Parents often create a trust as part of their estate planning to ensure their children have ongoing access to financial resources. When you create a trust, the trustee has certain legal and fiduciary obligations to the beneficiary. But how far does that duty actually extend?
“Opportunities Lost” Not Grounds for Breach of Duty Lawsuit
A California appeals court recently looked at this issue. The question was whether or not an adult child could sue the former trustees of a trust created by her father because of “opportunities lost” due to the trustees’ alleged neglect. Specifically, the child said she lost her house because she was never informed that she had access to the financial assets in the trust.
The father created the trust in 2008. He owned a successful manufacturing company and created separate irrevocable sub-trusts for his five children, using each to hold shares of stock in the business. (While most estate planning trusts are revocable by the donor, irrevocable trusts are sometimes used to minimize taxes.)
Of relevance here, the daughter’s sub-trust initially contained shares of the company valued at approximately $675,000. Later, the father repurchased the shares by giving the sub-trust a promissory note for $799,000. Each month the father made payments to the sub-trust to redeem the promissory note, which will continue until 2022.
The father informed his daughter about the existence of the sub-trust on at least two occasions in 2009. The initial co-trustees were the father’s attorney and accountant.
Sometime after the sub-trust was established, the daughter was having problems making the mortgage payments on her home in Santa Maria, California. Her sister offered to loan her the money to make the payments. The sister said the daughter could transfer the house to her, and the sister would let her continue to live there for $1,000 per month rent. The daughter ultimately decided to give up the house–the property was underwater on the mortgage–and signed a deed transferring it her sister outright. The sister eventually sold the property, with the father covering the remaining mortgage balance.
After these events took place, a new trustee took over the sub-trust. At the daughter’s instigation, the new trustee sued the original co-trustees for breach of fiduciary duty. The lawsuit alleged the co-trustees failed to inform the daughter of the subtrust in a timely manner. As a result, the daughter did not realize she could have used trust funds to make her mortgage payments and thus keep her home.
The courts rejected these arguments. The California Second District Court of Appeal, in a published decision, affirmed a trial judge’s decision in favor of the former co-trustees. The court said there was nothing in California trust law that allowed a beneficiary to “recover the value of opportunities lost when a trustee refuses or neglects to distribute assets from the trust.” In other words, even if the co-trustees failed to inform the daughter about her trust rights in a timely manner, she cannot seek damages based on the loss of her home, especially since she voluntarily chose to abandon the property.
Get Help Creating a California Trust
A trust is a complex undertaking. You need to make sure the people you select as trustees will carry out your wishes in a timely and effective manner. If you need help from an experienced San Diego estate planning lawyer with creating or maintaining a trust, contact the Law Office of Scott C. Soady today.