Q: A trust beneficiary wishes to bring a claim against the trustee for a 2005 defalcation of funds. The trustee disclosed the defalcation to the beneficiary in 2005. May the beneficiary bring a claim for breach of trust five years later?
A: Yes, unless the trustee told the beneficiary when disclosing the defalcation the limitations period for bringing the claim. Representing a significant departure from prior law, the Uniform Trust Code, RSA chapter 564-B, permits a trustee to shorten the limitations period to one year, but only if the trustee reports to the beneficiary the grounds for the claim and the one-year limitations period. If the trustee fails to tell the beneficiary about the limitations period, the trustee has exposure for the claim essentially in perpetuity, a dangerous trap for the unwary trustee.
RSA 564-B:10-1005(a) provides:
A beneficiary may not commence a proceeding against a trustee for breach of trust more than one year after the date the beneficiary or a representative of the beneficiary was sent a report that adequately disclosed the existence of a potential claim for breach of trust and informed the beneficiary of the time allowed for commencing a proceeding.
(Emphasis added.) The phrase “sent a report” contemplates that the notice to the beneficiary will be in writing. See also RSA 564-B:8-813(d). Adopting a discovery rule approach, RSA 564-B:10-1005(b) provides that “`a` report adequately discloses the existence of a potential claim…if it provides sufficient information so that the beneficiary or representative knows of the potential claim or should have inquired into its existence.”
If a trustee fails to make the required disclosure, the limitations period will not close until three years after the first to occur of: “1) the removal, resignation, or death of the trustee; 2) the termination of the beneficiary’s interest in the trust; or 3) the termination of the trust.” RSA 564-B:10-1005(c). These events might not occur for years, even decades, after the alleged breach of trust.
Although a trustee’s disclosure to a beneficiary of a breach of trust without informing the beneficiary of the limitations period will not support statute of limitations defense, the conduct might, depending on the facts, support several other defenses. First, the trustee might argue that the beneficiary’s response to the disclosure constituted a consent, release, or ratification under 564-B:10-1009. To prevail on this defense, the trustee must prove that the beneficiary, not only affirmatively assented to the transaction, but knew of his or her rights and “the material facts relating to the breach.” Proving actual knowledge by the beneficiary of all of material facts in many cases will be difficult. Second, the trustee might argue that the beneficiary’s claim is barred by equitable defenses, such waiver or estoppel. RSA 564-B:1-106 incorporates the “common law of trusts and principles of equity” into the Uniform Trust Code.
Given the significant benefit offered trustees by the one-year limitations period, trustees and their counsel should inform beneficiaries about the period when sending a report about trust affairs.