Updates – refined by New Case Rulings

Estate of Giraldin (Giraldin v. Giraldin) (Cal. Dec. 20, 2012)

A revocable trust is a trust that may be revoked, altered or amended during the lifetime of the person who created it (the settlor). The beneficiaries’ interest in such trust is merely contingent, and the settlor can eliminate that interest at any time. When the trustee of a revocable trust is someone other than the settlor, that non-settlor trustee owes a fiduciary duty to the settlor only – not to the beneficiaries – so long as the settlor is alive. See Cal. Prob. Code §§15800 et seq. During that time, the trustee must account to the settlor, but not to the beneficiaries. When the settlor dies, the trust becomes irrevocable, and the beneficiaries’ interest in the trust vests. In Estate of Giraldin (Giraldin v. Giraldin), the California Supreme Court was called upon to determine whether, after the settlor dies, the beneficiaries have standing to sue the non-settlor trustee for any purported breaches of fiduciary duty committed while the settlor was alive and the trust was still revocable. Because a non-settlor trustee’s breach of fiduciary duty owed to the settlor might substantially harm the beneficiaries by reducing the trust’s value contrary to the settlor’s wishes, the  majority opinion of the Supreme Court concluded the beneficiaries do have standing to sue for a breach of that duty, and may do so after the settlor has died. This ruling reverses a well-publicized judgment of the California Court of Appeal, which concluded the beneficiaries have no such standing. (An interesting dissent opinion concluded that a court-appointed personal representative of the decedent settlor should be the only person with such standing; in that California’s Probate Code does not imply that a beneficiary of a settlor’s revocable trust may sue the non-settlor trustee, on the deceased settlor’s behalf, for breaching the fiduciary duty the trustee owed the settlor during the settlor’s lifetime.) It will be interesting to see how this ruling is applied in practice, but, in the meantime, one will likely hear the members of the probate litigation bar joyfully dancing and yelling throughout the hallways of the probate courts “hooray for more trust litigation!”

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Thorpe v. Reed (Cal.App. 6th Dist., Dec. 13, 2012)

It is a well known principle of trust law that, if the trust provides for the trustee to be compensated for work performed as trustee, then the trustee is entitled only to the compensation set forth in the trust instrument. See Cal. Prob. Code §15680. So, the Court of Appeal in Thorpe v. Reed ruled that compensation was not payable to a successor trustee of a special needs trust where the trust instrument provided that no compensation was payable to any trustee. Somehow the successor trustee accepted the job as trustee knowing the trust instrument prohibited the payment of compensation, incurred over $100,000 in trustee’s fees, and, ultimately, the Court of Appeal said the successor trustee should get nothing. Tough break…but, as mentioned in the opinion, if the successor trustee thought that the compensation specified in the trust was inadequate, then he could have refused to accept the appointment. This case reminds us of the general principle of American jurisprudence that there is no involuntary servitude except as punishment for those duly convicted of a crime (i.e., the 13th Amendment to the United States Constitution). Thus, if you don’t want to work for free (as a trustee), then don’t take the job (as a trustee).

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Bendon v. Reynolds (In re Reynolds), 2012 Bankr.LEXIS 4023 (B.A.P. 9th Cir., Aug. 24, 2012)

In this case, the Bankruptcy Appellate Panel for the Ninth Circuit Court of Appeals affirmed the bankruptcy court order and judgment, holding that the Chapter 7 Trustee was entitled to reach only up to 25% of the Chapter 7 Debtor’s interests in two spendthrift trusts established in California by the debtor’s parents. Spendthrift provisions in a trust are generally permissible in California, as long as that trust is not self-settled. Ordinarily, a beneficiary’s interest in the income and principal of an otherwise valid California spendthrift trust is protected from the claims of creditors as long as the income and/or principal remains in the trust. However, once the income or principal of a spendthrift trust is distributed to a beneficiary, then it may  be reached by creditors. Cal. Prob. Code §§ 15300, 15301. As to be expected, there are a few exceptions to these rules. For instance, Probate Code §15306.5 provides that a judgment creditor may satisfy its judgment out of the payments to which the beneficiary is entitled under the spendthrift trust so long as it does not exceed 25% of the payment that otherwise would be made to the beneficiary. Another exception is found in Probate Code §15307, which provides that, not notwithstanding the spendthrift rules, a creditor may satisfy its judgment out of any amounts that the beneficiary is entitled to receive from the trust which is in excess of the amount that is or will be necessary for the education and support of the beneficiary. The text of Probate Code §15307 seems to suggest that it would permit invasion of the trust income and principal, however the title to the statute references only income. The application of Probate Code §15307 is somewhat unclear, and, unfortunately the interaction of these various statutory exceptions has become muddled in the case law. In this case, the Trustee was permitted to avail himself of the exceptions to the spendthrift rules because the U.S. Bankruptcy Code provides that he holds all of the rights of a hypothetical judgment creditor. Because these particular trusts permitted the Debtor only to receive principal distributions, not income, the majority of the judges on the panel ruled that the 25% cap of Probate Code §15306.5 applied and that Prob. Code §15307  did not apply due to its constraint to mere income payments. The dissent disagreed with the majority’s analysis, arguing that Probate Code §15307 was not so constrained and contending that the judgment creditor should be able to seek additional amounts to satisfy its judgments above and beyond the 25% cap of Probate Code §15306.5 so long as that discretion is exercised reasonably in conformity with the provisions of Probate Code §15307. The dissent is remarkably persuasive, and it should be interesting how this law further develops.

 

Diaz v. Bukey (2011) 195 Cal.App.4th 315

Sometimes I wonder why cases ever get as far as they do in the appeal process considering the ever increasing cost and expense of litigation. This is one of those cases. In the case of Diaz v. Bukey, the California Court of Appeal ruled that the beneficiary of a trust could not be compelled to arbitrate disputes arising under the trust in the absence of the beneficiary’s agreement to do so. In general, only parties to an agreement containing an arbitration clause may be required to arbitrate their disputes. Although arbitration is a favored method of solving disputes, the policy favoring arbitration does not eliminate the need for an agreement to arbitrate and does not extend to persons who are not parties to an agreement to arbitrate. Here, the arbitration clause was found in the trust instrument, and the beneficiary did not wish to arbitrate her dispute with the trustee concerning the internal affairs of the trust. In the absence of all of the beneficiaries and interested parties agreeing to resolve their dispute in arbitration rather than in probate court, there was no basis for an order compelling arbitration. Modern trust litigation in the probate court system is generally more expedient than ordinary civil litigation, there is no general right to a jury trial, and the probate court has trained research staff experienced in this interesting but specialized field of law. The appellate opinion is silent on the issue, but it makes me wonder what really may have motivated the trustee to expend such time, effort and money to seek to compel arbitration of this dispute.

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Christie v. Kimball (2012) 202 Cal.App.4th 1407

You never know what can happen once a case is filed in court. In the case of Christie v. Kimball, the California Court of Appeal ruled that the probate court, on its own initiative, had the authority to order the trustee of a trust to prepare and present a formal, verified accounting where it was deemed necessary in the court’s discretion in order to determine the status of trust assets. The Court of Appeal found that this authority rested upon the probate court’s general power to supervise the administration of a trust, and also pursuant to the catch-all authority provided to the probate court in Cal. Prob. Code §17206. The interesting thing about this ruling is that, despite confirming common assumptions of the probate court’s power, the Court of Appeal ultimately determined that the order compelling the accounting was not, in and of itself, appealable. Those who are considering acting as a trustee should realize that it is both possible and likely that the probate court may order you to prepare and present a formal, verified accounting as a preliminary step in any court dispute which arises regarding the trust and its assets, and that you do not have the right to appeal any such order.