Invalidating a Trustee’s Release

QUESTION: When can a receipt and release form for a trustee be invalidated by a beneficiary?

ANSWER: A receipt and release form is generally valid and may protect the trustee from liability but it may also be invalidated if it was induced by improper conduct on behalf of the trustee or where, at the time of the release, the beneficiary did not know of his or her rights or know of the material facts relating to any breach.

DISCUSSION: A beneficiary’s release of a trustee in Oregon from liability for breach of trust is valid so long as it does not violate the provisions of ORS 130.730 or ORS 130.840.

These statutes provide that a trustee is not liable to a beneficiary for a breach of trust if the beneficiary consented to the conduct, released the trustee from liability, or ratified the transaction. ORS 130.730(3)(a)(b); ORS 130.840(1)(2). Such provisions are intended to address the circumstance in which the trustee is reluctant to make a distribution until the beneficiary approves, but where the beneficiary will not approve unless the assets are distributed to him. 

A release will be invalid, however, if it was induced by improper conduct on behalf of the trustee or if the beneficiary was unaware of his rights or of material facts relating to the breach. ORS 130.730(3)(a)(b). Factors considered in determining whether the release was valid include: 1) adequacy of disclosure; 2) whether the beneficiary was financially or legally incapable; 3) whether the beneficiary was represented; and 4) whether the trustee engaged in improper conduct.


ORS 130.835 provides that an exculpatory clause included within a trust is unenforceable if it relieves a trustee from liability for a breach committed in bad-faith or  with reckless indifference to the purposes of the trust or interests of the beneficiaries. ORS 130.835(1)(a). Moreover, if the trustee drafted the clause, it is presumptively the result of abuse and is thus invalid. ORS 130.835(2). However, this presumption disappears if: 1) the settlor was represented by independent counsel who reviewed the exculpatory clause; or 2) the trustee proves that the clause is fair under the circumstances and that the clause’s existence and contents were adequately communicated to the settlor. ORS 130.835(2)(b). 


In considering whether an exculpatory clause within a trust is fair, courts consider: 1) the extent of the prior relationship between the settlor and the trustee; 2) whether the settlor received independent advice; 3) the sophistication of the settlor with respect to business and fiduciary matters; 4) the trustee’s reasons for inserting the clause; and 5) the scope of the particular provision inserted.


Exculpatory clauses contained within trusts will be enforced so long as they are fair and do not eliminate the trustee’s liability completely. Mest v. Dugan, 101 Or App 196, 199-200, 790 P2d 38 (1990).  


Trustee May Use Annual Report to Reduce Statute of Limitation

QUESTION: When an annual report or proposed distribution is provided to the beneficiary of a trust, can the statute of limitations be signficiantly reduced?

ANSWER: Likely, but the limitation for bringing an action based on an annual report is only applicable where the final report discloses specific information, including the existence of a potential claim.


A. Proposal for Distribution
Upon the termination of a trust, the trustee may send out a proposal for distribution to the trust beneficiaries. ORS 130.730(1). If a beneficiary wishes to object to the proposal, he or she must notify the trustee of the objection within thirty days after the proposal was sent so long as the proposal notifies the beneficiary of the right to object.

Absent objections, the trustee should be able to treat the period beyond 30 days as a safe harbor for distribution purposes. Although the time limitation included in ORS 130.730(1) is not specifically referenced in the provision limiting actions against a trustee (ORS 130.845), the comment to ORS 130.845 provides that the limitations that it imposes are not the only means from barring an action by a beneficiary. Oregon Uniform Trust Code and Comments at 388. The comment states, for example, that claims may be barred by consent, release, and principles of equity under the common law of trusts. Id.

B. Trustee’s Report
A trustee must send a trustee report to the beneficiaries of the trust at least annually. ORS 130.710(3). This report must include information such as trust property and liabilities, the market values of trust assets, and receipts and disbursements of the trust. Id. Moreover, ORS 130.820, which relates to limitations of actions against a trustee, states that a beneficiary may not commence an action against a trustee more than one year following the date on which the beneficiary was sent a report that discloses the existence of a potential claim and that informs the beneficiary of the time allowed for commencing a proceeding. ORS 130.820(2). But that statute is very specific. ("A beneficiary may not commence a proceeding against a trustee more than one year after the date the beneficiary or a representative of the beneficiary is sent a report by certified or regular mail that adequately discloses the existence of a potential claim and that informs the beneficiary of the time allowed for commencing a proceeding. A copy of this section must be attached to the report. The report must provide sufficient information so that the beneficiary or representative knows of the potential claim or should have inquired into its existence.") Accordingly, a standardized annual report with a statement that the beneficiary will have one year to bring a claim based on the matters covered by the report will not be adequate. Id. Thus, if there is no potential claim to be disclosed, the one year limitation period will not apply. Rather, the six year statute of limitations for actions against a trustee contained in ORS 130.820 will apply.

C. Statute of Limitations
Two Oregon cases discuss the statute of limitations in the context of actions by beneficiaries against trustees. In Condon v. Bank of California, 92 Or App 691, 694-95, 759 P2d 1137 (1988), and McDonald v. U.S. National Bank, 113 Or App 113, 830 P2d 618 (1992), the beneficiaries sued the trustees for negligence in the administration of the trust. In both cases, the courts enforced the two year statute of limitations for negligence, although they also held that the discovery rule was applicable. 92 Or App at 694; 113 Or App at 115. (Note that these cases were decided prior to the enactment of ORS 130.820.)