The Settlor Made Me Do It: Part 2, California Supreme Court Overturns Appellate Decision

Posted by Keith A. Davidson on January 03, 2013

It’s an exciting time to be a Trust and Will litigation lawyer.  Our California Supreme Court recently handed down an opinion on a very pivotal area of Trust litigation—Trustee liability.  Last October we wrote about the case entitled Estate of William Giraldin, where the Fourth District Court of Appeal held that beneficiaries of a revocable trust did NOT have standing to sue a Trustee for acts that occurred while the Trust settlor (the Trust creator) was still alive.

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Generally speaking, so long as the settlor is living, the Trustee owes duties ONLY to the settlor and not to any other beneficiaries.  Once the settlor dies, the revocable trust then becomes irrevocable and the beneficiaries’ interest in the Trust vest—making them actual beneficiaries with actual rights as against the Trustee. 

The question raised by the Giraldin case was whether beneficiaries could sue a Trustee for acts that the Trustee undertook while the settlor was still living.  The Appellate Court concluded that beneficiaries can NOT sue a Trustee for pre-death acts because the beneficiaries interests in the trust were not vested at that time.  But the Trustee’s wrong acts that take place before the settlor dies can have serious ramifications and damages to the beneficiaries’ interests after the Settlor dies.  For example, if the Trustee loses $1 million while the settlor is alive (and the settlor does nothing about it), that’s $1 million less for the beneficiaries after the settlor’s death. 

The California Supreme Court has overturned the Appealate Court's ruling in Giraldin, and instead held that beneficiaries do have the right to sue a Trustee for acts that occurred before the settlor died.  But there’s a catch, the suit must be brought to correct any breaches as against the settlor only.  In other words, the beneficiaries have no vested rights while the settlor is alive, so the Trustee, by definition, cannot breach any duty to the beneficiaries during the settlor’s lifetime.  But the Trustee could potentially breach his or her duties as against the settlor, and for that, the Trustee can be sued by the beneficiaries.

For example (these examples are taken from the Supreme Court’s opinion), let’s say a settlor tells the Trustee during the settlor’s lifetime that he wants to withdraw a substantial sum of money to take a final trip around the world.  The Trustee follows the settlor’s direction and the Trust is reduced by the withdrawal.  This act may not be in the best interests of the beneficiaries because it lessens their interest in the Trust, but because the settlor is alive they have no standing to sue.  And since the Trustee would NOT have breached his or her duty to the settlor by following the settlor’s direction to make the withdrawal, there would be no liability as against the Trustee.

In contrast, if the Trustee were to withdraw a large sum of money from the Trust during the settlor’s lifetime and then spend the money on a world trip for the Trustee—not the settlor—that would be a breach of Trust as against the settlor.  And the beneficiaries could sue the Trustsee for that breach even after the settlor dies.

In the end, this is a good result for future cases because under the Appellate Court’s view of the world, a Trustee could have breached his duties and looted a Trust once the settlor was incompetent or just before the settlor’s death and there would be nothing the beneficiaries could do about it.  Now, under the Supreme Court’s ruling, the beneficiaries could assert an action for the breaches the Trustee incurred as against the settlor.  It will help to ensure that last minute breaches that occur when the settlor cannot defend himself or herself will not go uncorrected.

The Settlor Made Me Do It: California Court Clarifies When Beneficiaries Can Sue Trustees...And When They Cannot

Posted by Keith A. Davidson on October 18, 2011

California Trust and Will litigation is like building a puzzle.  There are a lot of moving parts in most cases and trying to figure out how and when to put the parts together can be confusing.

The Fourth District Court of Appeals recently set Trust litigators straight on how and when a Trustee can be sued by Trust beneficiaries, in a case titled “Estate of William A. Giraldin” (2011, No. G041811).  Associate Justice William W. Bedsworth authored the opinion that holds beneficiaries have no standing to sue a Trustee for alleged breaches of fiduciary duty that occurred while the Settlor (which is the Trust creator) is still alive and had the power to revoke the Trust.  My first reaction: What???

In Estate of Giraldin, the decedent, William Giraldin had created a revocable, living trust.  Although he was the “Settlor”, because he created the Trust, he appointed one of his five sons, Tim, as the successor Trustee.  The Trust was revocable by William Giraldin during his lifetime and, therefore, under Probate Code Section 15800, the Trustee, while acting as Trustee during William’s lifetime, only owed duties to William—not the named Trust beneficiaries (Williams’ other four sons)..  In other words, the Probate Code specifically states that the Trustee does not owe any fiduciary duties to the children of William (who are “contingent” beneficiaries so long as William is alive) until after William’s death.

The problem in Estate of Giraldin revolved around a large investment William made, over $4 million, into a start-up company owned, in part, by his son Tim.  After William created the Trust, and made his investment in Tim’s company, William stepped down as Trustee and allowed Tim to act as Trustee of his Trust.  But Tim was acting at William’s direction.

As might be expected, the start-up company William invested $4 million in did not survive, and William’s wealth plummeted as a result.  After William’s death, the other siblings were not happy that William invested so much of his money into Tim’s company only to have it disappear (I would imagine that had Tim’s company been successful, the other siblings would have been quite happy).  So Tim’s siblings sued Tim for breach of Trust claiming, among other things, that Tim never should have allowed William to invest in the company and lose his $4 million.

The Trial court agreed with Tim’s siblings and awarded a surcharge against Tim in excess of $4 million (yikes!).  Tim naturally chose to appeal that ruling and Justice Bedsworth gives us new law with a ground-breaking result for Trust litigation issues—he reversed the surcharge.  Tim owes nothing!

Before Estate of Giraldin, it was generally assumed that while beneficiaries could not sue a Trustee while the Settlor was alive, they could do so after the Settlor’s death.  The beneficiary could receive both an accounting of actions that took place before the Settlor’s death and even ask for a surcharge for any breach of Trust that occurred during that time.  This was based on Evangelho vs. Presoto (1998) 67 Cal. Appl. 4th 615.  Not so fast, says Justice Bedsworth.  He overrules the concepts set down in Evangelho.

Instead, the Court states that when a Trust is revocable by a Settlor, the only duty a Trustee owes is to that Settlor.  Therefore, there is no basis, and even no standing(!), for beneficiaries to seek an accounting of Trust actions or assert a breach of Trust for actions taken during that time.  What about breaches that the Trustee incurs, but the Settlor could not assert due to the ill-health or lack of capacity of the Settlor?  The Court says that can be taken up by the Settlor’ successor’s-in-interest, which usually means his Executor or surviving heirs.  But that type of action must assert wrongs against the Settlor, which did not occur in this case.

In fact, in the Estate of Giraldin matter, the only wrongs asserted by the beneficiaries is that they should have had an extra $4 million to split among themselves.  Everyone agreed that the Settlor wanted to invest in Tim’s company and had the capacity to do so.  They merely asserted that Tim should have stopped William from investing how he liked.  The Court disagreed, saying that during the Settlor’s lifetime, since the Settlor has the power to revoke the trust, the Trustee must do as the Settlor directs.  This is true even if the investing decisions are foolish. 

Had the beneficiaries been asserting wrongs committed as against William, then it may have been a different story.  Or if the investing had occurred after William died, when the Trustee owned a duty to his siblings as vested trust beneficiaries, there would have been a different outcome.  But under these facts, the Trustee gets a free-pass because he based his actions on the directions of the Settlor.

Giraldin is a well-reasoned and well-written opinion and makes sense on the facts of that case.  But the downside of a case like this is that the new argument for every Trustee acting while the Settlor is alive is going to be “the Settlor made me do it”—no matter whether that is true or not.  It will then be up to the beneficiaries to show whether that is true. 

Trustees: Your Breaches Are Showing--Why Do So Many Individual Trustees Get It Wrong?

Posted by Keith A. Davidson on April 21, 2011

It is shocking to me how many Trustees violate their fiduciary duties.  Under California Probate Code Section 16000 et seq. there are voluminous sections on all the duties, responsibilities, and liabilities Trustees must comply with to property administrate a Trust.  There are rules on just about every action a Trustee must take, and on actions the Trustee must NOT take, from proper investing (under the Uniform Prudent Investor Act ), to allocation of items between income and principal, to every other action or inaction required of a Trustee.  Yet, so often these many duties and responsibilities are simply ignored, or worse, not known by the individual trustees. 

And when a Trustee violates his duty, and if that violation is challenged in Court, it is the Trustee’s burden to prove that he met the standards required of him under the California Probate Code.  This is why being a Trustee is a thankless job.

But why do so many Trustees get it wrong?  The biggest problem is lack of knowledge. Many individuals acting as Trustees have no idea that they have a boat-load of requirements to follow under the Probate Code, and likely under the Trust document.  They have never been educated, advised, or inquired about their duties at all.  It seems shocking just how many people willingly assume the many duties as Trustee, but have no idea what those duties are. 

A common misconception is that the person acting as Trustee is in control and can do whatever he likes, even continuing to own and invest the way the Trust creator (called a Settlor) did prior to his death.  Not so.  A Trustee cannot do whatever he likes and he cannot continue to invest or even hold assets that the Settlor acquired during life.  This is because the duties of investing for a Trustee are vastly different from those allowed by individual Settlors who created the Trust in the first place.

As a Settlor, the person is entitled to invest however they like (this assumes we are discussing a typical revocable living trust used in estate planning).  The only duties a Settlor has is to herself.  She does not hold assets for anyone other than herself and the Probate Code says she only is responsible to herself.  But once the Trustee passes and a successor Trustee takes over, the ground rules change substantially. 

For example, an individual Settlor has no duty to diversify assets.  She can hold 100% of the Trust assets in a single asset class (such as real estate), or even in a single stock (i.e. Enron) if she likes.  But when a successor Trustee takes over, a duty to diversify the Trust assets comes into effect.  That means the new Trustee must take immediate action to sell a portion of the Trust assets and diversify those investments as required by the Probate Code—there is no leeway here.  Assets MUST be diversified by Trustees!

If I had to guess how many private, individual Trustees are in breach of trust (this does not include professional fiduciaries or corporate fiduciaries), I would say from 80% to 90% of them.  Sounds extreme?  Maybe, but my experience with individual Trustees would suggest that 100% of them are in breach of trust as to at least some aspect of their duties. 

So when you are asked to act as Trustee of a California Trust, the first thing you should do is find out what duties and responsibilities you have.  You’ll be glad you did because it will be up to you alone to prove you complied with those duties.  And it’s much easier to comply with duties you know about than duties you don’t.