August 19, 2020 / Law Alert

Ohio irrevocable trusts – Respite for trustees? Proposed legislation establishes optional process for extra-judicial claim resolution

An advantage of an inter vivos revocable trust, which becomes irrevocable upon the settlor’s death, is that the trust typically avoids all probate court filings. However, the lack of filings with the probate court can also be a double-edged sword for trustees who wish for a swift absolution of all claims associated with an irrevocable trust’s administration in Ohio. The release of claims can be a significant issue, as there are often numerous opportunities for claims to arise over any trust’s administration. Such claims against the trustee may range from the mismanagement of trust assets to claims of self-dealing, to breach of fiduciary duty, and the potential for these types of claims against the trustee are only amplified when beneficiaries do not get along.

Conversely, with a probate administration, as occurs with a testamentary trust, the trustee asks the court to release it from claims regarding the trust’s administration when it files the required “final account.” Before the court releases the trustee from any claims, the trust’s beneficiaries receive notice and are given an opportunity to file objections to any matter concerning the trust’s administration. If no objections are filed by the stated deadline, the trustee is then released from any related claims.

The Ohio State Bar Association (OSBA) recently approved a policy that will advocate for a change in Ohio law to provide finality outside of probate administrations. Specifically, the OSBA, through its Estate Planning, Trust and Probate Section, has proposed legislation that, if adopted, would establish an optional process by which the trustee of an Ohio irrevocable trust could seek the finality of all claims while still giving beneficiaries a reasonable opportunity to assert any objection or claim. This proposed legislation should be of great interest to institutional trustees in the state.

The proposed statute applies to Ohio irrevocable trusts and is relevant in two circumstances:

  1. When the trust is to terminate as a result of one or more “trust terminating distributions”; or
  2. When the trustee ceases to serve as trustee and delivers the trust assets to a successor trustee.

In addition, the process established by the proposed statute is also optional—a trustee may, but is not required to, use the process established in the statute.

Should the trustee elect to use the process established by the statute, he or she must give written notice and also provide trustee reports to all current beneficiaries of the trust. The trustee may not include an indemnification clause in the written notice, trustee reports, or in any other documentation served upon beneficiaries. The written notice must include an exhibit noting the trust assets, the trustee’s contact information and must describe the reason for invoking the process, i.e. whether the trust is being terminated or whether the trustee is delivering the trust assets to a successor trustee.

The process provides anyone receiving notice 45 days to object. If the trustee receives no written objections within the 45 day period, the notice is considered approved by each noticed recipient. Notice recipients are then barred from bringing a claim against the trustee and from challenging the trust’s validity (with the same preclusive effect as if the court had entered a final order approving and settling the trustee’s full account of its administration of the trust).

This legislation proposed by the OSBA presents a significant opportunity for trustees (particularly institutional trustees), to fulfill their duties and have confidence that liability will not loom long after the trust’s administration. While the OSBA will advocate for the Ohio General Assembly to pass this law, whether the process becomes law is unknown. However, the OSBA has had past success advocating for changes in Ohio law, and it seems possible that, at some point in either the remainder of this term (i.e., by January 2021), or the next term (by January 2023), this legislation will be introduced.

Porter Wright follows legislation impacting our clients each day. We will continue to you aware of any changes in this proposed law, which offers more certainty for both trustees and beneficiaries, while avoiding the judicial process.

For more information, contact Elizabeth Arentz, David Bloomfield or any member of Porter Wright’s Taxes, Estates and Personal Wealth practice group.