned real-estate holding and development company, established two irrevocable trusts, a GST Exempt Trust and a GST Non-Exempt Trust (hereinafter referred to as the “2004 Trusts”). (These trusts were themselves the result of a decanting of an earlier trust, but that decanting was not being challenged in this case.) The beneficiaries of the 2004 Trusts were the wife and their blended family of five children: a son, two daughters, a step-son, and a step-daughter. The primary asset was non-voting stock in the husband’s company.
The 2004 Trusts provided for discretionary distributions to all of the beneficiaries in the Trustees’ discretion. The Trusts also provided that the Trustees could make unequal distributions to the beneficiaries and/or create sub-distributee trusts for the benefit of some, but not necessarily all, of the beneficiaries. Further, the Trusts contained a list of guidelines for the Trustees to consider when making distributions.
In 2009, the husband hired an attorney to represent him with regard to his estate planning matters. At this time, the husband wanted to limit the benefit he had previously provided to his step-children in the 2004 Trusts. The estate-planning attorney contacted the Trustees of the Trust (one of whom is now the President of the company and the other was the company’s attorney) to discuss decanting the 2004 Trusts. It was agreed that one of the Trustees would resign, the estate-planning attorney would be appointed Trustee, and the other Trustee would delegate his decanting authority to the estate-planning attorney. The estate-planning attorney would then prepare and execute the decanting documents. This process was completed in 2010 and the step-children were removed as beneficiaries. The same process was repeated again in 2012 to remove the biological son as a beneficiary, and again in 2013, to remove the wife as a beneficiary.
The family dynamics were deteriorating during this time period. The biological son, who had worked for the company from a very young age, was told in April 2012 that he would not become President because one of the Trustees of the 2004 Trusts would instead assume that position. In August 2012, that son was ultimately let go. Two months later, the step-son was also terminated after working at the company for 36 years. This series of events led to the step-son suffering a heart attack, the husband moving out of the family home, and the husband and wife getting divorced.
The biological son and two step-children ultimately filed an action in probate court challenging the decantings.
Trial Court Decision
Judge Cassavecchia held that the decantings were void ab initio because the Trustees abused their discretion by not giving due regard to all of the beneficial interests created by the terms of the 2004 Trusts. The statute in effect at the time of the decantings was an earlier version of RSA 564-B:4-418, which specifically stated that “[t]his section does not abrogate the trustee’s duty under RSA 564-B:8-801.” See NH RSA 564-B:4-418(e) (Supp. 2013). Judge Cassavecchia stated that Shelton v. Tamposi, 164 N.H. 490, 500 (2013) interpreted RSA 564-B:8-801 to require that trustees give “due regard for the diverse beneficial interests created by the terms of the trust.”
Judge Cassavecchia also stated that the reference to section 8-801 was significant because section 8-801 is included in the list of mandatory provisions under RSA 564-B:1-105, and therefore could not be waived by the terms of the 2004 Trusts. Judge Cassavecchia held that section 8-801 required the Trustees “to administer the trust in a manner that [was] impartial with respect to the various beneficiaries of the trust,” and because there was no record in the file as to whether the Trustees of the 2004 Trusts had considered or taken into account all of the beneficiaries interests before removing them via decanting, he ruled that the Trustees had abused their discretion. Interestingly, section 8-803, which is the section that deals with the duty of impartiality, is not included as a mandatory provision under section 1-105, and had in fact been waived in the 2004 Trusts. This waiver of the duty of impartiality suggests that the husband had not intended for the Trustees to be strictly bound by the duty of impartiality in administering the 2004 Trusts.
The NH Supreme Court Decision & Dissent
The Defendants appealed to the NH Supreme Court and in a divided opinion the Court affirmed Judge Cassavecchia’s decision, but on different grounds. The majority clarified the ruling in Shelton v. Tamposi meant that section 8-801 only requires that “trustees act in accordance with the trust provisions that define those interests.” However, the majority then went on to hold that the reference to section 8-801 in section 4-418 incorporated by reference the duty of impartiality under section 8-803. The majority explained that the duty of impartiality is violated when the “trustee fails to treat the beneficiaries equitably in light of the purposes and terms of the trust,” and that, because the Trustees in this case had not considered the interests of the beneficiaries being removed, they had violated this duty. The majority also stated that the duty of impartiality is owed to all beneficiaries of a trust, regardless of whether their benefits are future, vested, or contingent.
Justice Bassett dissented, noting that while the majority interpreted Judge Cassavecchia’s ruling to have found that the Trustees violated the duty of impartiality, Judge Cassavecchia had specifically stated that the duty of impartiality was not a mandatory term. He agreed that Judge Cassavecchia had misinterpreted section 8-801, but said that the proper decision would have been to remand to the probate court for further consideration. Justice Bassett stated that the majority erred in affirming on a ground “that the trial court did not reach and that the parties did not brief.” Justice Bassett also expressed concerns that the majority’s opinion undermined the legislature’s goal of making New Hampshire a progressive jurisdiction for trusts.
Where does this decision leave NH Practioners?
As noted above, Hodges involved a previous version of the decanting statute. Unlike that version, the current version of RSA 564-B:4-418 does not reference the requirements of RSA 564-B:8-801. Nevertheless, because the majority found that the duty of impartiality applied despite impartiality not being a mandatory term (and in fact waived by the trusts at issue), the Hodges ruling can arguably be read to impute the duty of impartiality into all trusts.
It is also important to note that both the NH Supreme Court and the probate court relied on the fact that there was no evidence in the record or files that the Trustees considered the financial interest of the beneficiaries being removed. This signals that in future decantings, it would be important for practitioners to note in their files the discussions and reasons as to why beneficiaries are being removed or why the distribution standards are being changed and to note how those decisions are consistent with the original intent of the Grantor as expressed in the original trust agreement. Additionally, when drafting new trust agreements, it would be advisable to include reasons why distributions could be made unevenly to beneficiaries, such as substance abuse issues or if the family members are no longer engaged/employed in the family business.
The Court also expressed displeasure that the estate-planning attorney had served as counsel to the Grantor, counsel to the delegating and former trustees, and as the decanting trustee himself. While the majority did not find this to be a conflict-of-interest, it may be prudent when decanting to remove beneficiaries to advise all parties to seek separate, independent counsel.
Finally, as Justice Bassett noted, the New Hampshire legislature has tried to make New Hampshire one of the more progressive trust jurisdictions in the country. The Hodges ruling will likely deter practitioners from decanting to remove beneficiaries in circumstances that they would have otherwise thought permitted by statute, which could have a discourage people from creating new trusts in New Hampshire or moving their existing trusts to New Hampshire. It would not be surprising to see new legislation introduced in response to this decision to clarify a Trustee’s duties when decanting to remove a beneficiary.