A Strong Offense
A Stronger Defense
Generally, beneficiaries of a trust, with full capacity to act and with full knowledge of the facts, can ratify otherwise invalid acts of a trustee. So, if a trustee takes an act prohibited by or unauthorized under the trust instrument (an example might be self-dealing), the trustee may escape liability for the act if the act and all the relevant facts are disclosed to the beneficiaries and the beneficiaries consent to or otherwise ratify the trustee’s act. Of course, the possibility of ratification of unauthorized acts is all the more reason for a trustee to share information with beneficiaries.
But, can a co-trustee ratify the other co-trustee’s unauthorized act and thereby make it okay? Here’s an example: one of the co-trustees of a trust is also a beneficiary and the trust instrument provides that the trustee/beneficiary is prohibited from exercising a power for his benefit, directly or indirectly; in these instances, the decisions shall be made exclusively and solely by the non-beneficiary co-trustee. This is a pretty common prohibition. Under these circumstances, can the beneficiary/trustee’s unauthorized act be ratified by the non-beneficiary co-trustee? There is an appeal to the argument: if the non-beneficiary co-trustee could have taken the act itself, then why shouldn’t it be able to ratify an act it could have taken?
In In re Estate of Foiles, a case of first impression under Colorado law, the Colorado Court of Appeals held that in the absence of a trust provision that would allow ratification by a co-trustee of otherwise invalid actions of the other co-trustee, only the consent of all the beneficiaries, with full knowledge of the relevant facts, could ratify an action of a trustee that is in violation of the express terms of a trust. The court analyzed a long list of authorities for the proposition that beneficiaries can ratify an otherwise invalid act, but stated that it could find no authorities indicating that a co-trustee may ratify an action of a trustee that violates the terms of the trust. A takeaway here for drafters is to discuss with your settlor-clients whether ratification by a co-trustee is a trust provision that your client wants. Trustees, again, should carefully consider the amount of information they want to or should be sharing with beneficiaries. Not only can disclosure help start a statute of limitations running, it could provide the foundation for beneficiary ratification of the trustee’s actions.