Kim v. Kim is about the “benefit” required to establish a presumption of undue influence in the testamentary context.
At the time of his death, Scott Kim was married to Lili Kim. He had two children from a prior relationship.
Eight days before his death, while receiving treatment for a terminal condition, Scott executed a revocable trust and a pour-over will. Scott’s brother, Brian Kim, who is an attorney, prepared the documents. The trust contains specific gifts to named individuals, including some gifts to Lili. It also contains the following dispositions:
“[I]tems of tangible personal property. . . shall be distributed as the Grantor’s brother, . . . BRIAN KIM, shall direct in his sole discretion.” While “[t]he Grantor may leave a memorandum containing suggestions as to the ultimate disposition of certain property the distribution of which is governed by this Article. . . such memorandum shall not affect the absolute nature of this gift.”
Interests in certain entities “or any sale proceeds from the sale of the Grantor’s interest in [the entities] shall be distributed to the Grantor’s brother, . . . Brian Kim, for him to distribute to the persons or entities outlined below in such amounts or proportions as he may designate in writing, specifically referring to this paragraph. . . . Brian Kim shall not be able to distribute any of the proceeds to himself.” (emphasis added).
“At least sixty percent. . . of the foregoing shall be distributed to one or more of the following individuals[,]” i.e., Scott’s father, nieces, and nephews. Brian’s children are among the listed nieces and nephews, but Brian himself is not on this list. “The remaining forty percent. . . shall be distributed to any persons or entities selected by. . . Brian Kim.”
The remainder passes to Scott’s children. The trust names Brian as the successor trustee (after Scott).
Lili sought to have the trust and the pour-over will set aside, alleging Brian unduly influenced Scott. Lili relied on the theory of presumed undue influence. The circuit court denied her claims, saying she did not establish all of the elements for a presumption of undue influence. Specifically, she did not establish that Brian benefitted from or was favored under the will or trust.
On appeal, Lili argued that the circuit court erred in dismissing her claims because Brian did derive a potential benefit from the will and trust through his appointments to fiduciary roles (for which he would be compensated) and certain discretion he was granted “as trustee.” The Virginia Supreme Court disagreed.
In the opinion, the Court reiterates that the test for a presumption of undue influence in the testamentary context is different from the test in the inter vivos transfer context. In the testamentary context (which is the where revocable trusts, or at least their testamentary provision, fall), the test is as follows:
- the testator was enfeebled in mind or old when the will was executed; and
- one who stood in a relationship of confidence or dependence to the testator procured or prepared a will in his favor or was named as a beneficiary thereof; and
- the testator previously had expressed a contrary intention to dispose of his property.
Weedon v. Weedon 283 Va. 241 (2012); Martin v. Phillips, 235 Va. 523 (1988).
The second element is the primary issue in this case. As to that element, the Court clarifies that “[t]he existence of a confidential relationship is insufficient, alone, to establish the second element; it ‘must be accompanied by activity on the part of the dominant person in procuring or preparing the will in his favor. . . .'” (internal citations omitted).
In concluding that Lili did not establish the “benefit” required for the second element (i.e., that Brian was named as a beneficiary or favored under the trust), the Court explains as follows:
- “Lili d[id] not allege. . . that Scott named Brian as a beneficiary. . . or that Brian procured or prepared the Will or Trust in his favor.”
- “[T]he Trust does not expressly provide for Brian to receive a distribution of any share of Trust property.”
- “[Brian’s] power as trustee to choose beneficiaries of certain Trust property [does not] make him a beneficiary….”
- Brian’s powers as trustee to “divert and distribute” Trust property to himself or choose his children as distributees are “uncertain and contingent possibilit[ies] of some future benefit[,]” insufficient to make Brian a beneficiary.
In reading the opinion and other documents in the record, including some of the briefs, my thoughts were as follows:
1. Hmmm… those look like general powers of appointment.
To me, Brian’s powers to appoint property to various people look like general powers of appointment granted to him personally, rather than discretionary powers granted to him “as trustee”:
- The trust calls for distributions “as the Grantor’s brother, . . . BRIAN KIM,” directs—not as the trustee directs. The tangible personal property, for example, is to be “distributed to the Grantor’s brother, . . . Brian Kim, for him to distribute. . . .”
- The trust says to distribute the property “in such amounts or proportions as [Brian] may designate in writing, specifically referring to this paragraph. . . .” Also, “[a]ny writing distributing any of the foregoing must only be signed and dated by [Brian] and need not be witnessed or acknowledged.” Requiring a fiduciary exercise a power in signed, dated writing by specific reference to the paragraph granting the power is common for the exercise of a power of appointment. Those requirements are not so common for the exercise of fiduciary powers to distribute.
- The limitation that Brian “shall not be able to distribute any of the proceeds to himself” is superfluous, if the power is a fiduciary power and Brian is not a beneficiary. Additionally, as to Scott’s tangible personal property, the trust says he “may leave a memorandum containing suggestions as to the ultimate disposition of [such] property. . . , but such memorandum shall not affect the absolute nature of this gift. . .” to Brian.
A holder of a general power of appointment over trust property is a “beneficiary” of the trust by definition under Va. Code § 64.2-701. As the holder of general powers of appointment, Brian is a beneficiary of the trust in substance as well. Brian can exercise at least some of his powers in his own favor. There is no limitation on the persons to whom he may distribute the items of tangible personal property. Also, the prohibition on his distributing interests in the entities to himself is limited to the “the proceeds” of the sale of the interest, presumably meaning that he could distribute the interests to himself in-kind. Additionally, there are no prohibitions on Brian exercising the powers to pay his debts or support his family. Furthermore, his creditors may be able to reach the assets of the trust. See Va. Code § 64.2-2736.
There is no savings clause that significantly limits the scope of Brian’s powers or alters the capacity in which they are granted. The trust prohibits a trustee from “distribut[ing] income or principal to any beneficiary for the purpose of discharging the legal obligations of the Trustee.” However, that limitation would only apply to powers granted in a fiduciary capacity. That Brian happens to be the trustee in addition to the holder of the powers does not change the capacity in which the powers are granted. The savings provisions in the Virginia Code do not help, either. The potentially helpful ones also only apply to powers granted to a trustee as trustee.
Given that he holds broad powers of appointment, Brian ought to be considered a beneficiary of the trust for undue influence purposes. However, that is not the result in this case. The Court treated Brian’s powers as fiduciary powers, not having found an argument from Lili that Brian benefitted from the trust or a an express provision in the trust instrument for Brian to receive a distribution.
2. If those powers are fiduciary powers, is the trust valid?
If Brian’s powers are fiduciary powers, does the trust have the ascertainable beneficiaries necessary for a valid trust? The beneficiaries of the 60% of the interest in the specified business entities are named (ascertainable) individuals. However, as to the remaining 40% and the tangible personal property, the beneficiaries could be anyone. Nonetheless, the trust is valid—but only because of the exception under Va. Code § 64.2-720(C) to the general requirements for the creation of a trust.
Va. Code § 64.2-720(C) says, “[a] power in a trustee to select a beneficiary from an indefinite class is valid. If the power is not exercised within a reasonable time, the power fails and the property subject to the power passes to the persons who would have taken the property had the power not been conferred.” The Restatement (Third) of Trusts further explains that the “devisee holds the property upon a trust, adapted by operation of law, for reversionary beneficiaries. . ., subject to the interests of potential beneficiaries later to be identified by the devisee[ ]. . . .” Restatement (Third) of Trusts § 46, cmt. d(1).
The reversionary beneficiaries in this case are not specified. Presumably, they would be the residuary beneficiaries of the trust, either directly or through Scott’s estate. Those reversionary beneficiaries are the ones who may enforce the trust. Restatement (Third) of Trusts § 46, cmt. g.
3. Should Brian’s powers make him a beneficiary?
a. Powers to choose beneficiaries.
The Court says “[Brian’s] power as trustee to choose beneficiaries of certain Trust property [does not] make him a beneficiary….”
In general, fiduciary powers should not cause a trustee to be treated as a beneficiary of a trust for any purposes. Exceptions to that principle should be few, if any. However, if there is an appropriate case for an exception, it may be this one:
- The beneficiaries, being members of an indefinite class, are unascertainable. The reversionary beneficiaries may enforce the trust, but it is difficult to see any exercise of the powers constituting a breach, particularly given the lack of guidance in the trust instrument regarding the selection of class members.
- The powers of the devisee-trustee of the adapted trust are difficult to distinguish from powers of appointment. Restatement (Third) of Trusts cmt. c and reporter’s note thereto; Loring and Rounds: A Trustee’s Handbook §9.29 (2013). Perhaps they should have the same effect as powers of appointment, at least under certain circumstances, e.g., where the class of distributees includes the devisee-trustee, his family, and his creditors.
b. Powers to “divert and distribute” trust property are too “uncertain and contingent.”
Brian’s powers to “divert and distribute” trust property to himself or choose his children as distributees are “uncertain and contingent possibilit[ies] of some future benefit” and are insufficient to make him a beneficiary.
“Diverting” may imply wrongdoing, i.e., a breach of a fiduciary duty. If Brian would have to breach his fiduciary duties to distribute to himself or his immediate family members, that power should not make him a beneficiary for undue influence purposes.,
If, on the other hand, “diverting” includes a permissible exercise of a power, it seems the actual exercise of the power for the direct or indirect benefit of the powerholder (or perhaps some circumstance requiring the power to be so exercised) is necessary before the powerholder will be treated as a beneficiary for undue influence purposes. The Court’s contrasting of Carter v. Williams, 246 Va. 53, 59 (1993), in footnote 7 seems consistent with this understanding. In the footnote, the Court notes parenthetically that the benefit to the influencer in Carter was “immediate” upon death of testator.
As the Court points out, the requirements at issue in this case are for establishing a presumption of undue influence. Undue influence can, as a legal matter, be established without a presumption. However, I’ve heard it is virtually impossible to prove undue influence without the presumption. Assuming that’s so, is it too easy to avoid get around undue influence? It may be as simple as granting oneself a power under 64.2-720(C) to appoint to a broad enough class and then waiting for the relevant limitations period run before exercising it. The limitations period for contesting the validity of a trust is the earlier of two years after the settlor’s death or six months after the trustee sent the contestant a certain type of notice. Va. Code § 64.2-753(A). As to the adapted trust, the “reasonable time” within which the power must be exercised seems to be 21 years. Restatement (Third) of Trusts § 47 cmt. d(2). Given those limitations periods and the potential difficulties in establishing the exercise of a power according to its terms to be a breach of trust, the beneficiaries or takers in default may often be without recourse against an undue influencer.
I see the value in adaptive trusts and Va. Code § 64.2-720(C). They can, for example, allow for distribution of personal effects among the settlor’s “friends” or “relatives” without the use of powers of appointment. However, their use in Scott Kim’s trust concerns me. It is difficult to see how the trustee’s power to distribute to “any person or entity” is meaningfully constrained by fiduciary duties or distinguishable from a general power of appointment, in the absence of limitations in the trust instrument. Perhaps there should be—or is—a point at which the class of distributees is too indefinite for the trust to be valid under § 64.2-720(C).
Regardless, Kim seems to tell us that that the “benefit” necessary for a presumption of undue influence can be indirect (i.e., the influencer does not have to be the actual beneficiary) but it has to be “immediate,” “express,” or not too “uncertain and contingent.” A fiduciary’s unexercised powers to appoint to “any person or entity,” as modified by the various savings clauses in the Code, are not sufficiently immediate/direct/certain/definite/something to cause the fiduciary to be treated as a beneficiary for undue influence purposes. I do not think Kim tells us whether the holder of a general power of appointment would be a beneficiary for undue influence purposes, and I would hope that situation would be distinguishable (e.g., because of Va. Code § 64.2-2736).