Court: Superior County: Orange Judge: David R. Chaffee Ct.App. 4/3 G041811 Orange County Super. Ct. No. A240697
The opinion of the court was delivered by: Chin, J.
A revocable trust is a trust that the person who creates it, generally called the settlor,*fn1 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.
I. Factual and Procedural History
Because neither party petitioned for rehearing, we take most of these facts from the Court of Appeal's opinion. (See Cal. Rules of Court, rule 8.500(c)(2).)
William Giraldin and Mary Giraldin were married in 1959. When they married, William had four children and Mary had three.*fn2 William adopted Mary's children. Together, they had twin sons, Timothy and Patrick. William was a successful businessman and investor and accumulated a substantial fortune.
In February 2002, William created the revocable trust at issue, the William A. Giraldin Trust (the trust), and made Timothy the trustee. William was the sole beneficiary during his lifetime. The remainder beneficiaries were Mary, who was entitled to the benefits of the trust during her lifetime, and then the nine children, who would share equally in what remained after both William and Mary were deceased. William reserved to himself specified rights, including the rights to amend or revoke the trust, to add or remove property from the trust, to remove the trustee, and to direct and approve the trustee's actions, including any investment decisions. The trust document provided that William could exercise these rights only in writing.
The trust document also provided that "[d]uring [William's] lifetime, the Trustee shall distribute to [William] that amount of net income and principal as [William] direct[s]." In the event William was declared to be incapacitated, the trustee was instructed to distribute the amount of net income and principal the trustee deemed to be appropriate to support William's "accustomed manner of living" with the understanding that "the rights of remainder beneficiaries shall be of no importance." The trust document also provided that "[d]uring [William's] lifetime, the trustee shall have no duty to provide any information regarding the trust to anyone other than [William]." After William's death, if Mary survived him, the trustee "shall have no duty to disclose to any beneficiary other than [Mary] the existence of this trust or any information about its terms or administration, except as required by law." The document also specified that William "waive[d] all statutory requirements . . . that the Trustee . . . render a report or account to the beneficiaries of the trust."
The trust document also states that William "[did] not want the Trustee to be personally liable for his or her good faith efforts in administering the trust estate," and that "[t]he discretionary powers granted to the Trustee under this Trust Agreement shall be absolute. This means that the Trustee can act arbitrarily, so long as he or she does not act in bad faith, and that no requirement of reasonableness shall apply to the exercise of his or her absolute discretion." William "waive[d] the requirement that the Trustee's conduct at all times must satisfy the standard of judgment and care exercised by a reasonable, prudent person. In particular, the decision of the Trustee as to the distributions to be made to beneficiaries under the distribution standards provided in this Trust Agreement shall be conclusive on all persons."
When first established, the trust contained no assets. The trust document indicated that William "had transferred and delivered to the Trustee the property described in schedule 1, attached," but the version of schedule 1 attached to the trust document was blank. It appears schedule 1 was never completed. Before establishing the trust, William had indicated the intent to invest about $4 million, about two-thirds of his fortune, in a company his son Patrick had started some years before called SafeTzone Technologies Corporation (SafeTzone). Timothy was also a part owner of the company. In January 2002, William signed a document detailing his planned investment in the company. The day he executed the trust document, William also signed another document stating that "after the trust has been set up William A. Giraldin and Timothy W. Giraldin will begin the process of selling stock and converting assets to fulfill the investment into SafeTzone Technologies corporation of $4 million dollars." William signed other documents indicating his intent to invest the money in the company.
Between February 2002 and May 2003, William made six payments of various amounts to invest in SafeTzone, ultimately totaling more than $4 million. The company issued stock to William. After the investment was fully funded, the stock was transferred into the name of the trust. William died in May 2005. By this time, the investment in SafeTzone had gone badly, and the trust's interest in the company was worth very little.
Four of William's children, Patricia Gray, Christine Giraldin, Michael Giraldin, and Philip Giraldin (collectively plaintiffs), sued Timothy in his capacity as trustee of the trust for breach of his fiduciary duties. They alleged, in effect, that Timothy had squandered William's life savings for his and Patrick's benefit, depriving the other seven children of their benefits from the trust. Plaintiffs sought to remove Timothy as trustee and to compel him to account for his actions while acting as trustee. An amended petition alleged that Timothy should be surcharged*fn3 for alleged breach of his fiduciary duties regarding the SafeTzone investment and in making loans to himself and Patrick from trust assets.*fn4
A court trial was held in October and November 2008. After the trial, the court ruled in plaintiffs' favor. It found Timothy had violated his fiduciary duty in various respects. It also found that William did not authorize many of Timothy's actions in writing as the trust required, and that William "was not sufficiently mentally competent in late 2001 and thereafter to either analyze the benefits and risks of an investment in SafeTzone . . . or to authorize and direct [Timothy] to make such an investment." The court ordered Timothy be removed as trustee and that he make an accounting of the trust for the period of January 1, 2008 until his removal. Additionally, it ordered that Timothy be surcharged "for his breach of the Trust and breach of fiduciary duties owed to Decedent William G. Giraldin" in the amount of $4,376,044 for the SafeTzone investment and surcharged $625,619 for other "unsupported disbursements, distributions and loans of Trust funds . . . ." It also ordered that Patrick return to the trust $155,000 loaned to him from trust funds.
Timothy appealed, raising several issues. The Court of Appeal additionally asked the parties to brief the question of whether, as its opinion describes it, plaintiffs had "standing to maintain claims for breach of fiduciary duty and to seek an accounting against [Timothy] based upon his actions as trustee during the period prior to [William's] death." After receiving the briefing, it found plaintiffs had no such standing. It explained that Timothy's "duties as trustee were owed solely to [William] during [the time William was alive], and not to the trust beneficiaries. Thus [plaintiffs], as beneficiaries, lack standing to complain of any alleged breaches of those duties occurring prior to [William's] death. Moreover, the beneficiaries have no right to compel an accounting of the trustee's actions for the period in which the trust remained revocable [citations], and thus also lack standing to seek such relief for the period prior to [William's] death."
The Court of Appeal also believed this action alleged a breach of Timothy's fiduciary duty solely towards the beneficiaries rather than toward William. "In this case," the Court of Appeal said, plaintiffs "were not purporting to pursue [William's] claims, or to seek redress for alleged wrongs done to him. Instead, they were seeking to vindicate their own distinct interests, by claiming [Timothy] had breached duties allegedly owed to them during the period prior to [William's] death. We hold merely that [Timothy] owed them no such duties, and thus [plaintiffs] lacked standing to assert those claims. We express no opinion on the merit of any theoretical claims that might have been asserted on [William's] behalf. None were."
The Court of Appeal reversed the trial court's judgment "without prejudice to [plaintiffs'] right to seek a new accounting pertaining solely to the period after [William] Giraldin's death . . . ."
We granted plaintiffs' petition for review limited to the following question: "When the settlor of a revocable inter vivos trust appoints, during his lifetime, someone other than himself to act as trustee, once the settlor dies and the trust becomes irrevocable, do the remainder beneficiaries have standing to sue the trustee for breaches of fiduciary duty committed during the period of revocability?"
William created the trust during his lifetime, and he reserved the right to revoke it. Property transferred into a revocable inter vivos trust is considered the property of the settlor for the settlor's lifetime. Accordingly, the beneficiaries' interest in that property is " 'merely potential' and can 'evaporate in a moment at the whim of the [settlor].' " (Steinhart v. County of Los Angeles (2010) 47 Cal.4th 1298, 1319, quoting Johnson v. Kotyck (1999) 76 Cal.App.4th 83, 88.) Thus, so long as William was alive, he had the power to divest the beneficiaries of any interest in the trust. (See generally Steinhart v. County of Los Angeles, supra, at pp. 1319-1320.)
Consistent with these principles, Probate Code section 15800 provides: "Except to the extent that the trust instrument otherwise provides . . . , during the time that a trust is revocable and the person holding the power to revoke the trust is competent:
"(a) The person holding the power to revoke, and not the beneficiary, has the rights afforded beneficiaries under this division.
"(b) The duties of the trustee are owed to the person holding the power to revoke." (Italics added.)*fn5
The italicized language from section 15800, subdivision (b), makes clear that so long as the settlor is alive, the trustee owes a duty solely to the settlor and not to the beneficiaries. The Court of Appeal viewed this lawsuit as alleging only that Timothy violated a fiduciary duty towards the beneficiaries during William's lifetime. Had this been the case, the action could simply have been dismissed on the basis that no such duty exists. There would be no need to raise any standing question. But this case does not simply involve an alleged breach of Timothy's duty towards the beneficiaries. Although some of the trial court's order underlying this appeal was ambiguous regarding whether the court had found a violation of a duty towards the beneficiaries or towards William, a substantial thrust of this lawsuit and the trial court's order is that Timothy violated his fiduciary duty towards William during William's lifetime. To the extent, if any, that the trial court based its order on a breach of duty towards the beneficiaries during William's lifetime, we agree the court erred. No such duty exists. But to the extent the court based its order on a violation of Timothy's duty towards William during his lifetime, we must decide whether the beneficiaries have standing after the settlor's death to sue the trustee for breach of that duty.
The Law Revision Commission comment to section 15800 explains that the "section has the effect of postponing the enjoyment of rights of beneficiaries of revocable trusts until the death or incompetence of the settlor or other person holding the power to revoke the trust. . . . Section 15800 thus recognizes that the holder of a power of revocation is in control of the trust and should have the right to enforce the trust. . . . A corollary principle is that the holder of the power of revocation may direct the actions of the trustee. . . . Under this section, the duty to inform and account to beneficiaries is owed to the person holding the power to revoke during the time that the trust is presently revocable." (Cal. Law Revision Com. com., 54 West's Ann. Prob. Code (2011 ed.) foll. § 15800, pp. 644-645.)
Similarly, section 15801, subdivision (a), provides that when a beneficiary's consent may or must be given, "during the time that a trust is revocable and the person holding the power to revoke the trust is competent, the person holding the power to revoke, and not the beneficiary, has the power to consent or withhold consent." The Law Revision Commission comment to this section explains that under its rule, "the consent of the person holding the power to revoke, rather than the beneficiaries, excuses the trustee from liability as provided in Section 16460(a) (limitations on proceedings against trustee)." (Cal. Law Revision Com. com., 54 West's Ann. Prob. Code, supra, foll. § 15801, p. 646.)
Section 15802 provides that "during the time that a trust is revocable and the person holding the power to revoke the trust is competent, a notice that is to be given to a beneficiary shall be given to the person holding the power to revoke and not to the beneficiary." The Law Revision Commission comment to this section explains that it "recognizes that notice to the beneficiary of a revocable trust would be an idle act in the case of a revocable trust since the beneficiary is powerless to act." (Cal. Law Revision Com. com., 54 West's Ann. Prob. Code, supra, foll. § 15802, p. 646.)
These provisions mean that during William's lifetime, and as long as he was competent, the trust beneficiaries were powerless to act regarding the trust. A report of the California Law Revision Commission also makes this clear. "[T]he proposed law makes clear that the beneficiaries of a revocable living trust do not have the right to petition the court concerning the internal affairs of the trust until such time as the settlor, or other person holding the power to revoke, is unable to exercise a power of revocation, whether due to incompetence or death." (Recommendation Proposing the Trust Law (Dec. ...