When setting up a trust as part of a family estate plan, it’s not uncommon to designate a family member as a successor trustee who will ensure that the goals of the trust are accomplished. But that successor trustee is obliged to treat all beneficiaries equally. This can be a challenge when family relationships come into play.
Just how complicated this obligation can become was demonstrated by a case recently decided by the California Court of Appeal (Zahnleuter v. Mueller).
In 2004, Richard and Joan Mueller set up a living trust that named their daughters, Katherine and Amy, as equal beneficiaries after payment of certain expenses and gifts, including a $10,000 gift to their half-sister, Julie. Amy and Katherine would serve as successor trustees after the couple died.
The trust document authorized a trustee to defend the trust in any litigation related to it or its property, employing attorneys as necessary.
It also included a “no-contest” clause which would disinherit any beneficiary who challenged the trust in court. A trustee was authorized to defend the trust against any such challenge, at the trust’s expense.
Notably, a trustee was not authorized to use trust assets to defend any later amendment to the trust.
Richard and Joan did amend their trust the following year, but the changes did not affect its key provisions.
Joan died in October of 2017, and Richard was diagnosed with terminal cancer two months later. Shortly after his diagnosis, Richard amended the trust a second time, naming Amy and Katherine as successor co-trustees, as he and Joan had done in the original trust.
This amendment also included a no-contest clause for any beneficiaries who challenged the validity of the amendment. It did not authorize a trustee to spend trust funds defending any such contest to the amendment.
In early 2018, Amy moved into the family home to care for her father. In April, Amy sent a letter in her handwriting to attorney Gabriel Lenhart, which she said expressed Richard's “final wishes based on Katie’s behavior and treatment toward himself and the family.” The letter specified several changes Richard purportedly wanted to make to the terms of the trust.
The next day, the attorney emailed Amy a third amendment to the trust. It named Richard’s brother, Thomas, as successor trustee, and said his two daughters would each receive $10,000 from the trust estate.
It also provided that Amy’s caregiving services would be reimbursed from the trust estate, and that she would receive a life estate in the family home. The remainder of the trust would be equally divided among Amy, Katherine, and Julie.
The third amendment included a no-contest clause identical to the one in the second amendment, and similarly did not authorize a trustee to use trust resources to defend against any contest.
Richard purportedly signed the third amendment about an hour after Lenhart emailed the document to Amy.
A few days later, the attorney emailed Amy a different version of the third amendment. This did not name Julie as a beneficiary of the resident of the trust. Instead, it said she would receive a $10,000 gift from the estate. It also set aside $100,000 to be used by the trustee to cover Amy’s expenses associated with her life estate in the home.
Richard died in August of 2018.
A few months later, Katherine asked the Nevada County Superior Court to invalidate the third amendment, arguing that it was the product of undue influence.
Thomas, acting as the successor trustee under the terms of the third amendment, opposed Katherine’s petition.
Katherine twice asked Thomas to provide an accounting of the trust. Thomas did not respond to either request.
In January of 2020, the court ruled in favor of Thomas, declaring that the third amendment was valid.
Katherine then asked the court to compel Thomas to provide an accounting of the trust, and to surcharge him – that is, order him to repay the trust’s funds he spent defending against her challenge to the third amendment.
A trial was held in June of 2020. Attorney Lenhart conceded that there were two versions of the third amendment; that the second version was materially different from the first; that the second version was completed five days after Richard purportedly signed the first version; and that the second version contained extra blank spaces that caused its signature page to line up with that page of the first version.
In August of 2020, the trial court invalidated both versions of the third amendment, but ruled that the trust, including the first and second amendments, was valid. It appointed a private fiduciary as successor trustee.
The court ordered Thomas to provide an accounting of the trust. He reported that he had spent over $201,000 on attorneys’ fees, but did not include any information about the specific legal services performed.
In February of 2021, the court ordered Thomas to repay the trust the $201,000 he had expended on attorneys’ fees. It noted that the trust and its amendments had not authorized Thomas to use funds from the trust to defend against challenges to the amendments.
It also said Thomas had “breached his duty to deal impartially with all beneficiaries.” Rather than taking a neutral position in the dispute over the validity of the third amendment, he represented the interests of Amy and his daughters against Katherine.
Thomas appealed, but the appellate justices agreed with the trial judge.
When a trust has two or more beneficiaries, the justices noted, a trustee must deal with them impartially. The litigation Thomas pursued benefited some beneficiaries, including his daughters, to the detriment of Katherine, also a beneficiary.
In addition, the accounting Thomas submitted did not include any information about the $201,000 in legal services billed to the estate. A trustee is obligated to provide clear, accurate records of expenses, the justices said, and a failure to do so means “all presumptions will be against the trustee.”
The justices said the lower court was correct to surcharge Thomas the $201,000 and ordered him to pay Katherine’s costs on appeal.
Here, Thomas was not a beneficiary of his brother Richard's trust, but will now have to pay the legal fees incurred to defend the discredited third amendment. These expenditures were not authorized by the trust, and to make things worse, Thomas did not properly account for them.
This case is a cautionary tale for anyone who is asked by a family member to act as his or her successor trustee. Understand your obligations before you agree to act as a trustee!
By Lynda I. Chung