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Can A Remainder Beneficiary Sue A Trustee In California: Estate of Giraldin

California courts have gone back and forth as to whether a remainder beneficiary can sue a trustee in California for breach of a fiduciary duty after the settlor’s death.  The California Supreme Court settled the question in In Re Estate of Giraldin.

The California Supreme Court held that yes, a remainder beneficiary can sue the trustee after the settlor’s death.  However, the beneficiary can only sue if the breach of duty to the settlor injured the interests of the remainder beneficiaries. The California Supreme Court held that “if the trustee does not act in accordance with the settlor’s directions, the trustee may be liable to the beneficiaries.”

What Interest Does a Beneficiary Have In A Revocable Trust During a Settlor’s Lifetime?

The California Supreme Court opened its opinion by defining a revocable trust and a beneficiary’s interest therein during a settlor’s lifetime:

A revocable trust is a trust that the person who creates it, generally called the settlor, can revoke during the person’s lifetime. The beneficiaries’ interest in the trust is contingent only, and the settlor can eliminate that interest at any time. When the trustee of a revocable trust is someone other than the settlor, that trustee owes a fiduciary duty to the settlor, not to the beneficiaries, as long as the settlor is alive. During that time, the trustee needs to account to the settlor only and not also to the beneficiaries. When the settlor dies, the trust becomes irrevocable, and the beneficiaries’ interest in the trust vests. We must decide whether, after the settlor dies, the beneficiaries have standing to sue the trustee for breach of the fiduciary duty committed while the settlor was alive and the trust was still revocable.

Because a trustee’s breach of the fiduciary duty owed to the settlor can substantially harm the beneficiaries by reducing the trust’s value against the settlor’s wishes, we conclude the beneficiaries do have standing to sue for a breach of that duty after the settlor has died. We reverse the judgment of the Court of Appeal, which concluded the beneficiaries have no such standing.

In In re Estate of Giraldin, the remainder beneficiaries sued the trustee in California for breach of fiduciary duty.  The breach of duty was allegedly committed during the settlor’s lifetime. The beneficiaries alleged that the trustee squandered the settlor’s savings.  The trustee’s squandering of savings deprived the beneficiaries of any remainder benefit from the trust.  Basically, there was no money left for the beneficiaries.

The trial court agreed with the beneficiaries.  The trial court entered a surcharge judgment against the trustee for over $5 million.   The trustee appealed the surcharge judgment.  The appellate court reversed the decision.  The appellate court ruled that the beneficiaries lacked standing to sue the trustee in California for breaches of fiduciary duty during the settlor’s lifetime.  The case went to the California Supreme Court for review.

Beneficiaries Have Standing To Sue A Trustee After Settlor’s Death For Breach of Duty During Settlor’s Lifetime

The California Supreme court examined the California Probate Code to arrive at the decision that the beneficiaries did indeed have standing to sue for a breach of duty after the settlor has died. The California Supreme Court found that a beneficiary’s standing to sue for breach of trust after the settlor has died is implied in the probate code, stating:

That is, no section expressly states that the beneficiaries of a revocable trust either have or do not have this standing. But the code, as a whole, implies that after the settlor has died, the beneficiaries of a revocable trust may challenge the trustee’s breach of the fiduciary duty owed to the settlor to the extent that breach harmed the beneficiaries’ interests.

Therefore, under California law, “if the trustee does not act in accordance with the settlor’s directions, the trustee may be liable to the beneficiaries.” A trustee’s breach of duty owed to the settlor can harm the beneficiaries by reducing the value of the trust against the settlor’s wishes.  It is this harm caused by the trustee to the potential value of the trust that gives the beneficiaries standing to sue the trustee under California law after the trust becomes irrevocable at the settlor’s death.

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San Diego

Merwyn J. Miller

Los Angeles County

Stewart J. Levin

Orange County

Priscilla Madrid

Ventura County

Naomi Stal

San Mateo County

Sally Bergman

San Bernardino County

Fred W. Edwards

Stanislaus County (Modesto)

Thomas Bonte

Santa Clara County

Nicholas P. Jellins