Trustee and Beneficiary Fight Over Interpretation of Their Father’s Trust…..Yet Again

Trustees in California have a duty to administer a trust solely in the interest of the beneficiaries and to avoid conflicts of interest. Failure to comply with this simple directive is one of the biggest sources of litigation between trustees and beneficiaries. In a recent case, the California Court of Appeals reviewed the actions of a trustee. The Court of Appeals affirmed the superior court’s order to sell the home. O’Reilly v. O’Reilly, 2017 Cal. App. Unpub. LEXIS 6937 (Cal. App. 2d Dist. Oct. 10, 2017).

A trust was established by the family patriarch (Patrick) who died in 2002. Patrick left a widow, Julie, and three adult children (Kevin, Cyril, and Ann). Kevin was the successor trustee and became the trustee when Patrick’s died.

The trust permitted the trustor’s widow to remain in the home as long as she wanted, then the home and remaining assets were to be distributed to the trustor’s three children. After Patrick’s death, his widow lived in the house for a few years then signed a document waiving any further interest in the property. Kevin, as the trustee, then was obligated to distribute the house and furnishings according to the terms of the trust.

As frequently is the case, the three children couldn’t agree on what to do with the house. In California, it is common to have the family home as the largest trust asset. Here, because the family could not decide what to do with the home, Kevin filed a petition to determine whether the trust granted him permission to sell the house. The trust provided that, after Patrick’s died, the trustee:

…shall hold the Settlor’s residence together with its furniture and furnishings for the use of [wife]. She shall be permitted to live in the house rent free. At such time as [wife] dies or permanently ceases to use the home as her residence, then the home together with its furniture and furnishings shall be distributed as follows….

The trust listed certain items of personal property to be distributed to each of the three children. It then said that the rest of the residence and furnishings was to be distributed as provided for the distribution of the residue of the trust estate (to the children).

The trust also explained the trustee’s power to sell trust assets, stating that:

The Trustee of this trust shall have all of the powers granted to Trustees by law (including the powers granted under California Probate Code §§ 16220-16249 inclusive which shall be broadly interpreted) and by this instrument. The powers specifically listed herein are for convenience only and are not to be interpreted as restricting the powers of the Trustee. Among the powers conferred on the Trustee are the following:… To buy, sell, and invest trust property.

Kevin tried to sell the house in several ways, but Cyril didn’t like any option. Cyril contended that settlor’s wife had abandoned her interest in the house years before—and that Kevin breached the trust by using the house for his and his sister’s benefit, and depriving Cyril of his fair share.

Cyril argued that the trust language that the house be “distributed” to the beneficiaries required that the house itself be transferred, and prevented it from being sold. The court ruled the trust instrument granted the trustee the power to sell the property, and specifically overruled all of Cyril’s objections. The court then signed a formal order authorizing the sale. Cyril appealed.

Acting Presiding Judge Laurence D. Rubin of the California Second District Court of Appeals wrote that the Probate Code states that a trustee has the powers conferred by the trust instrument, and except as limited in the trust instrument, the powers conferred by statute. The judge noted that the statutory powers include California Probate Code § 16226 which provides “the power to acquire or dispose of property, for cash or on credit, at public or private sale, or by exchange.” These powers weren’t limited by the trust, which specifically provided that the trustee had all the statutory powers and that they were to be broadly interpreted. The trust itself mentioned sale as one of the trustee’s powers.

Cyril argued that the trust contains a specific provision prohibiting sale of the house. Cyril argued that the trust language required that the house be “distributed” to the children. He maintained the use of the word “distribute” required a transfer of title to the children, and didn’t permit a sale and distribution of equivalent value.

The Court of Appeals disagreed. Judge Rubin explained that in this particular trust, “distributed” must mean a transfer of title, because the same word is used when discussing the disposition of individual items of personal property which were likely intended to be given to each of the individual children, not sold for fair market value. Plus, “distributed” is also used in the context of other distributions which were likely not intended to be distributions of title in equal shares.

Judge Rubin said that the Court didn’t think it likely that “Patrick intended each of his children to share title to each remaining chair, lamp, and coffee mug in the house.” The Court noted that Cyril’s argument that “distributed” is restricted to a transfer in kind everywhere it appears in the trust would lead to absurd results.

Finally, Judge Rubin pointed out a rather obvious fact: Kevin’s right to sell the property as trustee avoided a lengthy court battle which would’ve resulted in the same end. Judge Rubin explained that a house can’t be divided into three separate parcels—there has to be a sale and division of proceeds.

The takeaway from this case is twofold: 1) Make sure that your drafting attorney crafts language that reflects its conformity to the statute (which is well established and interpreted by many cases) to avoid lack of clarity as to what the testator intended OR that clearly defines how it should deviate from the statute. Additionally, trust administration (the process of a trustee following the trust’s terms at the right time) should include disclosure and communication to beneficiaries to avoid a dispute. Finally, get advice about the likely interpretations of the court and best strategy to get court intervention from an expert, namely an attorney who is well-versed in Probate litigation.

If you have questions about trusts and the powers and responsibilities of a trustee, contact NM Law, APC (949-253-0000) to speak to a trust administration attorney. We encourage you to take advantage of our superior skill and knowledge and to speak with us today to get answers to your questions about trusts.

Disclaimer: This article is intended to provide a general summary of laws in the State of California and should not be construed as a legal opinion nor a complete legal analysis of the subject matter. Noelle Minto is an attorney at NM Law, APC in Tustin, California, a law firm specializing in Trusts & Estates and Business Transactions.