February 27, 2017 Practice Points

Supreme Court of Nebraska Provides Guidance on UTC Mandatory Duties of the Trustee and Effectiveness of Exculpatory Clauses

The case is Rafert et al., v. Meyer

by Yara Kass-Gergi

In Rafert et al., v. Meyer, 290 Neb. 219, 859 N.W.2d 332 (2015), the Supreme Court of Nebraska provided guidance regarding the effectiveness of exculpatory clauses, and the mandatory duty of a trustee to report, under the Nebraska Uniform Trust Code. The court held that exculpatory clauses do not indemnify a trustee from his duties: (1) to act in good faith and in accordance with the terms and purposes of the trust; and (2) to keep qualified beneficiaries reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests. The court further held that an exculpatory provision was invalid because the trustee had not explained its “existence and contents” to the settlor. Given the similarity between the Nebraska UTC and the Model UTC, practitioners from other UTC jurisdictions will find this opinion instructive.

Jlee Rafert executed an irrevocable trust for the benefit of her four adult daughters in March 2009. The trust held $8.5 million in insurance policies on Rafert’s life. Her attorney, Robert J. Meyer, prepared the trust instrument, naming himself trustee. Meyer never met with Rafert to explain any of the trust provisions. As trustee, Meyer signed the three policies that named Rafert as the insured and the trust as owner. He provided a false address in South Dakota for himself as trustee. Rafert paid initial premiums on each of the policies in 2009. The insurance companies wrote to Meyer at his false address, informing him that the next premiums were due, and subsequently sent notices that the policies were in danger of lapsing. Rafert and her daughters were not made aware of the lapses until August, 2012. Rafert and her daughters sued Meyer for breach of fiduciary duty. Meyer moved to dismiss the complaint because the trust document specifically purported to relieve Meyer of the duty of paying the premiums or informing anyone of the nonpayment. The district court agreed and dismissed the complaint with prejudice. Rafert and her daughters appealed.

The trust specifically provided that the trustee had no duty to notify anyone of nonpayment of premiums. But, the Supreme Court of Nebraska held that, under the UTC, a trust instrument cannot excuse a trustee from certain duties. These duties included the specific duty to inform the beneficiaries that the life insurance policies were about to lapse, in order to comply with his overall duty to keep them “reasonably informed . . . of the material facts necessary for them to protect their interests.” Id., at 228–229, quoting Neb. Rev. Stat. § 30-3805(b)(8).

The court also held that the exculpatory clause in the trust instrument was invalid, because Meyer never conveyed its existence or its effect to Rafert. An exculpatory clause is invalid under the UTC, as an abuse of the fiduciary relationship, unless the trustee proves (a) that the exculpatory clause is fair under the circumstances, and (b) that its existence and contents were communicated to the settlor. See Neb. Rev. Stat. § 30-3897(b). The complaint filed in Rafert alleged that Meyer had drafted the trust without meeting with Rafert and never explained any of the trust’s terms to her.

Finally, the court dismissed Meyer’s argument that he had no duty to report that the payments were overdue to the beneficiaries because the annual reporting was not yet due. It held that annual reporting was only a minimal requirement in the ordinary administration of the trust. That requirement did not absolve Meyer of his mandatory duty to inform the beneficiaries of material facts necessary to protect their interests, when the policies were going to be cancelled before such reporting was due to be made.

In sum, the Rafert decision demonstrates that, under the UTC, there are limits to how much a trust instrument can reduce or eliminate the fiduciary duties of a trustee to the beneficiaries, particularly when the drafting attorney is the trustee.

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