## Facts

- Valma M. Hanson created a revocable trust in 1983 with a clause selecting Illinois law to govern construction and administration.
- The trust directed that, at Hanson’s death, trust assets would be distributed under a schedule that (as amended) specifically devised trust-held real estate to trustee Barry C. Bergstrom and divided remaining assets among multiple percentage beneficiaries, including Elizabeth Hanson and Bonnie Kuczkowski.
- The trust contained a tax provision granting the trustee discretion to pay death taxes from trust property.
- In 1992, Hanson executed a will in Indiana that (1) bequeathed personal property to Bergstrom, (2) exercised a power of appointment in Bergstrom’s favor over certain other trust assets, and (3) poured the residue of her probate estate into the trust.
- After Hanson’s death, Bergstrom, acting as trustee and as a beneficiary, paid Indiana inheritance taxes and federal estate taxes from the trust’s residuary assets rather than allocating any tax burden to the specifically devised real estate.
- Beneficiaries alleged the tax allocation left Bergstrom with substantial benefits while leaving the other trust beneficiaries with little or nothing.

## Issues

1. Whether the beneficiaries’ petition alleged facts that, if true, stated a claim for breach of trust and fiduciary duty sufficient to survive an Indiana Trial Rule 12(B)(6) motion to dismiss.
2. Whether a trustee’s discretionary authority to pay death taxes from trust principal can be exercised in a manner that effectively favors the trustee-beneficiary at the expense of other beneficiaries, consistent with the trust and fiduciary obligations.

## Decision

- The Court of Appeals of Indiana affirmed the trial court’s denial of Bergstrom’s Rule 12(B)(6) motion to dismiss.
- Accepting the complaint’s well-pleaded allegations as true and drawing reasonable inferences for the beneficiaries, the court held it was not certain the beneficiaries could prove no set of facts entitling them to relief.
- The court did not finally construe the trust’s tax clause or decide the proper tax allocation; it held only that the pleadings stated a legally cognizable claim warranting further proceedings.

## Legal Principles

- A Rule 12(B)(6) motion tests the legal sufficiency of the claim; dismissal is proper only when it is clear the plaintiff could obtain no relief under any set of facts consistent with the allegations.
- A trustee’s discretion— including discretion over allocation or payment of death taxes—must be exercised in good faith and consistent with fiduciary duties, particularly duties of loyalty and impartiality among beneficiaries.
- Allegations that a trustee used discretionary powers to protect the trustee’s own beneficial interest to the serious detriment of other beneficiaries may state a claim for breach of fiduciary duty and breach of trust, even where the trust language is facially broad.
- Choice-of-law and instrument-construction disputes involving a trust governed by one state’s law and a will governed by another typically present merits questions not suitable for resolution on a pleadings-based dismissal motion.

## Conclusion

The court allowed beneficiaries to proceed with claims that the trustee’s tax-allocation decisions, alleged to benefit the trustee personally while exhausting the residuary shares of other beneficiaries, could constitute a breach of the trust and fiduciary duties, making dismissal at the pleading stage improper.


In re Valma M. Hanson Revocable Trust, 779 N.E.2d 1218 (Ind. Ct. App. 2002)