When Does A Claim Against a Trustee Arise Under The Uniform Trust Code

It is difficult to ascertain when a claim against a trustee arises because the act giving rise to the claim may not be disclosed to the beneficiary. Therein lies the tension between the common law traditions of statute of repose (limitations) and the Doctrine of Laches (“Laches”).

Claim-Against-a-TrusteeLaches attempts to impose a standard that recognizes a reasonable balance of the interests of the two sides. The beneficiary may not be aware of he trustee’s breach of duty for many years after the event so it is unfair to impose a deadline measured from the date of the breach. It is also unfair that a trustee face potential liability forever. Laches attempts to balance the competing interests by requiring the beneficiary to bring an action within a reasonable time of learning of the event of breach giving rise to the claim.

When does a beneficiary learn of the breach and gain sufficient knowledge of the law to know he or she has a claim against the trustee?  This intensely factual inquiry consumes considerable resources before the alleged breach of duty is analyzed and debated.

The Uniform Trust Code (UTC) attempts to provide a greater measure of certainty in this murky area with a bright-line five (5) year statute of repose (limitations). The UTC calls for a trust beneficiary to bring an action against a trustee for breach of trust within five (5) years of: (1) removal, resignation of death of trustee; (2) termination of the beneficiary’s interest; (3) termination of the trust.

Two issues arise from the UTC’s five-year rule. First, a trustee that fails to report to the beneficiaries or adequately disclose sufficient information may not be able to avail itself of the rule. Some view this as encouraging a trustee not to disclose.  Others believe the requiring the trustee to report annually is sufficient.  Second, it is unclear what state law exceptions apply to the five year rule of the UTC.

We expect that three (3) exceptions toll the UTC’s five (5) year rule. Fraud is one exception, however, is not a specified exception in the UTC. Unjust enrichment may or may not toll the statute from running. Finally, trust reformation may avoid the five-year rule.

What happens when an attorney represents a trustee who has breached a duty? Does the attorney protect the trustee as an individual or as a fiduciary? Would the trustee have the benefit of the five-year statute yet the trustee’s agent and attorneys might not?  So far, it appears the UTC does not cover attorneys.  Is the imputation of knowledge of an agent to the trustee enough to overcome the five-year rule and snare the trustee?

At times, it is difficult to draw a bright line through equity’s maze of duty and doctrines.

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Frank Brunetti has been practicing law for over thirty years in the areas of estate and wealth preservation, tax planning for business entities and complex tax matters. He is admitted to the New Jersey and New York Bars as well as the United States Tax Court. Mr. Brunetti provides representation in federal and state tax matters, IRS controversies, estate and business planning and guidance for the preparation of wills and trusts as well as the administration of estates. For more information, please visit Frank Brunetti's full biography at Scarinci Hollenbeck

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