Landmark Decision Makes Incapacity Trustee Accountable to Death Beneficiaries

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As a rule, a trustee who follows the written instructions of a settlor of a revocable trust is not liable to the future death beneficiaries after the settlor's death.

Now, California's Supreme Court has decided that the death beneficiaries may hold the trustee responsible for any breach of trust while the settlor was alive (Estate of Giraldin, No. S197694, Dec. 20, 2012).

What does this mean?

This decision means that any successor trustee serving in place of a settlor who resigned or was replaced due to incapacity faces a dilemma.

On the one hand the trustee’s duty is to manage the trust assets solely for the benefit of the incapacitated settlor while he or she is then still alive. That is, while the settlor is alive the trustee owes no duty to the future (death) beneficiaries because their rights only come into existence when the settlor dies.

On the other hand, however, once the settlor dies the death beneficiaries may then sue the incapacity trustee for alleged breaches of trust that affected the settlor while alive.

Till now anyone concerned that the incapacity trustee improperly managing the trust assets would have petitioned for a court supervised conservatorship.

Once appointed, the conservator would hold and be able to exercise the incapacitated settlor's powers to revoke the trust, to replace the trustee and to sue the successor trustee for breach of trust.

Alternatively, if the settlor died before any breach of trust was so remedied the family could seek redress for such wrongs through probate court proceedings concerning the decedent’s estate.

Now California's Supreme Court has found such remedies to be nonexclusive.

Future beneficiaries can simply wait till after the settlor has died. They can then petition to hold the incapacity trustee both accountable and responsible for any breach of trust affecting the deceased settlor while alive.

What does that mean?

It means that the death beneficiaries step into the deceased settlor's shoes.

While this may not seem unreasonable in theory, it has important implications.

Families where distrust or hostility exist or later arise between the incapacity trustee and any of the death beneficiaries may become embroiled in lawsuits after the settlor’s death.

As a result of the greater risk of lawsuit, persons named as successor trustee are more likely to decline to serve as successor trustee.

Moreover, persons who do serve as trustee during the settlor’s incapacity will have to guard against possible future litigation by any hostile death beneficiaries.

Thus, trustees are now more likely to petition for court instructions to approve the use and investment of trust assets. These court petitions cost both money and time.

As a further result, people while competent to engage in estate planning will need to consider and anticipate possible future litigation by disgruntled death beneficiaries against their incapacity trustee.

First, their trusts may be drafted to provide more trustee discretion and protections for their incapacity trustees.

Second, family members who are likely to cause trouble after the settlor's death may simply not be included as trust beneficiaries in order to deny them future standing to sue the trustee for breach of trust.

These excluded persons might either receive nothing or else be named as death beneficiaries on non probate assets kept outside the trust – such as pay on death accounts or designated death beneficiary accounts.

The Giraldin decision has far reaching implications. The incapacity trustee's enhance exposure to liability after the settlor dies will affect the drafting of trusts, the willingness of persons to serve as trustee, and the administration of trusts during a settlor's incapacity.

Undoubtedly some families will see the need to revise their estate planning in the wake of this decision.

Dennis A. Fordham, attorney (LL.M. tax studies), is a State Bar Certified Specialist in Estate Planning, Probate and Trust Law. His office is at 55 First St., Lakeport, California. Dennis can be reached by e-mail at dennis@dennisfordhamlaw.com or by phone at 707-263-3235. Visit his Web site at www.dennisfordhamlaw.com .