competent settlor(s)’s power to revoke a living trust and return the assets
into his or her name(s) is equal to ownership of the trust assets. So long as the settlor is competent, the
trustee owes his primary duty to the settlor and can follow the written
instructions of the settlor. What
changes when the settlor becomes incompetent prior to death?
year, California’s Supreme Court decided the Estate of Giraldin (“Giraldin”). It held that once the incompetent settlor of
a living trust died, the death beneficiaries gained legal standing to dispute
the successor trustee’s alleged mismanagement of the trust, to the extent that the
trustee’s mismanagement reduced what remained for them.
on Giraldin, California’s Third District Court of Appeals decided Drake v.
Pinkham (“Drake”). Drake
holds that once a settlor of a living trust becomes incompetent – provided no
other competent person has the right to revoke the trust (e.g., another settlor, or an agent under a
power of attorney or a conservator) — the future death beneficiaries gain rights. The beneficiaries can then request the
successor trustee to provide an accounting and information regarding its
administration and dispute the trustee’s administration in court. Otherwise, barring the settlor’s incompetency
prior to death, the future trust beneficiaries must wait till all person(s)
with the power to revoke the trust die(s) (usually only the settlor(s)).
decision is a double edged sword; it was in fact a defeat for the beneficiary who
brought that case. In Drake, a death
beneficiary alleged that her mother, the settlor, was incompetent and had been subjected
to undue influence when she signed two trust amendments to her living trust
that disinherited one daughter and left everything to another. She did not challenge these amendments while her
mother was alive, even though she was aware of them. She waited until her mother died before she contested
them. The daughter’s contest was denied
as being untimely because, said the court, she had gained standing to petition
the court once the mother had become incompetent. By not acting while the mother was still alive,
she denied the court the opportunity to decide whether or not the mother was
truly incompetent when she signed the trust amendments.
the death beneficiaries also waited until the incompetent settlor died. They, however, were allowed to dispute the
trustee’s investment actions, taken while the settlor was incompetent, on the
grounds that the trustee had breached a duty owed to the then living settlor that
reduced the size of the death beneficiaries’ inheritances.
are to be learned by trustees, settlors and persons engaging in their own
estate planning. They include the
following: first, future death
beneficiaries of a living trust who believe that the living settlor is incompetent
should request information from the trustee regarding the trust terms and its management
(a court ruling of incapacity may be necessary should the trustee deny that the
settlor’s incapacity); second, the trustee who manages the living trust of an
incompetent settlor should be prepared to work with, and if necessary to defend
his or her actions against any claims brought by, the death beneficiaries (a
tightrope if ever there was one); third, a person engaging in estate planning
may consider giving someone else the power to revoke the trust, in the event of
the settlor’s incompetency, in order to prevent the death beneficiaries from becoming
involved with, in and perhaps interfering with, the administration of the trust
during the settlor’s lifetime should the settlor become incompetent; and,
fourth, a person may wish to exclude certain persons as beneficiaries of a
particular trust in order to prevent
conflicts regarding that trust; that may entail providing for these excluded
persons with other assets outside of the trust to buy peace.