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[165 Cal.Rptr.3d 478] Snow Law Corporation and Stephen L. Snow for Defendants and Appellants.
Mark H. Boykin, Woodland Hills, for Plaintiffs and Respondents.
[314 P.3d 782] Rodney E. Donkin and Mary E. Donkin, a married couple, executed a revocable trust in 1988 (the Family Trust) as part of their estate planning, naming their four children as equal primary beneficiaries after they both had died. Rodney died in 2002. Shortly before her death in 2005, Mary executed a second amendment to the Family Trust instrument (hereafter the Trust's Second Amendment) altering the provisions governing the allocation of the Family Trust's assets after her death. Both the Trust's Second Amendment and the original Family Trust instrument contain a " no contest" clause. In 2009, Annemarie and Lisa (hereafter the beneficiaries) filed a " safe harbor" proceeding in the probate court seeking a determination that the petition they proposed to file, challenging the conduct of the successor trustees under the asserted authority of the Trust's Second Amendment, would not trigger the no contest clauses of the amended Family Trust instrument.
We consider in this case whether the no contest clause law that became operative on January 1, 2010, while the beneficiaries' safe harbor application was still pending (Prob.Code, § 21310 et seq.; hereafter the current law) or the no contest clause law operative at the time of the filing of their safe harbor application (Prob.Code, former § 21300 et seq., repealed by Stats.2008, ch. 174, § 1, p. 567; hereafter the former law) applies to the beneficiaries' proposed petition and whether under the applicable law the beneficiaries may pursue their proposed claims without risk of being disinherited.
We conclude that safe harbor proceedings filed before 2010 are not affected by the repeal of former section 21320, which previously authorized safe harbor applications, and therefore, the probate court did not err in ruling on the beneficiaries' application. As to the substantive question of whether the beneficiaries' proposed claims trigger the no contest clauses, we conclude that the current law is applicable because the amended Family Trust instrument became irrevocable after January 1, 2001. (§ 21315, subd. (a).) We further conclude that under the current law, the no contest clauses in the
amended Family Trust instrument are unenforceable against the beneficiaries' proposed petition. We recognize [165 Cal.Rptr.3d 479] that a party may be able to qualify for a fairness exception (§ 3, subd. (h)) to the presumptive applicability of the [314 P.3d 783] current law to instruments that became irrevocable after January 1, 2001, if application of the former law would compel a different conclusion as to enforceability of a no contest clause and it is established that the trustor(s) of the trust instrument drafted the no contest clause in reliance on the former law. Here, however, the successor trustees are not able to claim such a fairness exception, because application of the former law would yield the same conclusion regarding the unenforceability of the no contest clauses. We reverse the judgment of the Court of Appeal, which determined that certain of the beneficiaries' claims constituted a contest violating the no contest clauses of the amended Family Trust instrument under the former law.
I. THE DONKINS' ESTATE PLAN
Federal law allows the property of a deceased spouse to be passed to the surviving spouse without payment of federal estate tax through the allowance of a " marital deduction." (Int.Rev.Code, § 2056.) The value of the estate of the surviving spouse is increased by such a passage of assets and it may be enlarged to the point where it will exceed the federal unified tax credit allowable to the estate when the surviving spouse dies. ( Id., § 2010; see 2 Drafting Cal. Revocable Trusts (Cont.Ed.Bar 4th ed. 2003) Bypass and Disclaimer Trusts, § 14.1, pp. 14-2 to 14-3 (rev. 9/13).) A common method of addressing such a situation, having the purpose of minimizing the estate taxes owed, is to provide for the transfer to the surviving spouse of only as much of the deceased spouse's property as necessary to reduce the deceased spouse's estate tax to zero with use of the applicable federal estate tax exemption. The property remaining in the deceased spouse's estate is placed in a bypass trust, which makes those assets available for the surviving spouse's use but does not give the surviving spouse rights to the property in the bypass trust that would cause any of the undistributed trust property to be included in the taxable estate of the surviving spouse upon his or her death. (Int.Rev.Code, § 2041; 1 Drafting Cal. Revocable Trusts, supra, Marital Deduction Formulas and Funding, § 11.1B, pp. 11-4 to 11-5 (rev. 9/13); 2 Drafting Cal. Revocable Trusts, supra, Bypass and Disclaimer Trusts, § 14.1, at pp. 14-2 to 14-3 (rev. 9/13).) Thus, " the undistributed assets of the decedent's estate ... ‘ bypass' the survivor's estate." (2 Drafting Cal. Revocable Trusts, supra, Bypass and Disclaimer Trusts, § 14.1, at pp. 14-2 to 14-3 (rev. 9/13).) " To avoid federal estate tax inclusion in the surviving
spouse's estate, the bypass trust must be irrevocable and unamendable on and after the first spouse's death." (2 Drafting Cal. Revocable Trusts, supra, Revocation and Amendment, § 20.6, p. 20-14 (rev. 9/13), italics added.)
In August 1988, the Donkins executed the original Family Trust instrument, along with their individual wills. The Family Trust was formed to hold title to the couple's real and personal property for their benefit during their lives and ultimately after their deaths to provide for the transfer of their assets to their beneficiaries. The Family Trust was a revocable " grantor" trust (Int.Rev.Code, § 676) for as long as the Donkins were both living.
On the death of the first spouse, the Family Trust instrument requires the trustee to divide the trust estate into two shares— a survivor's share that is designated " Survivor's Trust A" and a decedent's share that is designated " Decedent's Marital Share." Survivor's Trust A consists [165 Cal.Rptr.3d 480] of the surviving spouse's separate property and his or her one-half interest in the community property. It remains revocable during the life of the surviving spouse, and becomes irrevocable upon the surviving spouse's death. Decedent's Marital Share consists of the decedent spouse's separate property and his or her interest in the community property. It is to be divided into two shares: Decedent's Trust B and Decedent's Trust C. The Family Trust instrument states that upon creation these subtrusts " are irrevocable." The Family Trust instrument specifies that Decedent's Trust B is to contain property with a value equal to the largest amount possible that will not result in a federal estate tax being imposed on the estate of the deceased spouse. (Int.Rev.Code, § 2010.) Decedent's Trust C is a marital deduction trust, which is to contain essentially the residue of the deceased [314 P.3d 784] spouse's estate not allocated to Decedent's Trust B. (See, generally, id., § 2056.)
The Family Trust instrument provides that the surviving spouse is entitled to all of the income of the Survivor's Trust A, and as much principal as requested. The surviving spouse retains the right to change the beneficiaries of the Survivor's Trust A. In addition, the surviving spouse is entitled to all of the income of the Decedent's Trusts B and C, and as much of the principal of either trust as the trustee deems necessary for the surviving spouse's medical care, education and comfortable maintenance. The surviving spouse has a noncumulative power to withdraw $5,000 or 5 percent of the aggregate value of the principal of the Decedent's Trusts B and C annually, and a testamentary power of appointment over the assets of Decedent's Trust C, the marital deduction trust. Consistent with the requirements of a bypass trust, nothing in
the Family Trust instrument authorizes the surviving spouse to revoke or amend the provisions of Decedent's Trust B.
Upon the death of the surviving spouse, the Family Trust instrument, originally and as amended by the Donkins in 2002, provides for the payment of the debts and obligations of the trust estate and the distribution of any special bequests. It contains provisions governing " support and education" needs, " extraordinary distribution," and " handicapped beneficiaries." As relevant here, it then directs the trustee to allocate and divide the remaining assets of all three trusts into separate shares so as to provide one share for each of the surviving designated primary beneficiaries and one share for each deceased primary beneficiary leaving surviving issue. After allocating and dividing the residual of the trust estate into shares, the trustee is directed to distribute the allocated shares " outright as soon as is practicable."
In 2005, after the death of Rodney and shortly before her death, Mary executed the Trust's Second Amendment. The Trust's Second Amendment substituted a new paragraph regarding the allocation of the trust assets after her death as the surviving spouse. Instead of directing an immediate allocation and division of the assets into separate shares for the beneficiaries, the new paragraph grants the successor trustees " complete discretion" after the death of Mary to retain the assets of the Family Trust intact and to continue to manage the property for the equal benefit of the primary beneficiaries. The new paragraph also grants the successor trustees discretion to liquidate assets, and if they choose to do so, directs them to allocate [165 Cal.Rptr.3d 481] and divide the liquidated assets into separate trust shares for the beneficiaries. The new paragraph provides that the successor trustees, in their sole discretion, may continue to manage and invest such liquidated assets. The new paragraph grants the successor trustees sole discretion over distribution of income and principal from the trust shares to the beneficiaries. The Trust's Second Amendment otherwise confirms and republishes the remainder of the provisions of the trust, including the paragraph in the Family Trust instrument that required the trustee, " after allocating and dividing the residual of the Trust Estate into shares," to " distribute the shares allocated to Primary Beneficiaries outright as soon as is practicable."
The Family Trust instrument, as confirmed and republished, contains a no contest clause. The Trust's Second Amendment added a further no contest clause.
The first no contest clause in the Family Trust instrument states as follows: " The Settlors [the Donkins] desire that this Trust, the Trust Estate and the Trust Administrators and beneficiaries shall not be involved in time consuming and costly litigation concerning the function of this Trust and disbursement of the assets. Furthermore, the Settlors have taken great care to designate, through the provisions of this Trust, how they want the Trust Estate distributed. Therefore, if a beneficiary, or a representative of a beneficiary, or one claiming a beneficial interest in the Trust Estate, should legally challenge this Trust, its provisions, or asset distributions, [314 P.3d 785] then all asset distributions to said challenging beneficiary shall be retained in Trust and distributed to the remaining beneficiaries herein named, as if said challenging beneficiary and his or her issue had predeceased the distribution of the Trust Estate."
The no contest clause added by the Trust's Second Amendment provides: " If any beneficiary in any manner, directly or indirectly, contests or attacks this instrument or any of its provisions, any share or interest in the trust given to that contesting beneficiary under this instrument is revoked and shall be disposed of in the same manner provided herein as if that contesting beneficiary had predeceased the settlor."
II. PROCEEDINGS IN THE PROBATE COURT AND COURT OF APPEAL
In 2008, the beneficiaries filed an application in the probate court under the safe harbor provision of former section 21320 to determine whether the petition they proposed to file would trigger the no contest clause in either the Family Trust instrument or the Trust's Second Amendment. Their petition would seek to compel a proper accounting from the successor trustees, to fix the compensation of the successor trustees and surcharge them for any excess fees, to remove the successor trustees from office for misfeasance, and to compel the distribution of the assets of Decedent's Trusts B and C on the ground that the Family Trust instrument required [165 Cal.Rptr.3d 482] such assets to be distributed upon the death of Mary in 2005. After a dispute arose over whether the
beneficiaries were required to arbitrate their claims pursuant to an arbitration clause in the Family Trust instrument, the beneficiaries withdrew their safe harbor application.
In 2009, the beneficiaries renewed their safe harbor application, alleging that their proposed action was not a contest within the meaning of either of the no contest clauses contained in the amended Family Trust instrument. They included a request that the court, upon determining their claims do not constitute a violation of the no contest provisions, order that the disputes be submitted to arbitration. The probate court denied without prejudice the request for an order submitting the matter to arbitration, leaving pending the beneficiaries' safe harbor application.
In early 2010, the successor trustees filed their response to the safe harbor application, noting that the former provisions of the Probate Code governing no contest clauses had been repealed and replaced with a new statutory scheme, operative January 1, 2010. Because the new statutory scheme eliminated the safe harbor process, the successor trustees argued that the beneficiaries' safe harbor application was subject to demurrer. Nevertheless, the successor trustees requested that the court apply the former safe harbor provisions, pursuant to section 3, subdivision (h), because the beneficiaries' pleadings had been filed under the former law. Under the former law, the successor trustees argued, the court should determine that the beneficiaries' proposed claims violate the no contest clauses. The beneficiaries responded, reiterating their request that the court [314 P.3d 786] find their proposed petition did not constitute a contest.
The probate court authorized the successor trustees to file a petition for instructions further explaining their position regarding the applicability of the new law to the beneficiaries' safe harbor application. The successor trustees filed a petition arguing that the court should apply the former law and determine that the claims raised by the beneficiaries in their safe harbor application and proposed petition would violate the trust's no contest clauses.
The successor trustees also argued that the beneficiaries' petition to compel arbitration of their claims itself violated the no contest clauses. At the same time, the successor trustees contended that the Family Trust instrument obligated the beneficiaries to arbitrate any disputes that could be legally raised, and that by filing the safe harbor application instead of arbitrating, the beneficiaries had triggered the no contest clauses. The successor trustees contended that once the no contest clauses were triggered, the beneficiaries were no longer beneficiaries and had no standing to contest the trustees' actions, and their safe harbor application should be dismissed with prejudice. The beneficiaries replied that their actions were consistent with the provisions of the amended Family Trust instrument and that the court had discretion [165 Cal.Rptr.3d 483] to apply the former law and rule that the claims identified in their safe harbor application did not violate the no contest clauses.
After a hearing on the matter, the probate court concluded, without making a specific finding whether the former or the current no contest clause law applied, that the matters raised in the beneficiaries' proposed petition did not constitute a contest under the terms of the no contest clauses of the subject trust.
The successor trustees appealed, arguing, among other things, that the language used in the Trust's Second Amendment reflected a clear intent by Mary to change the distribution plan for all of the assets owned by the trust at the time of her death, including the assets in the Decedent's Marital Share trusts, by giving the successor trustees broad discretionary power over the disposition of the entire trust estate. The successor trustees contended, therefore, that the beneficiaries' demand for a distribution of the assets in the decedent's trusts on the ground that such trusts were irrevocable and unaffected by the Trust's Second Amendment constituted a challenge to and an attack on the validity of the Trust's Second Amendment, triggering the no contest clauses. In addition to opposing these claims, the beneficiaries argued that the successor trustees lacked standing to appeal.
The Court of Appeal affirmed in part and reversed in part. It concluded that both the beneficiaries and the successor trustees had standing and affirmed the probate court's order to the extent it impliedly determined that the former no contest law applied. The Court of Appeal otherwise reversed the judgment, concluding that " as a matter of law, the beneficiaries' challenges to Mary's ability to amend the Trust with the [Trust's] Second Amendment, the Trustees' failure to make distributions, and Mary's failure to create the subtrusts required by the Trust would, if pursued, constitute a contest under ...