Trustors’ intent to provide for themselves takes precedence over interests of their offspring
A revocable trust owned a home in Rancho Santa Fe where Mother/Trustor lived, a home in Dana Point where one of Mother’s adult daughters lived rent-free, and another home in Laguna Niguel where another of Mother’s adult daughters lived rent-free. Mother, 86 years old at the time of trial and suffering from dementia, was the subject of a conservatorship, with her third adult daughter serving as conservator. That daughter (“Client”) lived in a home whose rent was paid by the Trust.
The Trust, created by Mother and Father (before his death), provided support to Mother during her life. After her death, each of the daughters is to be a beneficiary of the remainder of the Trust estate.
The Trust was property rich but cash poor, and it developed a liquidity crisis because its cash on hand became insufficient to pay its debts. The corporate Trustee (a bank) filed a probate court petition seeking permission to sell all three Trust homes, including Mother’s. The two daughters living rent-free in Trust-owned homes objected, disputed whether there was a liquidity crisis, and asked the Court to direct only the sale of Mother’s home to raise any needed cash. Client objected both to the Trustee’s petition and to her sisters’ positions, contending that selling Mother’s home would be harmful to Mother’s mental health and that selling only the Trust homes in which the two daughters lived would solve the liquidity crisis. Client did not object to the Trust paying the other two daughters a rental stipend equal to the rent the Trust paid for her.
Part way through the pretrial proceedings, Client substituted into the case as her counsel Jim Bush and the firm with which he was then of counsel. Because neither direct negotiation nor a settlement conference presided over by a probate judge resolved the matter, it proceeded through a several day trial. In its statement of decision, the trial court decided that there was a liquidity crisis, that the intent of the Trustors should control, and that such intent “was, and continues to be, to first meet their own needs and then only after their needs are met, to provide for their children and grandchild.” Supported by the testimony of Client and of Mother’s doctor, the court also found “that it would be disruptive and harmful to [Mother’s] psychological wellbeing to force her to move from her home . . . . In contrast, nothing in the Trust documents establishes the right of [the daughters] to live in Trust properties in perpetuity.” The Court thus adopted Client’s position that the two Trust homes in which the two daughters lived should be sold and that Mother’s home should be retained for Mother’s benefit.
Change in law didn’t change substance of existing power of appointment
In his will, Grandfather – the owner of a controlling share of San Diego Trust & Savings Bank – created a power of appointment. The power allowed Father in his will to appoint the bulk of Grandfather’s multimillion dollar estate to Father’s children. Under the law in effect when Grandfather signed his will in 1955 and also in 1966 when he died, if Father chose to exercise the power, he had to give at least a “substantial” share of the estate to each of his three children (one from Father’s first marriage and two from his second). Grandfather further provided that, in the event of any default of the power, each of Father’s children would receive an equal share of the property.
A few years after Grandfather died, California changed the law of powers of appointment. Under the new law, a power like the one Grandfather created would have allowed Father to exclude any of his children from the subject property. Apparently relying on the changed law, Father signed a will in 1994 that completely excluded his eldest son (Client) and instead gave all the subject property to trusts Father established for the benefit of his other two children (and their offspring). After Father’s death in 2006, all the subject property was distributed to those two trusts, and Client received nothing.
In 2010, Client petitioned the probate court in San Diego County for a share of the subject property. Shortly thereafter, Client hired Jim Bush and the law firm to which he was then of counsel to represent Client in seeking a share. Jim served as Client’s lead counsel throughout the remainder of the litigation.
Early in the case, the trial court dismissed Client’s petition, accepting the arguments of the other two children’s trusts that the new law governed and allowed Father to completely exclude Client. Jim filed an appeal, arguing that Grandfather’s intent should control and that his intent had to be viewed in light of the law in effect at the time he created his power. In a published decision [206 Cal.App.4th 875, 142 Cal.Rptr.3d 174 (2012)], the California Court of Appeal agreed. It found that Grandfather’s intent was paramount, that Grandfather must have intended the law in effect at the time he created the power to control that power, that the California Legislature intended the substance of powers created before the new law became effective to be governed by the old law, and that due process required Grandfather’s power to be construed under the old law. The Court of Appeal sent the case back to the trial court to determine Client’s share.
Back in the trial court, Jim argued on Client’s behalf that Father’s improper exercise of the power was a default, for which Grandfather’s will provided that each of Father’s three children should receive an equal share of the more than $56 million at issue. But the trial court instead accepted the argument of the trusts for the other two children that Client should only be given the smallest possible share of the subject property that Father lawfully could have given Client had Father followed the law in effect at the time Grandfather created his power. On that basis, the trial court determined that a 1% share of the subject property would be a sufficiently “substantial” share to comply with the old law.
Arguing that, under both the law in effect when Grandfather created his power and under the Court of Appeal’s first decision, Client was entitled to an equal, one-third share of the appointive property, Jim again appealed on Client’s behalf. The Court of Appeal agreed [236 Cal.App.4th 159, 187 Cal.Rptr.3d 421 (2015)], holding that Client “should be awarded a one-third share of the appointive property as a taker in default under Grandfather’s will.” It again returned the case to the trial court for further proceedings.
On that return, the parties settled the case. Instead of the $0 that he received under Father’s exercise of the power and the trial court’s initial ruling, Client received under a court-approved settlement more than $26 million (made up of the principal he should have received after Father’s death plus appreciation on that amount).
Trustor’s power to amend could only be exercised during Trustor’s lifetime
Mother, as the sole Trustor, created a revocable trust in 1990. She reserved the right to amend the trust at any time or times” by a written notice delivered to the Trustee, with such amendment to become effective upon such delivery. Mother amended the Trust in 2006 to make both of her sons co-Trustees.
The Trust as drafted in 1990 and as amended in 2006 provided for the Trust income to be paid to Mother during her life and, after her death, for the remainder of the Trust to be distributed to her two sons in equal shares. Mother died in 2011. One of her sons (Client) began administering the Trust for the benefit of his brother and himself.
In 2013, Client’s brother filed a petition in San Diego County to determine the beneficiaries of the Trust. He attached to his petition a copy of what he claimed was a 2010 amendment to the Trust by which Mother purportedly made Client’s brother the sole beneficiary. Client’s brother contended that Mother delivered the amendment to him in 2010, but he admitted that the document had never been delivered to Client until it was served with the 2013 petition.
The trial court determined that the Trust required any amendment to be delivered to both co-Trustees and that, because the claimed 2010 amendment had not been timely delivered to Client, it was invalid.
Client’s brother appealed. The firm with which Jim Bush was then of counsel had been representing Client before the trial court, and Jim served as lead counsel on appeal.
In an unpublished decision, the Court of Appeal upheld the trial court’s order finding the 2010 amendment invalid. Client’s brother asserted that, as long as Mother executed the amendment during her lifetime, delivery could be made “at any time,” even years after Mother’s death. The Court of Appeal disagreed. It found that the purpose of the Trust was to sustain Mother during her life and, “at her death, provide an orderly estate distribution to her surviving children.” As the Court of Appeal held, “This purpose would be entirely frustrated if amendments could go into effect years after her death.” To be a valid exercise of Mother’s reserved right to amend, the Court of Appeal determined that Mother’s “power of amendment had to be exercised in the manner specified [by her Trust] during her lifetime.” Because delivery to all Trustees was required for an effective amendment, and because such delivery did not occur during her lifetime, the 2010 claimed amendment making Client’s brother the sole beneficiary was not ineffective.
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