In 2018, William J. Schwalm created the William J. Schwalm Retirement Plan Trust naming his wife, Karen Schwalm, as trustee and as beneficiary after his death. He named his three children from a prior marriage as the beneficiaries after Karen’s death. The trust included a “privacy” provision giving the trustee “sole and absolute discretion, to provide any information to a Permissible Distributee or Qualified Beneficiary” and permitting her to “exclude any information that [she] determines is not directly applicable to the beneficiary receiving the information.”
William died at the end of 2019 and matters quickly came to a head. The children asked Karen for information about the trust, as well as for a copy of the Schwalm’s prenuptial agreement. Karen did not provide the documentation. The children went to court seeking a declaratory judgment seeking an order that Karen provide the information and documents.
After a hearing, the probate court judge dismissed the complaint, stating “The Trust is clear and unambiguous regarding the Trustee’s discretion to provide information to the Beneficiaries.” The children appealed.
On appeal in Gregory K. Schwalm, et al. v. Karen Schwalm (Mass. App. Ct. No. 22-P-783, July 7, 2023) in the Massachusetts Appeals Court reviews whether Karen is required to provide the children with information about the trust under the Massachusetts Uniform Trust Code (MUTC) or common law principles.
The MUTC
The Appeals Court quickly dismisses the children’s claim under the MUTC, which requires trustees to account to “qualified” beneficiaries. The children, however, are not yet “qualified” beneficiaries under the terms of the MUTC because they have no current right to distributions under the trust. They will become qualified beneficiaries upon Karen’s death. So, under the MUTC the children have no right to information about the trust.
The Common Law
The Appeals Court then turns to the question of whether Karen has a common-law duty to account to William’s children. The “common-law” is the body of law created by court decisions over time — often centuries — as opposed to statutes passed by the legislature. Here, the Appeals Court agrees with the children that Karen as trustee has a common-law duty “to keep clear and accurate accounts with respect to the administration of [a] trust” (quoting from its earlier decision Matter of the Colecchia Family
Irrevocable Trust, 100 Mass. App. Ct. 504 (2021)).
However, it disagrees with the children about whether Karen has a duty to share the accounts with them. Earlier cases do not create such a duty. The Appeals Court notes that if the legislature had wanted to impose this duty with respect to nonqualified beneficiaries, it could have done so when it required accounting to qualified beneficiaries. It also notes that other states that have adopted versions of the Uniform Trust Code do include a duty to account to nonqualified beneficiaries.
Finally, the court, referencing the privacy language quoted above, concludes that William wanted to give Karen control over the release of information about the trust: “In prioritizing his privacy, William provided Karen with limited obligations toward the children as remainder beneficiaries, to avoid just the situation at issue here.”
What Accounting is Required?
While not necessary to resolve the dispute in this case, the decision provides important guidance on what accounts and financial records a trustee must maintain, as follows:
Generally speaking, the books and records should reflect what the trust has received and expended and, if there are beneficiaries in succession, should demonstrate what expenditures are allocated to income and what are allocated to principal.
For most trusts, this can be as simple as preservation of monthly statements for trust accounts as well as a checkbook register that records deposits, expenditures and distributions. These must be shared with qualified (or current) beneficiaries, usually on an annual basis, but not with nonqualified (future or “remainder”) beneficiaries. The trustee can, however, share accounts with nonqualified beneficiaries if they choose to do so in the interests of transparency.
But What If You Want the Remainder Beneficiaries to be Informed?
While this decision makes it clear that neither the Massachusetts trust statute nor the common law impose a duty on trustees to account to future beneficiaries, a trust grantor may want to keep them informed. If so, they can say so in the trust, requiring accountings be provided to the remainder beneficiaries as well as to the current or “qualified” beneficiaries required by the MUTC.
