Underhill v. United States Trust Company: An Introduction to Trusts

Financial Trust Law Trustee

Financial Trust

One of the chief goals of Huddleston Tax Weekly is to acquaint our readers with as many financial concepts as possible. The more financial knowledge our readers possess, the better they will be able to make sound decisions. Today we will discuss the concept of the financial trust. A trust is a legally recognized arrangement in which property is held by one party (referred to as the trustee) for the benefit of a different party (referred to as the beneficiary). Trusts are frequently established in wills in order to ensure that property is adequately managed and controlled for its beneficiaries. The terms of a trust can vary widely; one constant is that the trustee has a legal obligation to act in the interests of the beneficiaries.

With the creation of a trust, the individual who places the property into the hands of the trustee (known as the settlor) sacrifices a portion of his “bundle of rights” to the property. Consistent with this fact, typically a trust cannot be unilaterally removed by the settlor once it has been established. Hence, those thinking about setting up a trust should reason through the matter thoroughly and carefully because trusts are not the easiest things to do away with.

As we will see, the case of Underhill v. United States Trust Company (1929) provides good evidence for this last statement.

Facts

Ms. Evie Underhill (settlor) created a trust in which the trustee (United States Trust Company) was granted power to sell the property of the trust and then reinvest the profits at its discretion. Upon selling the property of the trust the trustee was supposed to receive a commission. Thus, due to the particular terms of the trust, the trustee acquired a “contingent interest” in its continuation because of its power to sell the property.

Both the settlor and the beneficiary attempted to dissolve the trust before the trustee had a chance to sell the property. The settlor and the beneficiary argued that dissolution of the trust was permissible because it was desired by both of them; the trustee argued that dissolution was impermissible because the terms of the trust granted him an interest in its continuation.

Law

When the express terms of a trust create a contingent interest for the trustee it is not permissible for the court, settlor or beneficiary (or both the settlor and beneficiary together) to alter or terminate the trust without the consent of the trustee.

Ruling

The court did not allow Ms. Underhill and the beneficiary to terminate the trust. The key aspect of the case was that the terms of the trust expressly conveyed an interest to the trustee. And since a trust is essentially a contractual agreement it follows that there must be consent from all parties in order to have the trust terminated.

Let this be a lesson: be sure that the terms you attach to your trust are such that they completely capture your full desire not only in the present moment but also the remote future.

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johnAbout john
Seattle CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.

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