30 Nov To Disclose or Not to Disclose? That is the Question.
A trust relationship arises in many different contexts under the law of property and is a legal mechanism whereby a third party, called a trustee, owns, and holds legal title to an asset for the benefit of someone else. Trusts are an extremely common tool for attorneys, especially those who focus on estate planning, to protect their clients’ assets while allowing them to enjoy all or some benefits of those assets. While the basic standards of care imposed on trustees by Texas laws are well known and frequently the subject of articles, there are many nuances within those standards. This is not to suggest that trustees do not owe beneficiaries the highest level of fiduciary duty which, while not explicitly defined in Title 9 of the Texas Property Code (commonly known as the Texas Trust Code), has been universally accepted to encompass the (i) duty of loyalty, (ii) duty of full disclosure, (iii) duty to exercise reasonable discretion, and (iv) duty to competently administer the trust. However, one particular area that remains muddled in Texas law is the definition of the duty of full disclosure—that is, the scope of a trustee’s duty to disclose facts to trust beneficiaries. Even more specifically, the answer to this question hangs on one word: “material”.
It is black letter law that the duty of an executor and trustee is to administer the estate or trust for the benefit of the beneficiaries. Huie v. DeShazo, 922 S.W.2d 920, 924 (Tex.1996). Likewise, executors and trustees owe beneficiaries a duty of full disclosure of all material facts known to them that might affect the rights of the beneficiaries. Id. at 923; see also Tex. Prop. Code §113.151(a). For a brief period between 2005 and 2007 the Texas legislature had codified this duty of a trustee to keep trust beneficiaries “reasonably informed” regarding the administration of the trust and any material facts necessary for the beneficiaries to protect their interests. Tex. Prop. Code §113.060 (repealed). Simultaneous with the creation of Section 113.060, the legislature also codified Section 111.0035(5)(c) of the Property Code which restricted a settlor’s ability to limit a trustee’s duty to keep a beneficiary reasonably informed. The 2005 version of Section 111.035(5)(c) directly cited Section 113.060.
Section 113.060 was short-lived and was repealed by the legislature in 2007. Likewise, in 2007, the legislature amended Section 111.035 which reverted the duty of disclosure to the common law. However, the legislature gave some settlors and their trustees more latitude in deviating from the common law and reducing a trustee’s disclosure obligations.
The code now allows a settlor of a revocable trust to limit the duty to keep the beneficiary informed if the beneficiary is under the age of twenty-five, or ineligible for current distributions or distribution if the trust were to terminate now. Tex. Prop. Code 111.0035(c). The ability of a settlor to limit the duty of a trustee to keep beneficiaries informed does not apply to irrevocable trusts. Id.
Absent specific controlling language in a trust agreement Section 111.0035 of the Property Code, if applicable, trustees are now faced with the dilemma of whether their duty to disclose information to beneficiaries is active (that is, without being prompted by the beneficiaries) or passive (that is, only upon request by the beneficiaries). The case law since the repeal of Section 113.060 certainly trends towards creating an obligation on trustees to actively disclose information to beneficiaries, much of it relying on the holding in Huie v. DeShazo 922 S.W.2d 920, 923 (Tex. 1996) (“The trustee’s duty of full disclosure extends to all material facts affecting the beneficiaries’ rights”). The Texas Supreme Court, however, has only just recently weighed in on the issue since the repeal of Section 113.060 and, in doing so, somewhat skirted the issue.
In Austin Tr. Co. v. Houren, 664 S.W.3d 35 (Tex. 2023) the Texas Supreme Court reiterated its holding in Huie. “Under longstanding common law, trustees and executors owe the beneficiaries of a respective trust or estate a fiduciary duty of full disclosure of all material facts known to them that might affect the beneficiaries’ rights” Id. at 46. However, the proposition set forth in Huie, that a trustee owes an active duty of disclosure to its beneficiaries was not particularly germane to the Court’s holding. In Austin Tr. Co. the primary issue being decided was the enforceability of broad releases given to the executor of an estate by beneficiaries of a non-testamentary trust. The beneficiaries claimed that the releases they provided to the executor were unenforceable because the executor failed to fully disclose all the material facts surrounding the trust at issue. While the Court acknowledged that a trustee does have a duty to fully disclose all material facts, it sidestepped that issue because the party adverse to the beneficiaries was the executor and not the trustee. The Court agreed with the executor and held that he did not owe the beneficiaries a duty since he was not the trustee.
While there does not appear to be a bright-line answer regarding a trustee’s duty to disclose, the prudent approach will remain that active and robust disclosures by a trustee to beneficiaries is always the safest bet. When a trust agreement is silent about a trustee’s duty to disclose, robust and active disclosure is always preferable to protracted litigation regarding what the law surrounding disclosure is and the factual dispute of whether information withheld by a trustee is “material” to a beneficiary.
ABOUT THE AUTHOR: Scott Seidl is Counsel at Rapp & Krock, PC in the Litigation group.
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