Part 2 of a 3 part series.
In a trilogy of new cases decided in the last couple of months, the courts in three states have addressed the issue of whether the trustee of a revocable trust has a duty to account to, and can be held liable to, the remainder beneficiaries of the trust after the death of the settlor, for a period during which the trust was revocable. In reviewing the discussion of the courts in these three decisions, it is clear that, while a trust is revocable, the trustee has a duty only to the settlor, and that even after the death of the settlor when the interests of the remainder beneficiaries has vested, the trustee continues to have no duty to the remainder beneficiaries for any actions taken while the trust was revocable. In this series of blogs, we review these cases. In Part 1 of this series, we reviewed the case of Pennell v. Alverson; now, we turn to In re Estate of Giraldin.
The Court in the Pennell case agreed that, to the extent that the remainder beneficiaries were raising issues concerning breaches of fiduciary duty to Cleo during her lifetime, the remainder beneficiaries have standing to pursue those claims.
This distinction was picked up and further refined in December of 2012 by the California Supreme Court in In re Estate of Giraldin, 150 Cal. Rptr. 3d, 290 P.3d 199 (Cal.2012), reversing the result in the decision of the Court of Appeals (199 Cal.App.4th 577 (2011). In that case, Bill Giraldin created a revocable trust in early 2002 and designated his son, Tim, to serve as the trustee. The trust provided that Bill was the only beneficiary during his lifetime, and in the event of Bill’s incapacity, the trustee was to make liberal distributions for Bill’s needs, and that “the rights of remainder beneficiaries shall be of no importance.” The trust also contained a provision that during Bill’s lifetime, “the trustee shall have no duty to provide any information regarding the trust to anyone other than [Bill].”
Just prior to creating the revocable trust, Bill entered into an agreement to invest 2/3rds of his fortune in SafeTzone, a company owned by Tim and another son, among others. Bill’s investment in SafeTzone ultimately became an asset of the revocable trust administered by Tim, as trustee. By the time Bill died in 2005, the SafeTzone investment was worth very little, which led Tim’s siblings, as trust remainder beneficiaries, to file suit against him for breach of fiduciary duties. The beneficiaries sought to recover from Tim the trust’s losses stemming from the trust’s investment in SafeTzone. Tim had testified that Bill persuaded him to serve as trustee on the basis that his duties would not “kick in” until Bill’s death and until that time Tim would be working “at the suggestions and direction of his father.”
The trial court issued a judgment against Tim, ruling that Tim had breached his fiduciary duty in, among other things, failing to consider the interests of the remainder beneficiaries when he invested and distributed. The court did note that prior to Bill’s death, the beneficiaries “did not have any right to an accounting of the Trust’s activities from Tim”, stating that the rights of the remainder beneficiaries against the trustee vested on Bill’s death.
On appeal, the court, sua sponte, requested the parties to brief the issue of the standing of the beneficiaries to maintain any claim for breach based on the actions of the trustee during Bill’s lifetime. The court then ruled that Tim’s duties as trustee were owed solely to Bill during his lifetime, and that the beneficiaries did not have standing to sue Tim for his actions taken during that time, reasoning that
“If the trustees’ duties are not owed to the beneficiaries at the time of the acts in question, the death of the settlor cannot make them retroactively owed to the beneficiaries. To rule otherwise would put the trustee in an impossible position: while the settlor is alive, he is obligated to do what the settlor wants, even if it harms the expectations of the beneficiaries, but once the settlor dies, the trustee would have to answer for allowing the interests of those same beneficiaries to be diminished by conduct during the settlor’s lifetime.”
The California Supreme Court granted the remainder beneficiaries’ petition for review limited to the question of whether the “remainder beneficiaries have standing to sue the trustee for breaches of fiduciary duty committed during the period of revocability”. As an initial matter, the Court agreed with the Court of Appeals that the trustee has no duty to the remainder beneficiaries during the settlor’s life, and that the trustee owes a duty only to the settlor during that period. The Court, however, noted this was not the only allegation made by the remainder beneficiaries. Instead, the Court found that the remainder beneficiaries had also alleged a breach of fiduciary duty to the settlor.
In deciding this issue, the Court first determined that, where the settlor had consented to the actions of the trustee that served as the foundation of the allegation of a breach of fiduciary duty to the settlor, that consent would relieve the trustee of all liability for those actions. Furthermore, the California Trust Code provides that, during any period when a trust is revocable, notice of the trustee’s actions is to be given only to the person holding a power to revoke. As a result of these provisions, remainder beneficiaries are unable to challenge a trustee’s breach of “fiduciary duty owed to the settlor to the extent that breach harmed the beneficiaries’ interests.” The Court went on to state that “if the trustee’s duty is to the settlor, and the trustee acts pursuant to the settlor’s directions, the trustee has violated no duty.” But if the trustee acts on his own and not pursuant to the settlor’s directions, “the trustee may be liable to the beneficiaries.” The Court then held that “the beneficiaries have standing to claim a violation of the trustee’s duty to the settlor. However that standing is limited to the situation in which the violation of fiduciary duty to the settlor harmed the beneficiaries, and liability would be limited to that extent, and further limited to the loss that was not the result of the settlor’s direction.
On remand to the Court of Appeal, in a decision filed April 16, 2013, the Court of Appeal held that, because Bill’s intent is “indispensable” to a determination of whether Tim had violated his duty to Bill during Bill’s lifetime, facts the trial court had initially disallowed as hearsay were admissible to determine “the precise nature of [Bill’s] intent and Timothy’s duties to [Bill].” The Court of Appeal therefore remanded the case back to the trial court for a determination of the factual issues in the case.