When a parent wants to treat all children fairly in an inheritance, a trust can include provisions designed to reflect financial assistance given during the parent’s lifetime. For example, a child who earlier received a substantial loan or gift might receive a smaller share of the estate.
But what happens when family finances have been managed informally for decades, and a trustee attempts to account for every dollar that passed between the parent and the children? Can an equalization clause become the basis for a sweeping financial audit, even when claims involving some of those transactions would otherwise be barred by the statute of limitations?
A recent California Court of Appeal decision, Sandford v Sandford, provides an important reminder: a trust’s equalization provision must be interpreted according to its actual language, not expanded to cover every transaction that in retrospect might seem unfair.
The dispute involved five siblings and the trust established by their mother, Jean Sandford.
The family owned interests in several properties, some of which generated rental income or were eventually sold. Over the years, the siblings became involved in managing their mother’s finances and properties, and their arrangements were often informal.
Two sons, Michael and Mark, were heavily involved in those financial affairs. The evidence introduced at trial showed they benefited from unpaid loans, distributions, rental income, and the proceeds from a property taken through eminent domain.
The trust contained an equalization provision. This clause required any unpaid loans to children or their families to be accounted for as part of the recipient’s share. It also treated unequal gifts to the children or their spouses as advances against their eventual inheritances, to equalize the overall distributions.
Jean, who set up a trust in 1998 and restated it in 2000, naming all five children as co-successor trustees. Jean began showing signs of dementia in 2003. She was declared incompetent in 2008, and her children became trustees. She died in 2014.
In 2018, two of Jean’s daughters challenged their brothers’ handling of the family’s finances. Following a 22-day trial, the Orange County Superior Court ordered an accounting of past transactions. It then directed the trustee to deduct from Michael’s and Mark’s respective shares over $1.6 million of rental and sale proceeds received by one or both brothers from the trust’s properties.
Michael and Mark appealed.
The Court of Appeal concluded that the trial court had erred by interpreting the trust’s equalization clause too broadly.
The provision expressly addressed only unpaid loans and unequal gifts. It did not authorize a trustee to treat every financial benefit received by a beneficiary as an advance against that beneficiary’s inheritance.
The distinction mattered because rental income and proceeds from property sales are not automatically loans or gifts. Whether those funds were properly handled presented a different legal question from whether a beneficiary had received a loan or gift that the trust required to be equalized.
The appellate court emphasized that a trust must be interpreted according to its language, considered in light of the circumstances surrounding the trust’s execution, to determine the settlor’s intent.
Evidence at trial indicated that Jean had been concerned about unpaid loans to her sons and wanted those debts reflected in their shares. But this did not mean that her intention was for the trust to trigger a detailed audit of decades of informal family financial dealings.
The court noted that Jean had wanted to minimize financial conflict among her children. Interpreting the equalization clause to require an extensive retrospective analysis of every transaction would risk producing the family conflict Jean sought to avoid.
The appellate court reversed the trial court’s orders equalizing rental income, sales proceeds, and other non-loan, non-gift transactions, as well as the award of attorney fees. It affirmed the judgment in all other respects.
The appellate decision clarifies an important distinction between enforcing a trust’s distribution provisions and pursuing a legal claim against a beneficiary.
The trial court had found that certain claims involving the brothers’ past conduct, including claims for financial elder abuse and breach of fiduciary duty, were barred by the applicable statutes of limitations.
Despite this, the Court of Appeal upheld the use of unpaid loans to adjust beneficiaries’ shares even when the loans themselves were too old to support an independent lawsuit for collection.
Relying on an earlier decision, Cook v Cook, the court explained that a settlor may direct that unpaid debts be deducted from a beneficiary’s inheritance without limiting the provision to debts that remain judicially enforceable. Here, the language of Jean’s trust supported that result.
This ruling does not mean a trustee can circumvent an expired statute of limitations simply by characterizing a transaction as an equalization adjustment. The critical question is whether the trust authorizes the adjustment. In this case it did so for unpaid loans, but not for the rental income and sale transactions covered by the trial court’s orders.
The decision underscores the importance of drafting trust provisions with precision.
If a parent wants a beneficiary’s inheritance reduced for unpaid loans and unequal gifts, the trust should define clearly what those terms mean. If the parent intends to address other transactions, the document should expressly identify those categories and specify how they are to be treated.
California’s real estate boom over the past several decades has generated substantial wealth for families who retained their real property over time.
Although the mother’s decision to appoint all five children as co-trustees does not appear to have caused the disputes in this case, many practitioners would discourage appointing multiple children as co-trustees.
Even well-intentioned family members may disagree on how trust assets should be managed, and parents sometimes face the difficult choice of appointing one child over the others, potentially at the risk of hurting their feelings.
As Leo Tolstoy famously observed in the opening line of Anna Karenina, “All happy families are alike; each unhappy family is unhappy in its own way.”
By Lynda I. Chung