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 non exclusive.  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.


















“Serving Lake and Mendocino Counties for nineteen years, the Law Office of Dennis Fordham focuses on legacy and estate planning, trust and probate administration, and special needs planning. We are here for you. 870 South Main Street Lakeport, California 95453-4801. Phone: 707-263-3235.”