Living Trust and Fiduciary Duty at Issue in Case Before California Court of Appeals

This case involves the issue of whether and to what extent superior courts have authority to intervene in the administration of nonintervention estates.

This case involves the issue of whether and to what extent superior courts have authority to intervene in the administration of nonintervention estates.

MP900387776A successful business owner, Mildred Vail had purchased a number of properties in the Healdsburg area during the course of her lifetime. She was also the mother of four children: Patricia, Jonatha, Michael and Steven. recently published the case of “In re Mildred M. Vail Living Trust.”In this litigation, Mildred executed a Living Trust naming her four children as equal beneficiaries in 2003. The Trust instrument named Mildred as the "trust manager" and provided that her four children would become joint successor "Co-trust managers" in the event of her death, incapacity or resignation. It also gave Mildred the absolute power to revoke or amend the Trust during her lifetime and to add or remove property from the Trust at any time. Mildred placed several properties in the Trust.

In October 2004, before heart surgery, Mildred gave Steven her general durable power of attorney and a separate durable power of attorney "for banking and other financial institution transactions." In 2007, she revised her trust. She resigned as Trustee and named Steven as the "new trust manager."

In 2006, Steven led an effort to purchase and develop a property on behalf of the Trust. A family meeting was held to discuss the transaction. To obtain the money to buy the property, two Trust rental properties were sold, netting $466,000.

Mildred died on in 2011, at the age of 94. At that time, the four siblings, including Steven, behaved as though they had become successor co-Trust Managers. Steven later testified at his deposition that at the time of his mother's death, he hadn’t remembered her resignation as trust manager, but he later found the document making him the substitute trust manager.

Michael filed a petition to remove Steven as a co-trust manager, which alleged Steven was taking action without the consent of the other co-trust managers and refused to provide an accounting of his activities. In 2012, the court relieved all four siblings as co-trust managers and appointed Shelly Ocana as the interim trust manager.

Michael provided Ocana with a witnessed 2011 letter signed by Mildred that stated that Steven has been engaged in "rogue [activities]" and "secretive dealings" and was not authorized to act under her power of attorney. Ocana investigated the claims against Steven and ultimately sold the property at issue. The four siblings then entered into a settlement agreement providing for the distribution of Trust assets.

In 2015, Michael filed a suit accusing Steven of "numerous acts of injury to his mother and her trust involving elder abuse, conversion, breach of fiduciary duty, theft of trust assets, fraudulent transfer of assets, forgery, co-mingling trust assets, impersonating as trustee of the trust for personal gain, undue influence, conflict of interest, breach of trust, constructive trust for wrongfully retaining, secreting and/or appropriating trust assets and perjury." The trial court issued a statement of decision concluding that Steven had produced credible evidence that he had spent $71,000 for legitimate trust purposes.

The Court of Appeal of California reviewed Steven’s claim that the trial court applied the wrong legal standard, when determining whether he violated his duties as trustee.

Judge Henry E. Needhamwrote the opinion of the Court and agreed with Steven that it was Mildred to whom he owed a fiduciary duty.

“A revocable trust is a trust that the person who creates it, generally called the settlor, can revoke during the person's lifetime,” Needham explained. The beneficiaries' interest in the trust is contingent only, and the settlor can eliminate that interest at any time. When the trustee of a revocable trust is someone other than the settlor, that trustee owes a fiduciary duty to the settlor, the Court said—not to the beneficiaries,  if the settlor is alive. During that time, the trustee needs to account to the settlor only and not also to the beneficiaries.

However, the judge did note that after the settlor's death, the beneficiaries have standing to assert a breach of the fiduciary duty the trustee owed to the settlor to the extent that breach harmed the beneficiaries, and that the trustee's conduct can be attacked for fraud or bad faith. Therefore, Michael had standing to bring claims against Steven for his alleged breach of his duty to Mildred while she was alive.

The judgment was affirmed.Judge Needham said he inferred that the court had found Steven to be liable based on a breach of his duties to his mother as settlor of the Trust, which was supported by substantial evidence. The court ruled that Steven was not credible regarding the expenditures for which he was claiming an offset. Those included a down payment to purchase a property, payments made on a property after it was sold and the cost of building out his office.

Reference: (March 27, 2018) “In re Mildred M. Vail Living Trust”

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