When a business owner dies, his or her ownership interests often become part of a probate estate or are transferred to one or more trusts in order to continue the operations of the business. But sometimes the decedent’s business is distressed at the time of death and of questionable value to the estate or to the trust beneficiaries. In that case, executors or trustees, along with their beneficiaries, should understand what fiduciary standards apply to the use of estate or trust resources in connection with the continued management, operation and ownership of the business.
The Supreme Court of Georgia recently addressed this issue in Peterson v. Peterson (Case No. S17A1488, March 5, 2018). In that case, two brothers sued their mother and a third brother, claiming, among other things, that the defendants breached their fiduciary duties as executors of their father’s will and as trustees of a trust created under that will by improperly using estate and trust resources to continue the operations of certain businesses. The father, Charles Peterson, died in 1994. At the time of his death, Charles’ estate consisted largely of stock in various private companies and substantial real estate holdings. Charles’ estate also included “several financially distressed family companies.”
Charles’ will provided for the creation of two trusts, a marital trust for the sole benefit of Charles’ wife, Mary, and a “bypass trust,” which had a “primary purpose” of providing support for Mary as well as Charles’ three sons, Alex, David and Calhoun. Charles’ will also provided that the executors and trustees could “retain and carry on any business in which [he] may own an interest at the time of [his] death.” All four family members were initially named co-executors and co-trustees under the will. However, Alex and David alleged that Mary and Calhoun made all the decisions under the will and trusts without consulting them. They also alleged that Mary and Calhoun used and collateralized estate assets to fund the financially distressed family companies that Charles owned at his death.
Alex and David claimed that Mary and Calhoun breached their fiduciary duties by wasting estate assets through the continued operation of Charles’ businesses. As remedies for these alleged breaches, Alex and David sought, among other things, an accounting, the appointment of a receiver and the removal of Mary and Calhoun as executors and trustees. Mary filed a summary judgment motion seeking dismissal of Alex and David’s claims. The superior court allowed her motion on the grounds that Charles’ will authorized the executors and trustees to continue the businesses’ operations.
On appeal, the Georgia Supreme Court reversed the summary judgment ruling. Referencing Georgia law, the Court noted that “the fact that the executors and trustees had the discretionary power to operate the businesses did not relieve them of their fiduciary duties, including their duty not to commit waste.” The Court further explained that, under Georgia law, a grant of power to continue operating a decedent’s business does not excuse an executor from the fiduciary duty to avoid a conflict of interest with those interested in the estate. The Court also noted that trustees have a fiduciary duty to exercise discretionary powers in good faith and in a manner designed to serve the interests of the beneficiaries.
The Court further held that, as executors, Mary and Calhoun were obligated to manage the estate “to the best advantage of those interested in it” and, as trustees, they were obligated to “exercise the degree of care and skill as a person of ordinary prudence would exercise in administering the trust.” The Court concluded that “the proper issue for the superior court with regard to the claim that Mary and Calhoun committed waste in operating the businesses was not whether the will granted them the power to operate the businesses, but whether their operation of the businesses was in accordance with the foregoing standards.” The Court thus reversed the superior court’s grant of summary judgment and remanded the matter for further proceedings on the claims brought by Alex and David.
The decision in the Peterson case serves as a reminder that just because an executor or trustee has the discretionary authority to continue to operate a deceased owner’s business, it may not be appropriate to do so under all circumstances.
Executors and trustees therefore should be aware of the applicable fiduciary standards of care and loyalty to which they will be held in connection with their decisions in operating an estate or trust-owned business. While the precise fiduciary standards may differ from state to state, in general, executors and trustees should make their decisions based upon the best interests of the estate or the trust beneficiaries to whom they owe their duties.
Executors and Trustees should consider whether, instead of continuing to operate the business, it may be more appropriate to attempt to sell the business, in order to maximize value for the beneficiaries or interested parties, or to wind down the business altogether, in order to avoid further expenses and potential waste of estate or trust assets. In the end, it may be impossible to avoid all disagreements or claims by beneficiaries concerning continued operation of a decedent’s business by a trust or estate. However, all parties should understand the applicable fiduciary standards in order to be able to evaluate whether estate or trust-owned business assets are being managed in good faith and in a manner that serves the interests of the beneficiaries.
