It is common for wills or trusts to provide that the fiduciary has the right to construe the document. For example, a provision may state that the fiduciary shall resolve any question regarding the construction, interpretation, or operation of the will/trust or any matter involving the administration of the estate/trust or any rights of any beneficiary and that the executor’s/trustee’s decision shall be conclusive on all persons ever interested in the estate/trust. Is this provision enforceable, and if so, under what circumstances and to what extent?
Courts have upheld provisions in a will that authorize the executors to settle disputes among beneficiaries concerning the construction of the will or administration of the estate since at least 1828, when the United States Supreme Court decided Pray v. Belt, 26 U.S. (1 Pet.) 670 (1828). But, from the beginning, courts have emphasized that the executors’ decisions are subject to judicial review and may be overridden when “an unreasonable use be made of the power, one not foreseen, and which could not be intended by the testator.” Id. at 680 As Chief Justice Marshall explained in Pray:
This power is given in the apprehension that [the testator] may have committed error. It is to be exercised in order to ascertain his intent in such cases. It certainly does not include the power of altering the will. It cannot be contended, that this clause would protect the executors in refusing to pay legacies altogether, or in paying to A, a legacy bequeathed to B, or in any other plain deviation from the will. In such case, what would be the remedy of the injury party? Is he concluded by the decision of the executors, or may he resort to a Court of Justice? But one answer can be given to these questions. So gross a departure from the manifest intent of the testator, cannot be the result of an honest endeavor to find that intent; and must be considered as a fraudulent exercise of a power, given for the purpose of preserving peace, and preserving expensive and frivolous litigation.
One treatise provides:
In the absence of a provision in a will authorizing the executor or trustee to construe it, beneficiaries are not bound by any construction given by the executor. A will may specifically provide for the submission of questions as to construction to certain designated persons, generally the executors or trustees. Under such provisions, the decision of the designated person as to any doubtful question is said to be binding on all parties in interest, unless it is made arbitrarily or in bad faith, or is clearly contrary to other provisions of the will. The umpire’s decision may be binding in such a case even though he has a personal interest in the result, as where the question for construction relates to executor’s fees. There must be a bona fide question in order to give the executor the right to exercise the power. It is said in some jurisdictions that, since construction is a matter for the courts, a legatee cannot be deprived of his right to judicial review of a clearly erroneous decision, and if such a case comes before the court it must construe the will correctly.
4 Page on Wills § 31.15.
Texas courts have enforced provisions giving the executor or trustee discretion to construe the document. Key v. Metcalf, No. 14-04-00782-CV, 2006 WL 348149, at *2 (Tex. App.—Houston [14th Dist.] Feb. 16, 2006, no pet.) (Will provisions making executors’ decision regarding will construction binding on all interested parties valid.); Grant v. Stephens, 200 S.W. 893, 896 (Tex. Civ. App.—Fort Worth 1917, writ ref d). One way to look at these types of provisions is that they are a dispute-resolution process that is binding on beneficiaries. See Rachal v. Reitz, 403 S.W.3d 840, 844 (Tex. 2013) (holding that “We enforce the settlor’s intent as expressed in an unambiguous trust over the objections of beneficiaries that disagree with a trust’s terms” in enforcing an arbitration clause in a trust dispute even though the trustee and the beneficiary did not sign the trust document: “[T]he settlor determines the conditions attached to her gifts, and we enforce trust restrictions on the basis of the settlor’s intent. The settlor’s intent here was to arbitrate any disputes over the trust.”). “The rule, as we conceive it, is, when an arbiter honestly and in good faith exercises his power and passes upon a doubtful question, either of law or of fact, his decision will not be revised by a court, notwithstanding the court, whose interposition is invoked, may think his decision erroneous.” Counts v. Holland, 107 S.W. 913, 916 (Tex. Civ. App.—1908, writ ref d).
Texas courts have held that the executor’s interpretation is binding on the beneficiaries if (1) “such a decision is fairly and honestly made” and (2) “the will is reasonably susceptible of such construction.” Nations v. Ulmer, 139 S.W.2d 352, 356 (Tex. Civ. App.—El Paso 1940, writ dism’d); see also Key v. Metcalf, No. 14-04-00782-CV, 2006 WL 348149, at *2 (Tex. App.—Houston [14th Dist.] Feb. 16, 2006, no pet.) (stating that the executor’s decision, “if fairly and honestly made and reasonably susceptible to the terms of the will, are binding and final on all interested parties”); Grant v. Stephens, 200 S.W. 893, 896 (Tex. Civ. App.—Fort Worth 1917, writ ref d) (stating that the executor’s decision must be “fairly and honestly made and reasonably to be predicated upon the terms of the will taken as a whole”); Couts v. Holland, 107 S.W. at 916 (“The rule . . . is, when an arbiter honestly and in good faith, exercises his power and passes upon a doubtful question, either of law or in fact, his decision will not be revised by a court.”). In short, regardless of whether executors/trustees act reasonably, honestly, and in good faith, their interpretation of the document must be “reasonably reached and deduced from the language used.” Grant, 200 S.W. at 896.
“[A]n executor acts in good faith when he or she subjectively believes his or her defense is viable, if that belief is reasonable in light of existing law.” Est. of Nunu, 542 S.W.3d 67, 81 (Tex. App.—Houston [14th Dist.] 2017, pet. denied) (quoting Lee v. Lee, 47 S.W.3d 767, 795 (Tex. App. Houston [14th Dist.] 2001, pet. denied)). Good faith is established as a matter of law if reasonable minds could not differ in concluding from the undisputed facts that the person in question acted in good faith. See Medina Cty. Commit’s’ Court v. Integrity Grp., Inc., 944 S.W.2d 6, 10 (Tex. App.—San Antonio 1996, no writ); see also Joe v. Two Thirty Nine Joint Venture, 145 S.W.3d 150, 164-65 (Tex. 2004) (holding that uncontroverted facts established as a matter of law that a litigant acted in good faith); Looper v. Hous. Crnty Coil. Sys., No. 14-07-00040-CV, 2007 WL 4200642, *7 (Tex. App.—Houston [14th Dist.] Nov. 29, 2007, pet. denied) (mem. op.) (same).
Those holdings are consistent with the executors’ fiduciary duty to administer the estate in accordance with the will’s terms. Executors, who hold the estate’s property for the benefit of the devisees, owe the same fiduciary duties as trustees. Humane Soc’y of Austin & Travis Cty. v. Austin Nat’l Bank, 531 S.W.3d 574, 577 (Tex. 1975); Geeslin v. McElhenney, 788 S.W.3d 683, 684-85 (Tex. App. Austin 1990, no writ). One of those duties is to “administer the trust in good faith according to its terms . . .” Tex. Prop. Code Ann. § 113.051. Additionally, the terms of a trust cannot limit that duty or “the power of a court, in the interest of justice, to take action or exercise jurisdiction.” See id. § 111.0035. Further, a trustee or executor may never act arbitrarily, and his discretion must be reasonably exercised to accomplish the purposes of the trust according to the settlor’s intent. State v. Rubion, 158 Tex. 43, 51, 308 S.W.2d 4, 9 (1957); In re Estate of Dillard, 98 S.W.3d 386, 395 (Tex. App. Amarillo 2003, pet. denied). The Texas Trust Code provides: “Notwithstanding the breadth of discretion granted to a trustee in the terms of the trust, including the use of terms such as “absolute,” “sole,” or “uncontrolled,” the trustee shall exercise a discretionary power in good faith and in accordance with the terms and purposes of the trust and the interests of the beneficiaries.” Tex. Prop. Code Ann. § 113.029.
For example, in In re Estate of Bryant, a couple set up three trusts for their three children: Bill, Leslie, and Jane. No. 07-18-00429-CV, 2020 Tex. App. LEXIS 2131 (Tex. App.—Amarillo March 11, 2020, no pet.). After the couple had both passed away, their son Bill assumed the role of trustee of three trusts: Irrevocable Trust, the Children’s Trust, and the Family Trust. Under the terms of the three trusts, following the couple’s deaths, trust assets were to be distributed to the three siblings equally, with the partial exception of the Family Trust assets. Under the Family Trust, Bill and his sister Leslie were to each receive one million dollars, after which any remaining assets would be distributed equally among all three children. Bill then received three checks from life insurance companies: one, for $500,041.00, was payable to the Children’s Trust and two, totaling $510,938.82, were payable to the Family Trust. The insurance proceeds ended up in the Family Trust, and Bill distributed $500,000 in Family Trust funds to himself and $500,000 in Family Trust funds to his sister Leslie. Jane sued Bill, alleging breaches of fiduciary duty and seeking to remove him from his roles as executor and trustee.
The court of appeals first addressed the issue of whether the trial court erred in holding that a loan from the parents to Jane should have been accounted for in an advancement clause or whether it was still an asset of the Family Trust, as argued by Bill. The court addressed Bill’s argument that the trial court improperly invaded his discretionary authority provided under the trust document to construe the trust. Bill noted that the Family Trust gave him authority to interpret and manage the trust, specifically providing:
If and when in good faith any doubt arises as to the proper construction, interpretation, or operation of a trust established hereunder . . . or as to any other or additional matter involving the administration of a trust established hereunder or the rights of any beneficiary thereof . . . the Trustee is authorized to resolve those doubts as it deems equitable and proper, it being the Settlors’ intention to avoid suits for construction or instruction to the fullest extent possible.
Id. Bill noted that the trial court found that the dispute arising from the parties’ conflicting viewpoints as to the meaning and scope of the advancement clause was “a legitimate one” and “brought in good faith.” He argued that these findings demonstrated that the trial court acknowledged that reasonable minds could differ, and that the trial court then erroneously usurped his authority as trustee to interpret the clause. The court of appeals disagreed:
While Bill suggests that his exercise of discretion in determining the status of the Elsbeth loan under the Advancement Clause could not be disturbed by the trial court, Jane counters that the trial court had authority to ensure that Bill effectuated the purpose of the Advancement Clause. We agree with Jane. Even where a trustee is vested with broad discretion, courts may assert control over the trustee’s exercise of power “to prevent the frustration of the fundamental intent of the settlor” and compel the trustee’s performance of his duty. Boyd v. Frost Nat’l Bank, 145 Tex. 206, 196 S.W.2d 497, 504 (Tex. 1946). The Advancement Clause provides that the trustee “shall consider and account for the advancements made to Jane in the amount of One Million Dollars ($1,000,000) before making any further distribution to Jane from any trust created herein.” The language of the clause is mandatory, not discretionary. The trial court was vested with, and properly exercised, the authority to construe the trust to determine whether Bill complied with the Advancement Clause.
Accordingly, in Texas, a clause providing a trustee/executor with discretion to interpret or construe a trust/will is enforceable, but there are limits to the clause and its enforcement. The trustee/executor must act in good faith and in accordance with the terms and purposes of the trust and the interests of the beneficiaries and the interpretation or construction must be a reasonable one. But where the trustee/executor has a reasonable construction and acts in good faith, a trial court should not step in and usurp the trustee’s/executor’s decision even if the court disagrees with the trustee/executor.