When you create a living trust, you transfer personal assets to a trustee, who then manages those assets on your behalf. In most cases, this won't be a problem, since you can name yourself as trustee during your lifetime. But when someone else serves as trustee, he or she owes a duty, not only to you as the person creating the trust, but to any persons you name as beneficiaries of your trust. Under California law, a trustee may not misuse (or co-mingle) trust assets for his or her personal benefit to the detriment of any beneficiaries.
Recently, a California appeals court addressed a question that apparently had not been considered before: Does a trustee owe a creditor a duty to avoid self-dealing? The appeals court answered no, reversing a lower court's decision to the contrary.
Vance v. Bizek
Wallace and Pearl Burt each had a daughter from a prior relationship. The Burts created a joint living trust, known here as the “WPB Trust,” naming both daughters, Sally Gordon and Linda Larsen, as co-trustees. The trustees were to use the income from the trust to support their parents during their lifetimes, and upon their deaths, both daughters (or their heirs) would receive an equal share of the remaining assets.
In 2011 a man named Don Bizek obtained a judgment of just under $1 million against Gordon arising from her conduct as trustee of another trust. Bizek asked a California probate court to enforce this judgment against Gordon's share of the WPB Trust. (By this time Wallace and Pearl Burt were both deceased.) The court granted Bizek's petition, and Gordon responded by disclaiming her interest in the WPB Trust. This meant her 50% share would go to her daughter, Cynthia Vance, who was not a party to Bizek's case.
Vance then filed her own petition with the probate court, seeking a declaration her mother's disclaimer was valid, and therefore Bizek could not pursue a creditor's claim against the WPB Trust assets. The court sided with Bizek, holding Gordon's disclaimer void because, while serving as trustee of the WPB Trust, she improperly transferred some of the trust's assets to herself while her mother was still alive. As the probate court saw it, Gordon's actions constituted an “acceptance of beneficial interest” in the trust.
The Court of Appeals disagreed. In a decision issued on August 12 of this year, a three-judge panel said Gordon's actions did not constitute an acceptance of her share of the trust. She simply exercised control over her mother's assets, during her mother's lifetime, in a situation akin to a power of attorney. More to the point, Bizek could not challenge Gordon's co-mingling of trust and personal assets. California law allows a trust beneficiary to challenge a trustee's mismanagement. But Bizek was not a beneficiary of the WPB Trust; he was a purported creditor. Gordon owed him no fiduciary duty.
Making Sense of Trusts
Cases like this make trusts sound complicated. But this is an exceptional situation, albeit one that highlights the importance of working with an experienced California estate planning attorney and selecting the right trustee. If you are considering creating a living trust, contact the Law Office of Scott C. Soady in San Diego today.