A person who makes a living trust usually names himself or herself as the initial trustee. The trust instrument should also name successor trustees to act in the event the trust's maker dies or becomes incapable of managing their own affairs. In many cases, the successor trustee is a spouse or other family member. But a successor trustees can also be a corporation. Many banks and financial companies provide “corporate trustee” services, which can be useful if the trust assets include a substantial investment portfolio.
If your trust contemplates naming a corporate successor trustee, it is important the trust instrument define the scope of that trustee's liability. A recent California appeals court decision illustrates the importance of such language. This case is discussed for informational purposes only and should not be construed as a complete statement of California law on this subject.
Sommerfield v. Wells Fargo Bank, N.A.
Jean and Jane Sommerfield, a husband and wife, created a joint living trust with themselves as the trustees. Jean Sommerfield died in 2007. Jane Sommerfield is in her 90s and in poor health. Over the years, she transferred decision-making power over her finances and healthcare to her children, including her son, Larry Sommerfield, who holds his mother's power of attorney.
In 2009, Jane Sommerfield agreed to name Wells Fargo Bank as successor trustee of the trust. Wells Fargo named one of its employees, Jann Watenpaugh, as the trust officer. Acting in this capacity, Watenpaugh advised Larry Sommerfield in late 2009 to switch his mother's health insurance coverage from an existing preferred provider organization (PPO) plan to a less expensive health maintenance organization (HMO). Sommerfield never responded to Watenpaugh's advice. Watenpaugh then went to Sommerfield's sister, who also held her mother's power of attorney for financial matters, and she agreed to the switch.
This led to confusion. In 2011, Larry Sommerfield was unable to obtain medical care for his mother under the HMO plan. He moved his mother out of the HMO and into a new PPO plan. Sommerfield then sued Wells Fargo to recover the cost difference between the new PPO and the original PPO, which he said was approximately $25,000.
A trial court granted summary judgment to Wells Fargo, finding there was “no evidence of damages” Sommerfield could recover. Furthermore, the court absolved Wells Fargo of any liability under the terms of the trust. A California Court of Appeals panel disagreed with the trial court on both issues and reversed the ruling in a decision released in August of this year.
Regarding the question of trust liability, the appeals court focused on the plain language of the trust, which said, “No trustee (other than a corporate trustee) shall be liable to any beneficiary or any heir of either of Grantors for that trustee's acts or failure to act, unless the act or failure to act constituted willful misconduct, gross negligence, bad faith or fraud.” By excluding corporate trustees, Wells Fargo was subject to the general, higher standard of care for trustees under California law, whose job it is to “administer the trust with reasonable care, skill, and caution under the circumstances.” If Sommerfield can prove Wells Fargo violated this standard with respect to his mother's health insurance, he can recover the damages sought.
Selecting the Right Successor
Selecting a successor trustee is a critical part of estate planning. You must ensure the person—or corporation—you designate to manage your affairs is competent and will act in your best interests. As with any such matter, you should consult with an experienced California estate planning attorney. Contact the Law Office of Scott C. Soady today if you have any questions.