Trust Beneficiaries Get One Bite of the Apple

Authored by: Paul J. Sowell, Esq.

With the recent volatility in the economy and markets, wealth advisers have been preaching to trustees the need to have well defined investment protocols which fully address risk.  On the flip side of the coin, it is incumbent on trust beneficiaries to fully understand what actions have been taken by their trustee in managing their trust account and to only sign off on such actions after thoughtful reflection and professional advice.

A recent example of this need for vigilance is the Matter of HSBC Bank U.S.A., 2010 N.Y. App. Div. LEXIS 1120.  In this case, a bank acquired by HSBC Bank U.S.A. served as the trustee of a trust holding a concentrated position in Corning Glass Works stock, which was authorized by the terms of the Trust document. Upon the settling of the trustee’s account, an informal accounting of the trust was sent to the trust beneficiaries’ attorney along with receipt and releases. The accounting revealed a significant decrease in value of the Corning Glass Works Stock.. The beneficiaries’ attorney forwarded the release to the beneficiaries and the beneficiaries signed their releases, which provided that HSBC was forever absolved of all liability for the handling of trust assets.

The beneficiaries later sued the trustee and their own attorney three years after signing the releases alleging that the trustee and the attorney failed to disclose the legal effect of their signing of the releases. The Surrogate’s Court dismissed the petition, and the Appellate Division affirmed based on the failure of the beneficiaries to allege facts supporting the claim of misrepresentation, and because the legal malpractice claim was barred by the statute of limitations. Importantly, the court noted that the trustee “fulfilled its fiduciary duty by providing petitioners with a full accounting of the trust, and [the beneficiaries] failed to object to the accounting and executed releases waiving their rights against HSBC.” This case reiterates the importance of trust beneficiaries carefully scrutinizing a trustee’s action and not willingly signing a receipt and release if there are objectionable items in the trustee’s accounting.

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