On September 22, 2022, the Court of Appeals of Arizona affirmed jury awards against Trustees (and also the trust Settlor and attorneys) for breach of fiduciary duty, which included compensatory damages in the amount of $10.5 million and punitive damages in the amount of $10.5 million. Kunasek v. Johnson, 2022 WL 4377299. This case arose after Defendant Settlor had a falling out with Plaintiff, who was one of the beneficiaries of the trust and also served on the Maricopa County Board of Supervisors and as an advisor to the Arizona governor.
Plaintiff is said to have refused Settlor’s demand to use his government influence to intervene to stop a state investigation into a public utility owned by Settlor. Working with the Trustees (Settlor’s adult children, who were also beneficiaries) and trust attorneys, Settlor was able to get most of the trust assets to another entity, which significantly reduced the income and value of the trust. Thus, Plaintiff sued the Trustees, Settlor, and the trust attorneys for breach of fiduciary duty, and won the case. Defendants appealed the jury verdicts and awards, but the Court of Appeals affirmed the judgment.
The Kunasek case is a dire warning for all trustees and attorneys engaged in trust administration. As a trustee, you have several duties that you must follow in order to properly administer the trust. These duties include, among others: 1) the duty to administer the trust in good faith (in the best interests of the beneficiaries and consistent with the purposes of the trust and its express terms); 2) the duty of loyalty to the beneficiaries; 3) the duty of impartiality between the beneficiaries; 4) the duty of adequate record keeping, and 5) the duty to provide reports to beneficiaries and otherwise keep beneficiaries informed. In Kunasek, the Trustees ran afoul of their duty loyalty to the beneficiaries, by transferring assets out of the trust at the direction of the Settlor, which resulted in great harm to the trust and Kunasek himself, a fellow beneficiary of the trust. Here the Trustees did as their father, the Settlor, instructed, in contravention of their duty to the beneficiary. In addition, the Trustee failed to comply with their duty of impartiality to the beneficiaries. In Kunasek, the Trustees (brother and sister) were also beneficiaries, along with Kunasek. Thus, when the Trustees transferred assets away from the trust into another entity that would not benefit Kunasek, the Trustees were obviously not acting impartially between themselves and Kunasek as beneficiaries. Moreover, when the Trustees did not report the transfer of the trust assets out of the trust, they failed in their duty to report to Kunasek, as a fellow beneficiary, and keep him informed of the trust status.
How can you as a Trustee avoid making the mistakes that led to the result in the Kunasek case? In Kunasek, the Trustees, as the adult children of the Settlor, were no doubt used to acting at the command of the Settlor. Thus, they may not have realized that in following the Settlor’s directive to dilute the trust of assets, they violated their duties of loyalty, impartiality, and reporting to their fellow beneficiary, Kunasek. The Trustees could have avoided these mistakes by educating themselves about their duties as trustees, and seeking independent legal counsel separate and different from the trust attorneys or the Settlor’s attorneys.
An easy way to get trustee education is by joining the Private Trust Consortium (PTC), which is a membership organization dedicated to educating and assisting trustees on their journey through trust administration. As members of PTC, trustees have the ability to purchase trustee professional liability insurance through Brown & Brown and underwritten by Chubb, at a discount, which protects trustees against liability for damages, attorney fees, and costs, arising out of defending claims of breach of duty and negligence (while intentional bad acts are generally not covered by insurance, it is possible in Kunasek, for example, that the co-trustees would have been covered under a liability policy, which may likely require indemnity from their father and the trust attorneys).
In addition, PTC provides its trustees with specialized Onboarding Reports, which assess the unique strengths and weaknesses of each trust, weighing specific risk factors present in each trust, and suggesting best practices for trustees to mitigate such risks. With a PTC Onboarding Report, the Trustees in Kunasek would have been educated about the risks they faced serving as trustees, while at the same time being beneficiaries of the trust, in addition to having a duty to another non-familial beneficiary. Don’t delay – join PTC today and get the insurance protection and onboarding knowledge you need to arm yourself with to effectively serve as a trustee in today’s litigious environment.