August 20, 2014
Special to Business in Savannah
In Georgia, a new state Supreme Court ruling will significantly affect court cases involving trusts and conflict of fiduciary duty. Rollins v. Rollins, decided in March, illustrates the substantial conflict of interest that can occur when the owners of a family-operated business also control a trust that owns a part of that business.
Let’s consider a hypothetical in order to clarify this issue. When Sam, the founder and owner of FAMCO, died, he left a will that bequeathed FAMCO stock in equal 25 percent shares to (1) his son John, (2) his daughter Jane, (3) his son Jim, and (4) a trust for the benefit of his son Joe and Joe’s children, with John and Jane named as trustees.
Now John and Jane hold 75 percent of the voting control of FAMCO: his 25%, her 25%, and the 25% in the trust. As officers and directors of FAMCO, they owe fiduciary duties to FAMCO and its shareholders, but as trustees of the trust, they also owe fiduciary duties to the trust’s beneficiaries (their brother Joe and his children), none of whom are associated with FAMCO. What happens when these duties collide?
In cases that involve trusts, Georgia courts seek to determine and implement the creator’s intent. In the Rollins case, Wayne Rollins established several trusts for the benefit of his grandchildren and named his sons Gary and Randall trustees. The trusts held minority interests in family businesses that were also controlled by Gary and Randall. Some of the grandchildren sued Gary and Randall, contending that some of Gary and Randall’s actions as business owners had adversely affected the grandchildren’s beneficiary interests in the trusts.
The conflict here was between Gary and Randall’s dual roles as business owners and trustees. They are bound by fiduciary duties to the trusts, but also bound by their responsibilities as shareholders, directors, and officers of the businesses. The grandchildren claimed that Gary and Randall’s duties as trustees should supersede their duties to the company.
In seeking to clarify Wayne’s intent, the Court noted that he intentionally named Gary and Randall as trustees when the two already controlled the family business. The Court concluded that Wayne did not intend to limit Gary and Wayne’s duty to the business and its shareholders by appointing them as trustees. In other words, a trustee in this position has no duty to put the interests of the trust beneficiaries over those of the corporation.
To answer the question raised by our hypothetical: John and Jane’s fiduciary duty to the corporate shareholders supersedes their duty to the trust beneficiaries.
Rollins has clarified the law on this subject in Georgia. While we must always keep in mind the specific limitations of a decision’s applicability, this ruling underscores the importance of appointing independent trustees when creating a family trust.
Business succession planning involves many critical decisions that can greatly impact both families and businesses. Business owners should consult an attorney experienced in these issues so that they may carefully weigh their options and understand the risks and benefits associated with each.
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