The holding of the Estate of Giraldin:
Remainder Beneficiaries May Recover From trustee of a revocable trust even if actions were taken with Settlor consent!
Most middle class families now utilize a revocable living trust to avoid the costs of probate. Indeed, it is the most common method of middle class estate planning now in California. A new case illustrates clearly a danger that the trustee of such a trust may face.
A trustee of a revocable trust may assume that while the person who created the trust (“Settlor” or “Trustor”) is alive and is the sole beneficiary, the Trustee should be answerable only to the Settlor for actions that the trustee takes during the Settlor’s lifetime. After all, the Settlor is alive and could revoke the Trust if displeased with the Trustee’s actions.
But a recent California Supreme Court decision has overturned that assumption. The decision places new responsibilities and extended potential liability on any trustee acting even while the Settlor is living, including a spouse-Trustee administering a joint trust.
Facts of the Case. In Estate of Giraldin, December 20, 2012, the Settlor (Father) named Son as sole trustee of the Father’s revocable trust (Trust). Son acted as trustee while Father was living. Father invested his funds in a business that Son partly owned, the start-up company SafeTzone Technologies Corporation (SafeTzone).
Father then contributed his stock in SafeTzone to the Trust. Son retained the Trust investment in SafeTzone even though it became almost worthless. Father never objected to the SafeTzone investment, and the Trust instrument provided wording that gave broad protection to Son acting as Trustee.
At Father’s death Son’s siblings, remainder beneficiaries of the trust, filed suit against Son, seeking an accounting and recovery of those investment losses claiming the Son failed to act as a prudent trustee, risked their eventual inheritance, even though the Father was still alive and could, presumably, have revoked the Trust and regained control of the assets at any time.
The legal issue was whether the other children could sue Son for actions he had taken during Father’s lifetime. The Son argued that the Father could take back the assets at any time so if anyone could complain, it would have been the Father and by leaving the assets in the Trust, the Father had made his choice. The remainder beneficiaries contended that they had standing to pursue the trustee for Father’s economic loss after Father’s death since they were the ones destined to inherit.
Holding:The Supreme Court agreed with the remainder beneficiaries. A trustee of a revocable trust may be required to account to the remainder beneficiaries after the settlor’s death for actions that the trustee took during the settlor’s life. The trustee may be liable if the trustee did not follow the settlor’s directions or otherwise breached a duty to the settlor. Remainder beneficiaries unaware of a Settlor’s finances during the Settlors’ life, and not necessarily knowing Settlors’ desires may seek to recover a “missing” inheritance from a trustee.
Effect of Direction by the Settlor. The Settlor may dissipate trust funds as the Settlor chooses. The Trustee has no duty to prevent the Settlor from a knowing, voluntary use of revocable trust assets. In the Giraldin case the siblings as remainder beneficiaries could not pursue Son for losses caused by Father’s informed decisions.
But a Trustee may find it difficult to prove that the Settlor made a particular decision. It is critical in such a situation to make full, written disclosure and consent from the Settlor to avoid later possible disputes.
Spouse as Trustee. The effect of Estate of Giraldin may be most pronounced when a married couple serves as cotrustees of their joint trust, or one spouse acts as sole trustee upon incapacity of the other. Children from a prior marriage or disgruntled children may use the decision in Estate of Giraldin to require a surviving spouse to account for years of trust administration when financial records may not be readily available. They may seek to recover a loss in value of the trust property from the surviving spouse, if he or she cannot produce evidence to show that the deceased spouse approved a trustee action.
Again, clear records and informed written instruction and consent of the Settlor is vital to avoid later claims years down the road. An ounce of such prevention is worth a ton of cure…for the cure in court is sure to be expensive!