Trustees have a duty to defend the Trust in actions and lawsuits filed against it (Cal. Prob. Code § 16011; Hawaii Revised Statutes 554A-3). State Trust law also recognizes no contest clauses in Trusts that disinherit beneficiaries who unsuccessfully challenge the Trust. (Hawaii Revised Statutes 560:3-905; Cal. Prob. Code § 21310). (The use of No Contest Clauses was discussed in a prior blog article.
If the Trustee is also a Trust beneficiary, what happens when the lawsuit against the Trust alleges misconduct by the Trustee? In defending the lawsuit, does the Trustee/Beneficiary risk losing his/her inheritance? In certain instances, under California law, the answer is “yes.”
Beneficiary Seeks to Invalidate Trust Amendment
In Key v. Tyler, 34 Cal. App. 5th 505, 246 Cal. Rptr. 3d 224 (2019), Sarah Plott Key (Sarah) filed a petition to invalidate a 2007 amendment to her parents’ 1999 Family Trust. Sarah believed her sister, Elizabeth Plott Tyler (Elizabeth), obtained a 2007 Trust amendment through undue influence. That amendment disinherited Sarah.
In response to Sarah’s petition, Elizabeth, in her capacity as Trustee, filed a response defending the validity of the amendment. Sarah prevailed. The court determined that there was no evidence that the 2007 Trust amendment represented the desires and choices of her mother, and the amendment was found to be invalid.
The No Contest Provision
The Family Trust contained a no contest provision. A no contest clause operates as a disinheritance device: “[I]f a beneficiary contests or seeks to impair or invalidate the trust instrument or its provisions, the beneficiary will be disinherited and thus may not take the gift or devise provided under the instrument.” (E.g. Donkin v. Donkin (2013) 58 Cal.4th 412, 422 [165 Cal. Rptr. 3d 476, 314 P.3d 780]) Sarah then filed a petition to enforce the no contest clause against Elizabeth for her defense of the 2007 amendment. The remedy sought was to disinherit Elizabeth from any devise she would have received in the original 1999 Family Trust.
In response, Elizabeth filed a motion to dismiss Sarah’s petition, asserting her actions were protected conduct, and that the petition would be unsuccessful as a matter of law because her defense of the original claims against the Trust would not meet the required criteria as a direct contest against the Trust. The trial court agreed.
Trustee/Beneficiary Disinherited
On appeal, the California Second Appellate District appellate court disagreed. It determined that Elizabeth had violated the no contest clause in her defense of the 2007 Amendment. The court found that by defending the validity of the trust amendment which she procured through undue influence, she lacked probable cause to do so.
Takeaway
This case highlights several important estate planning and trust administration issues – primarily the potential conflict that can arise when a Trustee is also a Beneficiary of the Trust. Assuming a different set of facts and the Amendment was procured legitimately, would the Trustee/Beneficiary be conflicted in the performance of her duties if a court had held otherwise?
If you are developing or reviewing your estate plan, or are a Trustee or Beneficiary in need of advice, Contact CASHMAN LAW today for a free consultation to see how we might help you more clearly understand the various plans and roles.
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