Trusts are generally governed by state law and as such, disputes are usually handled in state courts. However, in some situations, suing in federal court may be an option and may have potential benefits to a party.

There are several reasons why a party may want its action adjudicated in federal court:

• Some federal courts run more efficiently than their state counterparts so the litigation may require less time and money.
• The location of the federal court may be more beneficial to one party than to the other.
• Federal judges are perceived to be highly skilled, knowledgeable and professional.
• If you are the defendant, removing the case from state to federal court may be a good tactical move for any of the above reasons.

Lawsuits involving traditional trusts can only be brought in federal court if there is “diversity of citizenship” and the amount in controversy exceeds $75,000. Diversity of citizenship means there are residents of different states on opposite sides of the lawsuit. A party is a “citizen” of the state in which they are domiciled.

There must be “complete” diversity. In other words, there cannot be parties of the same citizenship on both side of the action. For example, if an Indiana resident sues a resident of Delaware and a resident of Indiana, the lawsuit does not qualify for federal jurisdiction. However, if the Indiana resident sues residents of Delaware and Michigan, there is complete diversity.

When it comes to determining the citizenship (i.e., the residency) of parties who are not natural persons, there are specific rules which apply to different types of entities. However, the rule for determining the citizenship of a trust was an open question until recently.

On June 1, 2017, the US Court of Appeals for the Second Circuit decided the case of Raymond Loubier Irrevocable Trust v. Loubier. The Court held that traditional trusts are not distinct legal entities like, for example, corporations. Instead, the “trust” is really the relationship between the trustee who has legal ownership of goods for the benefit of someone else (the beneficiaries). Therefore, citizenship is determined by the citizenship of the trustee.

The Court distinguished the traditional trust from non-traditional trusts, such as a real estate investment trust (REIT), which may exist under state law as a separate legal entity. In that case, the citizenship of the trust is determined by the citizenship of its beneficiaries. Accordingly, if the REIT has beneficiaries domiciled in New York, Connecticut and New Jersey, the REIT will be a “citizen” for purposes of diversity of each of these states.

For example, a traditional trust is sued in state court and has a trustee who is a Florida resident, and beneficiaries who are from Virginia and Maryland. The party suing is from Maryland; therefore, there is complete diversity (Maryland vs. Florida). The trust can “remove” the case to federal court so that it is adjudicated in federal court instead of state court.

If, on the other hand, the defendant trust was a REIT, there would not be complete diversity because the person suing is in Maryland and the trust beneficiaries are in Virginia and Maryland (Maryland vs. Maryland). The case could not be “removed” and must be adjudicated in the state court in which it was commenced.

The decision in Loubier clarifies when parties can have their suit heard in federal court. If you are considering a lawsuit or you are defending one, discuss your options with an experienced attorney. It may offer significant benefits in your case.

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