What are the limits of a trustee’s obligations to  the beneficiaries of a trust? When an unhappy beneficiary lost her home to foreclosure, she sued the administrators of a trust set up by her father for her and her siblings, alleging the trustees had breached their fiduciary duty.

Her lawsuit argued that the beneficiary should be allowed to recover the value of “opportunities lost” by her because the trustees did not distribute the trust’s assets to her – even though this would have violated the terms of the trust.

Both the trial court and the California Court of Appeal denied the beneficiary’s claim, ruling that the fact that the trustees did not bail her out of her financial difficulties was very different from a loss caused by a breach of fiduciary duty.

Her father, William, ran a successful small business. In 2008 he set up an irrevocable trust with five subtrusts, one for each of his adult children. He gifted $67,500 in cash to each subtrust. The subtrusts each purchased 18 shares of the business for $675,000, using the cash as a down payment plus a promissory note for the balance. Distributions by the company to the trusts would pay off the notes.

The subtrust allowed Beverly to withdraw certain portions of the trust at 40, 50 and 60 years of age.

Beverly was on the payroll of her father’s company until 2010, when he fired her for refusing to do any work. Concerned about how she might affect the company as a shareholder, he reacquired her 18 shares by substituting a $799,000 promissory note to her, payable at $6,258 a month for 10 years, followed by a balloon payment for the $134,000 balance.

After she was fired, Beverly was unable to make the $2,800 monthly mortgage payment on her home, which she had bought with financial help from her father and a sister. The market value of the house was $100,000 less than the mortgage balance.

Her sister offered to take over the home and rent it to Beverly for $1,000 a month, the amount Beverly said she could pay. But Beverly chose to move into the guest room of a friend, Williamson.

Later she made Williamson the trustee of the trust her father had established. Williamson then sued the original trustees for the financial loss Beverly had suffered by losing her home. The lawsuit alleged they had breached their fiduciary duty as trustees, and asked that the trust assets be delivered to Beverly.

The trial court rejected these claims, finding the subtrust had not suffered any damages and there were “no compensable damages of any kind related to” her loss of the home. It awarded attorney fees and costs of over $500,000 to the original trustees.

Williamson appealed, and again lost.

The appellate court said, “Trustees accused of breaches of fiduciary duty may only be held liable for losses to the trust itself, not for personal damages to beneficiaries.” (The value of Beverly’s trust increased from $67,500 to over $725,000 while the original trustees were managing it.)

In effect, the appellate ruling said that a trustee’s job is to manage the trust properly, not to babysit beneficiaries and safeguard them against financial problems in their personal lives.

By Lynda Chung