A daughter went to court, unhappy that her father decided to take for himself assets of a trust that the daughter believed should go to her. The father responded that he was only doing what the plain language of the trust allowed him to do.

While the daughter may have disapproved of what her father did, the California Court of Appeal pointed out in a recent ruling (Tubbs v. Berkowitz), that the father was simply acting in a manner specifically allowed by the trust.

Harry Berkowitz and his wife created a trust in 2005, with both of them serving as trustees while they were alive. The trust provided that, after the death of the first spouse, the trustee (the surviving spouse) was required to allocate the trust assets between the marital trust and the surviving spouse’s trust.

Both the marital trust and the surviving spouse’s trust would provide support for the surviving spouse for life. When the surviving spouse died, the remaining assets of both trusts would be distributed to trusts for the children and grandchildren.

The couple had two children, Janice Tubbs and her brother, and three grandchildren, the children of Tubbs.

The marital trust, however, gave the surviving spouse a “general power of appointment”; the focus of the dispute between Tubbs and her father.

It said, “at any time during the surviving spouse’s life, the trustee shall distribute all or any part of the trust … to such one or more persons and entities, including the surviving spouse or the surviving spouse’s estate.”

Mrs. Berkowitz passed away in 2011, requiring Berkowitz to allocate the trust’s assets. He filed a petition with the probate court in Orange County in April of 2017 to confirm his proposed allocation of the assets. Tubbs filed objections to his petition.

Berkowitz then exercised his general power of appointment and distributed all of the trust’s assets to himself. This effectively stripped the contingent beneficiaries (Tubbs, her brother and her children) of their right to distributions when Berkowitz died.

In December of 2017 Tubbs petitioned the court to stop her father from taking the trust’s assets. She asked the court to interpret the words of the trust to mean that they “were not intended to provide unlimited powers of appointment,” and that the remainder beneficiaries … have vested rights to property, which are not subject to divestment.”

As a successor trustee, she argued, Berkowitz had a fiduciary duty to these beneficiaries that would be violated by transferring all of the trust’s assets to himself.

Berkowitz replied that the general power of appointment provisions in the trust gave him “the right and power” to transfer trust assets to himself “for any reason or no reason.”

He acknowledged that he had certain fiduciary obligations as a trustee. But in his role as recipient of the powers of appointment, Berkowitz said, he “had no duties whatsoever to other beneficiaries.”

He filed a motion for summary judgment, meaning that he asked the court to rule that there were no material facts that had to be determined at trial, and that he was entitled to win based on the law.

Tubbs objected, arguing that her father breached an implied covenant of good faith and fair dealing.

The court ruled in favor of Berkowitz. It said the general power of appointment provision gave the surviving spouse “essentially unfettered discretion” to direct the trustee to distribute the trust’s asset. The fact that Berkowitz was both settlor and trustee was irrelevant, it said.

“If faced with the exercise of a power of appointment by Harry-as-Settlor…, Harry-as-Trustee has no discretion but to follow those directions,” the court pointed out. It granted his motion for summary judgment. Tubbs appealed.

The appellate court noted that the power of appointment gave Berkowitz the “equivalent to a grant of absolute ownership” in the trust’s assets. Unlike a trustee, the holder of such a power has no fiduciary obligation to others.

If Berkowitz had appointed someone else to act as successor trustee, the justices pointed out, that person would have been obliged to transfer the assets to Berkowitz. So Berkowitz was not violating his duties as a trustee when he did the same thing – a transfer that was “expressly authorized and required” under terms of the trust.

In addition to upholding the lower court’s decision, the justices awarded Berkowitz his costs.

By Stefan O’Grady