Trustees, Executors, Guardians and POA Agents - Your Accounting Cometh. Be prepared!!!

In the recent case In Re: Estate of Lee, the Illinois Appellate Court, Third District, reviewed orders from the trial court requiring an accounting from the trustee, finding contempt for failure to comply by the deadline in the court order for the accounting, ordering the executor to bypass the trustee and make payments direct to the beneficiaries, and removing the trustee.  The appellate court affirmed the court orders, except reversing the contempt ruling and sanctions.

The decedent (Sandra) died in 2005, leaving three minor children. She had a will that (in a common estate planning strategy for parents with minor children) included a testamentary trust as the means by which her children would receive their inheritance, and providing that each child would receive 1/3 of the trust assets at the age of 25.  The will appointed an executor (Jennifer) and a trustee (Kathleen) who appears to also have served as guardian (the opinion indicates the children lived with Kathleen).  

In 2010 Kathleen as trustee filed a petition in probate demanding an accounting from Jennifer, and an accounting was filed for the estate.  In 2014, one of the children (who appears to have turned 25 that year) filed a petition for an accounting from both the estate and the trust. By agreement, the court so ordered; Jennifer filed one for the estate but Kathleen did not do so for the trust.  Only after a rule to show cause issued and after the subsequent hearing resulted in the court finding Kathleen in contempt, did she file an accounting, and then an amendment.

Her accounting apparently consisted of estimated expenses based on a USDA study, and did not contain figures from specific, actual expenses, nor any supporting receipts, copies of checks, etc.  The accounting resulted in Kathleen alleging she was owed some $315,000 from the Estate.  The children responded by petitioning the court to remove Kathleen as trustee and to enter a judgment against her for $190,000--the amount she had received from the estate already, plus interest.  In a subsequent evidentiary hearing, Kathleen testified that she did not keep records for most of the money she had spent for the children, and that while initially the money she received for the children went into a trust account, it was later transferred to Kathleen's own account.  She and her husband testified that they had built a new house and purchased a new vehicle, to have room to fit Sandra's three children along with their own family.  

The trial court found the evidence to be "overwhelming and basically uncontroverted" that Kathleen had violated her fiduciary duty by essentially treating the trust money as if it were her own.  On appeal Kathleen argued that she had no duty to provide an accounting.  After pointing out that she had waived that argument by entering an agreed order at the trial court, the appellate court confirmed that even without the agreed order, the accounting was required.  Under the Trusts and Trustees Act, a trustee is required to provide a yearly accounting to any income beneficiary, which in this case, the children were.  

The appellate court then affirmed the trial court's order to the executor to make payments directly to the children who had turned 25, as reasonable and within the court's discretion, in light of the "unique circumstances of this particular case."  The same argument might have applied to the ruling to removed her as trustee, but Kathleen failed to argue this issue in her briefs on appeal and so it was deemed waived.  Finally, the court explained the difference between criminal and civil contempt, and between direct and indirect, and found the trial court's contempt finding was not sufficiently clear as to which kind had been determined.  On that basis, the finding was reversed; however the court noted that the children could file a new contempt proceeding as the reversal was without prejudice.  

For Trustees, Executors, POA Agents, Guardians and other Fiduciaries - This case shows what can go wrong and the serious consequences that can accrue, when trustees do not keep proper records.  Where was the attorney for the estate and trust when Sandra died, and did the attorney properly advise Kathleen how to document for an accounting?  It is mind-boggling to me that she thought she didn't have to do that (when it is spelled out black and white in the statute), even to the point of arguing that to the appellate court.

For Families With Young Children - The case also stands as an example to keep in mind when parents of young children are writing their estate plans and considering who to name in these important fiduciary roles of executor, trustee, and guardian, and just how important those decisions are.  First, having a will and naming someone at all, rather than leaving it up to a judge, and second the importance of naming the right person or professional fiduciary.

Nate Hinch is an attorney and partner at the law firm of Mueller, Reece & Hinch, LLC.  He has offices at 404 N. Hershey Road, Suite C, Bloomington, IL 61704, and 809 Detweiller Drive, Peoria, IL 61615, and can be reached by phone at (309) 827-4055 and email at nhinch@mrh-law.com.