Virginia Fiduciary Law Blog

CAN A TRUSTEE HIDE MATERIAL TRUST INFORMATION FROM THE TRUST’S QUALIFIED BENEFICIARY?

In the law of trusts, basic transparency isn't optional; it’s foundational. Despite some trust instruments attempting to restrict beneficiary access to information, the fiduciary duties of a trustee make clear that a trustee cannot prevent a qualified beneficiary from protecting their interest in the trust or evading core fiduciary obligations. The trust law affirms that trustees have a duty to keep beneficiaries reasonably informed and to furnish material information necessary to protect their interests.

Crucially, this duty cannot be wholly eliminated by trust language, especially after the settlor’s death when the trust becomes irrevocable and a qualified beneficiary’s interests become fully vested. Core trust law principles provide that a beneficiary is entitled to request such information as is reasonably necessary to enable the beneficiary to prevent or redress a breach of trust. This principle underscores that core disclosure duties serve not just individual beneficiaries but also the integrity of the trust relationship itself.

The common law of trusts has long echoed this policy. The trustee's fiduciary duty encompasses providing material information to a trust beneficiary. A trustee's arbitrary or capricious application of trust provisions to limit access to key financial information required to protect a beneficiary’s interests risks a breach of the trustee's fiduciary duties. The takeaway for trustees and drafters: fiduciary duties are not entirely waivable, and a trustee, particularly if also a beneficiary, must act with impartiality and transparency.

ASSET PROTECTION THROUGH TENANTS BY THE ENTIRETY OWNERSHIP

A key component of asset protection in Virginia is the extension of the tenancy by the entirety to personal property. This extension occurred through legislative grant. While often also used in the context of real property and protecting real property against third party claims, Virginia recognizes the tenants by the entirety form of ownership over personal property. This form of asset protection is only available to married persons, and, in the context of personal property, it applies whether or not personal property represents the proceeds of the sale of real property.

  Parties engaged in comprehensive estate or succession planning, particularly professionals and those with real property interests, should carefully consider these protections and their scope afforded under Virginia law. Moreover, in considering the powers of trustees in trust instruments or agents under powers of attorney, consideration should be given to whether the powers of trustees or agents (formerly, “attorneys-in-fact”), particularly when these roles may be occupied by successors, should be limited in the case of tenants by the entirety property, and whether these limitations should apply equally to real property and personal property.

  The grant of a power to sever or convey tenancy by the entirety property should be carefully evaluated, particularly if either spouse has strong opinions or specific intentions regarding such property’s ultimate disposition.  

MISUNDERSTANDING THE OFFICE OF THE COMMISSIONER OF ACCOUNTS

   A common misunderstanding in Virginia practice and procedure arises in the context of Commissioners of Accounts.  Individuals interacting for the first time with a Commissioner of Accounts’ office may misapprehend the nature of that office, believing it to be fulfilling a merely ministerial or administrative function.  In fact, it is a quasi-judicial office, with appointment made by the court.

  Persons appearing before the Office of the Commissioner of Accounts, including its staff, would do well to remember the judicial nexus.  While a level of informality is permitted to occur, a fiduciary’s continued failure to comply with the Commissioner’s mandate can result in substantial negative repercussions.  In extreme cases, even arrest and incarceration may be sought from and ordered through the court for contempt.

  On the other hand, beneficiaries who believe that a Commissioner’s office is a free tool to settle scores with a fiduciary may be in for a surprise.  The Commissioner’s office may be willing to pursue a particular fiduciary for compliance, and if a fiduciary satisfies the Commissioner’s office through substantial compliance with pending requests, the issue may stand ended. Beneficiaries who are primarily pursuing a vendetta also may come to learn that a fiduciary is not expected to bear legal fees and costs from the fiduciary's personal funds to perform their duties.

SUPERMAJORITY SHAREHOLDER VOTING REQUIREMENTS: A TECHNICALITY OR A SAFEGUARD FOR THE MINORITY?

    The Virginia Supreme Court recently reversed a trial court’s ruling in favor of a corporation and its majority shareholders on a question of statutory interpretation. At issue was whether a simple majority of the corporation’s shareholders could redefine the statutory meaning of “significant continuing business activity.”  If a simple majority of the closely-held corporation’s shareholders could redefine that statutory term’s meaning in its bylaws, then the majority could escape the statutory requirement that a sale of the corporation’s assets outside of its ordinary business operations be approved by a supermajority, or two-thirds, of its shareholders.

    The Court drew on a plain meaning test to determine that the statute in question, Virginia Code Section 13.1-724, required a two-thirds supermajority vote to approve the sale of a substantial line of the corporation’s business.  The Court rejected the majority’s argument that amendments to the corporation’s bylaws could effectively redefine the meaning of “significant continuing business activity” to escape the supermajority voting requirement.  The Court held that the statutory scheme did not contemplate a private redefinition of the statutory term. 

    In a parting assessment, the Court noted, however, that a corporation could reject, or opt out of, the supermajority voting requirement altogether.  The corporation could have adopted a lower voting threshold. That, the Court observed, was clearly contemplated by the statutory scheme.  

    To eliminate the supermajority voting requirement to sell the corporation’s assets outside of its ordinary business activities, the corporation could have amended its articles of incorporation—an amendment that, the Court emphasized, itself required two-thirds, or supermajority, shareholder approval.  The outcome of the case is noteworthy in a variety of contexts, including the importance of carefully considering the terms of the original articles of incorporation and any amendments made before new or minority owners are admitted as shareholders. The case is May v. R.A. Yancey Lumber Corporation, No. 171708 (2019).

PITFALLS IN LETTING “THE STATE” WRITE YOUR WILL: MINDING THE SEPARATE MOIETIES IN CASES OF INTESTACY

    A longstanding saying within the estate planning bar proceeds approximately as follows:  the prospective client can either engage a competent estate planning attorney to write a proper will or let the State do it for them at their peril.  The reference to the “State,” in this context, refers to ceding this important right, namely, of creating a last will and testament, to the state's intestacy statute, as enacted by each state’s legislature.  Some individuals may well ask, however, Why, if the intestacy statute exists, do they really need a will?  The answer is that the intestacy statute is not a substitute for a will reflecting your wishes, but a fail-safe device of last resort; prospective estate planning clients would still do well to avoid intestacy by adopting a properly drafted will (or living trust).

  In an instructive but infrequently discussed intestacy case in Virginia, the question arose whether a decedent’s estate passed half of the paternal share (called the “paternal moiety”) to the share of the decedent's maternal kin (called the “maternal moiety”), or whether a paternal “half uncle” could take the entire paternal moiety.  The trial court had held that the paternal half uncle would be permitted to take a portion of the paternal kindred’s share—one half of the paternal moiety, as he was an uncle of the “half-blood” under Virginia law, with the rest passing to the “maternal moiety,” to be divided equally among 14 maternal second cousins who would also receive the entire maternal moiety. 

   On appeal, however, the Virginia Supreme Court reversed the trial court.  The Supreme Court noted that the paternal and maternal moieties theoretically may be rejoined, but only if there is no kindred of one moiety and one or more kindred of the other moiety.  In the event that there are one or more kindred of both paternal and maternal moieties, the interests of each moiety are determined entirely separately.  The Court thus awarded the entire share that would pass to the paternal moiety to the decedent’s “half uncle” because his status as an heir of the “half-blood” under Virginia law had no application outside of the paternal moiety.  The maternal moiety separately would be divided by the 14 second cousins. The ruling thus eliminated any interest that the 14 maternal cousins were awarded by the trial court in the paternal moiety.

   An ounce of prevention, in the form of a properly drafted last will and testament or living trust, can go a long way in avoiding these kinds of disputes and the attendant litigation delays, fees and costs.