Does the trustee of a revocable trust ever have a duty to account to the remainder beneficiaries of the trust?  The Supreme Court of California says yes, but not until after the death of the settlor.  In a recent decision, In Re Estate of Giraldin, 290 P.3d 199 (Cal. 2012), the Court held that, because a trustee’s breach of fiduciary duty owed to the settlor could substantially harm the remainder beneficiaries by diminishing the value of a revocable trust against the settlor’s wishes, the beneficiaries attain standing to sue for a breach once the settlor has died.  This decision reversed the result reached by the Court of Appeal that the beneficiaries of a revocable trust would never have standing to sue for a breach by the trustee.  199 Cal.App.4th 577 (2011).

The dispute arose out of a revocable trust created by William Giraldin, who was the sole beneficiary during his lifetime.  The remainder beneficiaries were William’s wife, Mary, who was entitled to the benefits of the trust during her lifetime, and their nine children, who would share equally in what remained after both William and Mary were deceased.  William appointed his son, Timothy, as the sole trustee.  The trust provided that William was the only beneficiary during his lifetime, and in the event of William’s incapacity, the trustee was to make liberal distributions for William’s needs, and that “the rights of remainder beneficiaries shall be of no importance.”

Before establishing the trust, William had agreed to invest about $4 million dollars, roughly two-thirds of his fortune, in a company called SafeTzone, which another son, Patrick, had started and of which Timothy was part owner.  The company issued stock to William, which was transferred into the trust.  SafeTzone did poorly and, by the time William died in, the trust’s interest in the company was worth very little.

Plaintiffs, four of William’s children and remainder beneficiaries under the trust, sued Timothy in his capacity as trustee for breach of his fiduciary duties, alleging that he had squandered William’s life savings for his and Patrick’s benefit, with the consequence that the other seven children were deprived of any benefit from the trust.  They sought to remove Timothy as trustee and to compel him to account for his actions.

The trial court ruled in plaintiffs’ favor, finding that Timothy had violated his fiduciary duties and ordering that he be removed as trustee and be compelled to provide an accounting.  Additionally, the court ordered that Timothy be surcharged in the amount of $ 4,376,044 for the SafeTzone investment and surcharged $ 625,619 for other “unsupported disbursements, distributions, and loans of Trust funds.”

On appeal, the court similarly found that Timothy’s actions constituted a breach of his fiduciary duties, but only towards the beneficiaries rather than toward William.  The court held that “Timothy owed them no such duties, and thus plaintiffs lacked standing to assert those claims.”

The California Supreme Court granted review as to the limited issue of whether, when the settlor of a revocable inter vivos trust appoints during his lifetime someone other than himself to act as trustee, the remainder beneficiaries have standing to sue the trustee for breach of fiduciary duty committed during the period of revocability once the settlor dies.  The Court explained that the Probate Code affords beneficiaries broad remedies for breach of trust and that, pursuant to Section 16420(a), a beneficiary may commence a proceeding against the trustee to redress such a breach.  While Section 16462(a) provides that “a trustee of a revocable trust is not liable to a beneficiary for any act performed or omitted pursuant to written directions from the person holding the power to revoke,” – in this case, the settlor – the court reasoned that the same section also implies that, if the trustee does not act in accordance with the settlor’s directions, the trustee may, in fact, be liable to the beneficiaries.  Accordingly, the Court held that beneficiaries have standing to claim a violation of the trustee’s duty to the settlor, when that violation harmed the beneficiaries and the harm was not the direct result of the settlor’s instruction.

In an unpublished decision filed on April 16, the Court of Appeal held that, because the issues now largely turned on “the precise nature of William’s intent and Timothy’s duties to William,” they amounted to factual questions best left to be resolved by the trial court on remand.

The long-term implications of Giraldin remain to be seen, but California probate courts could very well see an increase in litigation as trustees may be more likely to petition for court instruction on the use and investment of trust assets during the period of revocability.

If you have any questions, please contact Andrea Smith at: (650) 342-9600 or asmith@carr-mcclellan.com.