A Trustee Has a Duty to Preserve Trust for Beneficiaries, Not to Ensure Payment of Alimony to Grantor’s Ex-Wife

An Iowa appeals court recently ruled that a trustee of his father’s trust is not liable for interference with a contract when he stopped paying his father’s ex-wife alimony because his duty was to preserve the estate for the beneficiaries of the trust, not to ensure that she received alimony. Brownell v. Johnson (Iowa Ct. App., No. 19-0847, Nov. 4, 2020).  The case is an excellent example of the complications that arise in planning, and the complexity of analyzing the legal duties of fiduciaries, in this case a son who acted as both a trustee and an agent under a power of attorney.  

Phillip Johnson and Kathleen Brownell were a married couple when Phillip was diagnosed with cognitive impairment. In anticipation of applying for Medicaid, Phillip transferred all of his assets to a trust with his son, Scott Johnson, as successor trustee. Ms. Brownell filed for divorce, and under the divorce settlement, Ms. Brownell agreed to have no interest in the trust and Phillip agreed to pay her alimony. 

Phillip suffered a farm injury in July 2015, which injury coincided with Phillip’s mental decline.  He transitioned to a nursing home that same month. He continued to live there at the time of the underlying trial in January 2019. Phillip was at first not eligible for nursing home compensation through Medicaid because the Johnson Farm Account Trust had been set up within five years. Phillip became eligible in July 2017—when the five-year lookback period expired. Phillip paid Ms. Brownell alimony until he entered a nursing home, at which point Scott began managing his affairs as agent under a power of attorney.

Ms. Brownell sued Scott for intentional interference with a contract for failing to make the alimony payments. Scott testified that his duty as trustee was to qualify Phillip for Medicaid and preserve the family real estate, not to pay Ms. Brownell who had, as a result of the divorce, become a creditor of Phillip. The parties stipulated that she was owed $25,200 in alimony as of the trial. Kathleen further testified that she borrowed $2500 from a daughter, $4500 from another daughter, and $7698 from her son to live on while she was not receiving her alimony payments. She also testified she incurred about $19,000 in attorney fees and had taken $15,000 in cash value from the life 6 insurance policy to keep the payments up to date on that policy. Kathleen asked for $74,000 in damages. A trial was conducted and the jury found for Ms. Brownell, awarding her damages. 

Scott appealed. 

It is interesting to note that on appeal, the Iowa Academy of Trust and Estate Counsel sought leave to file an amicus brief, which the Iowa Supreme Court granted.  The amicus’s stated purpose in filing an appellate brief was to “assure that [our] disposition of the appeal does not result in the adoption of a standard that the trustee of a trust owes any duty to the creditor of a beneficiary of a trust when the trustee is making distributions to other beneficiaries of the trust in compliance with terms of the trust.” Brownell at p. 2-3. The Iowa Court of Appeals reversed, holding that Scott cannot be held liable under an interference with contract theory as a matter of law. The court ruled that “Scott, acting as the trustee, had to make decisions that were best for the beneficiaries without concerning himself whether those actions interfered with Phillip’s ability to make his alimony payments.” The court similarly found that Scott’s motives of “preserving assets for his father’s care and upholding the estate plan” were not improper under his role as agent. 

The court wrote that 

"...the trust and trustee owed no duty to Kathleen as a creditor of a trust beneficiary (Phillip). “Persons who may incidentally benefit in some manner from the performance of the trust are not beneficiaries of the trust and cannot enforce it.” Restatement (Third) of Trusts § 48 cmt. a (Am. Law. Inst. Oct. 2020 Update). The Iowa Academy of Trust and Estate Counsel raised this concern. And the amicus implores us to find that Scott had no duty to Phillip’s creditors when he, acting in his capacity as trustee in compliance with the terms of the trust, decided what distributions to make and to whom. The undisputed duty of loyalty of a trustee is to the beneficiaries of the trust, not the creditor of any beneficiary. Restatement (Third) of Trusts § 78(1).

First, both Kathleen and Scott confirmed that the trust purpose was twofold. One purpose was to qualify Phillip for Medicaid benefits, which required Phillip to maintain a limited net worth of $2000 and a limited monthly income. The second purpose was to ensure that Phillip’s sons retained the family real estate. To effectuate this purpose, Kathleen admits in her brief that after all real estate was transferred to the trust she “disclaimed and surrendered any and all interest she may have in the Trust.” Also with those goals in mind, Scott maintains he fulfilled his obligations as trustee in the manner he was supposed to; he stopped making income distributions to Phillip so that his father could remain eligible for Medicaid nursing home coverage. Then after the qualification for Medicaid, he transferred the trust assets to the beneficiaries to preserve their interests in the family real estate. Scott notes that he relied on the advice of several attorneys in taking these actions.

.     .     . 

Kathleen acknowledged the trust goals that Scott followed. But at trial and in her brief, she argues in his role as trustee, his failure to pay her interfered with her contract between herself and Phillip. But Kathleen is not a creditor of the trust. Even the jury found the trust owed her nothing. Thus, Scott, operating as trustee, owed Kathleen no fiduciary duty. See Iowa Code §633A.4202(1) (“A trustee shall administer the trust solely in the interests of the beneficiaries, and shall act with due regard to their respective interests.”).

[Second], drilling down to the specific improper conduct of Scott as agent, Kathleen argues Scott “felt entitled to pick and choose which bills ultimately got paid.” It then follows, under Kathleen’s theme, Scott was not acting on behalf of or in Phillip’s best interest. And Kathleen emphasizes that Scott testified he did not like that his father was ordered to pay alimony because he thought it was unfair. So does refusing to pay the principal’s creditor amount to improper conduct by the agent under an interference-of-contract claim? If we step back from this case, we would plow new ground to hold that an agent acting under a power of attorney must pay all bills of the principal or risk a claim of interference with a contract by a creditor. An agent, acting for the principal, might decide to prioritize which bills to pay, and if a creditor finds the action wrongful, the remedy is breach of contract. The motives of Scott in preserving assets for his father’s care and upholding the estate plan, which all parties acknowledged in this case, is not improper under his role as agent. Scott exercised financial discretion to protect his father’s legal rights, and Kathleen failed to prove his sole motivation was to defeat the alimony contract. [citation omitted, emphasis added]. Thus, the record does not support a finding of wrongful conduct against Scott as an agent for Phillip.     

The court noted that Ms. Brownell still has a breach of contract claim for alimony against Phillip. 

More Adults Now Share Living Space As More Parents Live With Adult Children

The Pew Research Center has posted a new report  indicating that more adults are sharing  a home with other adults with whom they are not romantically involved. This arrangement, which Pew identifies as “doubling up” or shared living, gained notice in the wake of the Great Recession.  Nearly a decade later, the prevalence of shared living has continued to grow.

While the rise in shared living during and immediately after the recession was attributed in large part to a growing number of Millennials moving back in with their parents, the longer-term increase has been partially driven by a different phenomenon: parents moving in with their adult children.

In 2017, nearly 79 million adults (31.9% of the adult population) lived in a shared household – that is, a household with at least one “extra adult” who is not the household head, the spouse or unmarried partner of the head, or an 18- to 24-year-old student. In 1995, the earliest year with comparable data, 55 million adults (28.8%) lived in a shared household. In 2004, at the peak of homeownership and before the onset of the home foreclosure crisis, 27.4% of adults shared a household.

A shared household is defined somewhat differently from a multigenerational household (although the two can overlap), as shared households can include unrelated adults and adult siblings. More adults live in shared households than multigenerational households: In 2014, 61 million Americans (including children) resided in multigenerational households.

The nearly 79 million adults living in a shared household include about 25 million adults who own or rent the household. An additional 10 million adults are the spouse or unmarried partner of the head of the household. Another 40 million, or 16% of all adults, are the “extra adult” in the shared household. This share living in someone else’s household is up from 14% in 1995.

Adults who live in someone else’s household typically live with a relative. Today, 14% of adults living in someone else’s household are a parent of the household head, up from 7% in 1995. Some 47% of extra adults today are adult children living in their mom and/or dad’s home, down from 52% in 1995. Other examples of extra adults are a sibling living in the home of a brother or sister, or a roommate.

In 2017, only 18% of extra adults lived in a household in which the head was unrelated (typically a housemate or roommate). Living with nonrelatives has become less prevalent since 1995, when 22% of extra adults lived with a nonrelative.

Regardless of their relationship to the household head, young adults are more likely than middle-aged or older adults to live in someone else’s household. Among those younger than 35, 30% were the extra adult in someone else’s household in 2017, up from 26% in 1995. Among 35- to 54-year-olds, 12% were living in someone else’s household, an increase from 9% in 1995. Today 10% of 55- to 64-year-olds are an extra adult, up from 6% in 1995. The only adult group that isn’t more likely than before to live in another adult’s household is those ages 75 and older (10% in both years).

The rise in shared living may have implications for the nature of household finances – that is, how income and expenses are shared among members.  The complexity of the interpersonal relationships, together with interrelated financial relationships complicate estate planning  solutions.  Often, these relationships beg for planning to clarify, crystallize, and memorialize expectations arising from the relationships.   

In addition, the increase in “doubling up” is offsetting other social trends bearing on the nature of the nation’s households and demand for housing. While Americans are less likely to be living with a spouse or unmarried partner in their household, the rise in doubling up means more adults are living with nonrelatives and with relatives other than romantic partners. As a result, the average number of adults per household has not declined since 1995, and consequently, the number of households per adult has not increased.

In fact, household formation, or the number of households for every 100 adults, has recently fallen to very modest levels for several age groups. For example, in 2017 there were 31 households headed by an adult younger than 35 for every 100 adults in that age bracket (adjusted for the age bias in head-of-household status), among the lowest rate of household formation for this age group since the early 1970s. Decreased household formation is not confined to young adults. Last year there were 61 households headed by a 65- to 74-year-old for every 100 65- to 74-year-olds. While this marked a slight statistical increase from 2014, the last time household formation rates were that low among this demographic was 1972.

The rise in shared living is likely not simply a response to rising housing costs and weak incomes. Nonwhite adults are much more likely than white adults to be doubled up, mirroring their greater propensity to live in multigenerational households. Nonwhite adults are a growing share of the adult population, and thus some of the rise in shared living arrangements is due to longer-running demographic change.  

Regardless of the causes of these trends, families are well-advised to consider their specific circumstances when designing, drafting and implementing individual financial and estate plans.  Experienced counsel and advisers will ordinarily consider these relationships in the fact-finding portion of planning.  Individuals must, however, fully advise their advisers of such relationships, and their expectations in order to ensure full consideration of goals and objectives.     

Caregiving Complicated By Late-In-Life Marriages

Disputes with Step-Children Increase Risk of Guardianship and Institutionalization

Mrs. Staffler calls her step-daughters to inform them that her husband, their father, has been admitted to the hospital following a massive stroke. As they gather in the hospital, it quickly becomes clear that the eldest daughter has been selected to give Mrs. Staffler some chilling and unexpected news. "You are not making decisions for our father; as his daughters, we will decide what needs to be done for him."

Feeling betrayed and offended, Mrs. Staffler rushes home to retrieve the health care power of attorney which appoints her as attorney-in-fact to make health care decisions. Armed with what she trusts is a clear statement of her authority, she returns to the hospital to find that the step-daughter has an attorney, and a caseworker from adult protective services awaiting her. In the ensuing battle, the stepdaughter is appointed guardian for her father by the probate court, and Mrs. Staffler is forced to hire an attorney to prevent the court from appointing a guardian for her.

Although she is successful in maintaining her freedom and independence, her legal expenses exceed fifteen thousand dollars. Moreover, although Mrs. Staffler assumed that she would have access to her husband's estate to care for her in the event of her husband's death, it is now apparent that the step daughters want their to inherit from their father's estate immediatelyupon his death.