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.
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.