Friday, December 21, 2012
S.C. Rules for Revocable Trust Beneficiaries in Dispute Over Standing
By JACKIE FUCHS, Staff Writer
Beneficiaries under a revocable trust have standing to sue the trustee after the settlor’s death for breaches of fiduciary duty to the settlor committed while the settlor was alive, the state’s high court held yesterday.
In a 5-2 opinion by Justice Ming Chin, the justices said that even though a beneficiary’s interest in such a trust is merely contingent, a breach of the fiduciary duty owed to the settlor can substantially harm the beneficiaries; accordingly, the latter may sue for breaches committed by the trustee against the settlor’s interest prior to the settlor’s death.
William and Mary Giraldin married in 1959. At that time, William Giraldin had four children and his wife had three, whom he adopted. The couple thereafter had twin sons, Timothy and Patrick.
In 2002, the husband created the William A. Giraldin Trust and made Timothy Giraldin the trustee. William Giraldin was the sole beneficiary during his lifetime.
The remainder beneficiaries were his wife, who was entitled to the benefits of the trust during her lifetime, and then the nine children, who would share equally in what remained after both William and Mary Giraldin were deceased.
Under the express terms of the trust document, the settlor reserved to himself the right to revoke the trust during his lifetime.
The trust document also provided that that “[t]he discretionary powers granted to the Trustee under this Trust Agreement shall be absolute. This means that the Trustee can act arbitrarily, so long as he or she does not act in bad faith, and that no requirement of reasonableness shall apply to the exercise of his or her absolute discretion.”
Before establishing the trust, William Giraldin had indicated the intent to invest about $4 million, approximately two-thirds of his fortune, in a company his son Patrick Giraldin had started some years before called SafeTzone Technologies Corporation. Timothy Giraldin was also a part owner of the company.
Over the next year-and-a-half William Giraldin invested over $4 million in SafeTzone and transferred the stock into the trust.
By the time William Giraldin died in 2005, however, the trust’s interest in the company was worth very little. After his death, four of his children sued Timothy Giraldin in his capacity as trustee of the trust for breach of his fiduciary duties.
As Chin put it:
“They alleged, in effect, that Timothy had squandered William’s life savings for his and Patrick’s benefit, depriving the other seven children of their benefits from the trust.”
After a non-jury trial, Orange Superior Court Judge David R. Chaffee agreed with the plaintiffs that Timothy Giraldin had violated his fiduciary duty, and ordered that he be removed as trustee and be surcharged “for his breach of the Trust and breach of fiduciary duties owed to Decedent William G. Giraldin…”
On appeal, Div. Three of the Fourth District Court of Appeal asked the parties to brief the question of whether the plaintiffs had “standing to maintain claims for breach of fiduciary duty and to seek an accounting against [Timothy] based upon his actions as trustee during the period prior to [William’s] death.”
After briefing, the panel concluded that the plaintiffs had no such standing because Timothy Giraldin’s “duties as trustee were owed solely to [William] during [the time William was alive], and not to the trust beneficiaries.” It reversed Chaffee’s judgment “without prejudice to [plaintiffs’] right to seek a new accounting pertaining solely to the period after [William] Giraldin’s death. ...”
The high court started its analysis by noting that property transferred into a revocable inter vivos trust is considered the property of the settlor for the settlor’s lifetime, making the beneficiaries’ interest in that property “merely potential.”
The appellate panel, Chin said, viewed the plaintiffs’ suit as alleging only that Timothy Giraldin violated a fiduciary duty towards the beneficiaries – as opposed to toward his father — during William Giraldin’s lifetime.
Had that been the case, he said:
“[T]he action could simply have been dismissed on the basis that no such duty exists. … To the extent, if any, that the trial court based its order on a breach of duty towards the beneficiaries during William’s lifetime, we agree the court erred. … But to the extent the court based its order on a violation of Timothy’s duty towards William during his lifetime, we must decide whether the beneficiaries have standing after the settlor’s death to sue the trustee for breach of that duty.”
Chin noted that the “Court of Appeal had stressed that since the trustee’s duties were not owed to the beneficiaries at the time of the acts in question, the death of the settlor could not make them retroactively owed to the beneficiaries.” But, he said, while that is correct, “it does not address the question of whether the beneficiaries have standing to assert a breach of the duty towards the settlor after the settlor has died and can no longer do so personally.”
He pointed to the Court of Appeals’ “rather colorful hypothetical” of a settlor of a revocable trust who learns that he has a terminal disease and dissipates most of his trust’s assets to take his mistress on a cruise around the world. The trustee, whose duties are owed to the settlor at that point, would have no basis to deny that last wish.
If, however, the panel had said, “the trustee’s duties were deemed to be retroactively owed to the trust beneficiaries — say, the settlor’s widow and children — then the trustee’s act, which was not a breach of any duty owed by the trustee when he committed it, would suddenly be transformed into a breach of a different duty that only came into existence when the settlor died.”
But, Chin noted, if it were the trustee that had taken a mistress on a cruise unbeknownst to the settlor, thereby dissipating the assets of the trust against the settlor’s wishes, and such actions did not come to light until after the settlor died, the trustee would have violated his duty to the settlor to the beneficiaries’ harm. He wrote:
“A trustee, like our hypothetical one, cannot loot a revocable trust against the settlor’s wishes without the beneficiaries’ having recourse after the settlor has died.”
In response to the position taken by both the trustee and the dissent that the actual trust gave the trustee great discretion to act and that the beneficiaries’ suit conflicted with William Giraldin’s intent, Chin said:
“[T]his argument just goes to whether there was a breach of a duty towards the settlor in this case, not to whether the beneficiaries have standing to assert a breach if there was one. We express no view regarding the merits of this particular case. We merely hold that, after the settlor’s death, the beneficiaries have standing to assert a breach of the fiduciary duty the trustee owed to the settlor to the extent that breach harmed the beneficiaries.”
Chief Justice Tani Cantil-Sakauye and Justices Marvin Baxter, Carol Corrigan, and Goodwin Liu concurred in the majority opinion.
Justice Joyce Kennard dissented, saying that in her view only an estate’s personal representative or, if none exists, the decedent’s successor in interest, had standing to sue on a deceased settlor’s behalf.
She said there was a conflict of interest inherent in the majority’s approach because:
“The suing beneficiaries generally have a personal interest in maximizing their share of the inheritance. That interest may be at odds with what the decedent had in mind…” She pointed to the instant case, in which William Giraldin had given the trustee discretionary power in administering the trust and waive[d] the requirement that his conduct as trustee be that of a reasonable, prudent person.
As a further example she posited a hypothetical case in which a personal representative and several beneficiaries of a revocable trust sue the trustee on behalf of the deceased settlor, and the defendant trustee offers to settle:
“Some of the plaintiffs want to accept the offer; others do not. What to do? Which of the plaintiffs, all of whom purport to represent the deceased settlor’s interests, get to decide whether to accept the offer?”
The statutory language relied on by the majority must necessarily, she said, refer to a lawsuit by a beneficiary of a revocable trust based on the trustee’s conduct after the settlor’s death, when the trustee owes the trust beneficiary a fiduciary duty.
Justice Kathryn Werdegar concurred in the dissent.
The case is Estate of Giraldin; 12 S.O.S. 6575
Copyright 2012, Metropolitan News Company