Contingent Beneficiaries Can Pursue Trustee for Squandering Trust’s Assets, High Court Says

A family’s trust dispute got new life when the California Supreme Court reversed an an appellate court ruling, and determined that a group of contingent beneficiaries did, as a matter of law, have standing to sue the trustee of a family trust for breaching his duties by making a large, risky investment in a company that the trustee co-owned. In deciding Estate of Giraldin, the court concluded that, under California law, because the trustee’s actions could harm the contingent beneficiaries and contravene the wishes of the deceased trustor, they had standing to sue.

In 2001, William Giraldin began considering investing $4 million, roughly 2/3 of his wealth, in a technological start-up company created by Patrick Giraldin, his son. Patrick’s twin, Tim, was also a partial owner. Soon thereafter, Bill created a new revocable trust, which essentially replaced the previous revocable trust he established in 1997, naming all of his children as contingent beneficiaries. In one key difference between the trusts, however, Tim, not Bill, served as trustee of the trust. Bill ultimately decided to make the investment, with the funds coming from the trust.

The start-up proved unsuccessful and, by the time Bill died in May 2005, his investment was largely worthless. Four of Tim’s half-siblings sued him, claiming he violated his fiduciary duties to the trust’s beneficiaries. The suit claimed that Tim’s mismanagement deprived Bill’s seven other legal children of the benefit of the trust.

The trial court ruled in favor of the four children. The court concluded that Tim acted to serve his interests, and those of the start-up, at the peril of his father and the trust.

The California Court of Appeal reversed. The court determined that Cal. Prob. Code 15800 made clear that, during Bill’s lifetime, Tim’s duties were to his father alone, not his siblings (as trust beneficiaries). During’s Bill’s lifetime, the Court of Appeal concluded, Tim’s siblings were akin to heirs named in a will, possessing no rights until Bill died and the trust became irrevocable. Thus, the siblings lacked standing to sue for his pre-May 2005 conduct as trustee.

The California Supreme Court disagreed, however. The high court agreed that the siblings could not sue based on alleged financial harm they suffered during Bill’s lifetime, and could not sue while Bill was alive, but concluded that they could assert a claim after Bill’s death, based upon harm to Bill caused by Tim’s actions during Bill’s lifetime. “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,” the court wrote.

The dissent, however, concluded that, while a claim might exist against Tim for breaching his duty to Bill, the siblings were not the proper parties to pursue such an action. According to the dissent, only the personal representative of Bill’s estate, or else his successor in interest, had the right to sue for any harm Tim did to Bill’s assets. Tim’s siblings, as mere contingent beneficiaries to Bill’s trust, lacked standing, the dissent contended.

As the Court of Appeal in the Giraldin case stated, “it’s about as tragic as families can get when all they are fighting about is money.” When such a trust and estate dispute arises, though, consult the attorneys at Ginzburg & Bronshteyn. Our knowledgeable Los Angeles probate and trust lawyers are here to help clients in Los Angeles and Orange Counties, and throughout Southern California, navigate the stressful course of trust and estate disputes, and other family law matters. To contact our experienced, diligent attorneys, please contact Ginzburg & Bronshteyn online or call us at (310) 914-3222.

Related blog posts:

A California Will May Not Prevent an Inheritance Battle, Los Angeles Probate Litigation Attorney Blog, July 31, 2012
California’s Fourth Appellate District Recognizes Intentional Interference with an Expected Inheritance Tort, Los Angeles Probate Litigation Attorney Blog, June 19, 2012