Can You Enforce The Arbitration Clause In A Trust Against A Beneficiary Who Is Challenging The Trust? A Recent California Court Of Appeal Case Says No.

By Lynda Chung

Lynda Chung

Over the years some arbitration clauses in different contracts have withstood the litigants’ challenges.  Some arbitration clauses have not.   In a recent California Court of Appeal cases, McArthur v. McArthur (2014) 2014 S.O.S. A137133, the trustee attempted to enforce the arbitration clause in the amended trust document (the “Amended Trust”) created by her mother against the beneficiary who was the trustee’s sister.  The Amended Trust required mediation, and if necessary, arbitration of “any claim or dispute arising from or related to the Trust as amended.”  The Court of Appeal held that the arbitration clause in the challenged the Amended Trust is not enforceable against the beneficiary who was not a party to the Amended Trust.

In McArthur, in 2001, the settlor (the mother of the plaintiff and the defendant) created a trust which purported to distribute her assets upon death to her three daughters equally.  In January, 2011, the mother amended the Trust, giving a greater portion of the trust property to Kristi, the respondent, and also naming Kristi the trustee of the Trust.  The mother died in August, 2011.  Thereafter, Pamela, another daughter, filed a petition to invalidate the Amendment on the grounds that her mother lacked capacity when she executed the Amendment and that Kristi committed financial elder abuse against their mother.  The trustee moved to compel arbitration of Pamela’s claims pursuant to the arbitration provision in the 2011 Trust, and Pamela objected to the motion on the grounds that she was not a party to the Amended Trust.  The trial court agreed with Pamela, and the trustee appealed.

Noting two inconsistent cases from Arizona (holding that the arbitration clause is unenforceable against the beneficiary who was not a party to the trust agreement) and Texas (holding that the arbitration clause was enforceable), the California Court of Appeal held that the arbitration clause in a trust instrument is not binding on a beneficiary who never agreed to it.  “It is illogical to suggest that Pamela’s claim of entitlement to benefits under ‘the trust’ as it existed before the 2011 amendment amounts to acceptance of an arbitration clause first appearing in the 2011 amendment, a document she specifically challenges as invalid.” (Emphasis in original.)

It should be noted that the holding of this case was obviously limited to the beneficiary who was not a party to the Trust and who challenged the very instrument containing an arbitration clause.  If the disputes were of a different nature, for example, a fee dispute between the beneficiaries and the trustee who accepted her fiduciary position upon review of the terms of the trust, the result would have been different because the trustee’s acceptance of the trusteeship implies her acceptance of the terms of the trust, including the arbitration clause.

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Looters Beware: Breaches of Fiduciary Duty are Actionable by Beneficiaries of a Revocable Trust After a Settlor’s Death

By Autumn Ronda, Esq.

Autumn Ronda

In Estate of Giraldin; 12 S.O.S. 6575, the California Supreme Court ruled in a 5-2 opinion by Justice Ming Chin that the beneficiaries of a trust which is revocable by the settlor have standing to sue the non-settlor-trustee of the trust after the settlor's death for a breach of a fiduciary duty owed to the settlor while the settlor was living.  Under Probate Code Section 15800, unless the trust instrument otherwise provides, while the settlor is living and holds the power to revoke the trust, the trustee must only account to and owes fiduciary duties only to the settlor of the revocable trust. This is consistent with the fact that, by definition, a revocable trust can be revoked or amended by the settlor at any time while the settlor is living and has mental capacity, thereby divesting a beneficiary's interest in the trust. Thus, until the trust becomes irrevocable at the settlor's death and in doing so vests the rights of the beneficiaries, the named beneficiaries merely have a contingent interest in the trust.  This ruling provides a precedent that despite a beneficiary's mere contingent interest in a revocable trust during the settlor's lifetime, any fiduciary breaches committed by the non-settlor-trustee against the settlor, while the trust is revocable by the settlor, are actionable by the beneficiaries after the settlor's death, to the extent that the violation harmed the beneficiaries' interests.  The Court proclaimed, "A trustee…cannot loot a revocable trust against the settlor's wishes without the beneficiaries' having recourse after the settlor has died."

The factual circumstances giving rise to this case are not uncommon.  The settlor, William Giraldin established a trust for the benefit of his blended family consisting of his wife, his four children from another marriage, his wife's three children from another marriage and their twin sons from their marriage. One of the twin sons of the current marriage, Timothy, was appointed as sole trustee.  The trust made substantial investments in a company owned by both Timothy and his twin brother Patrick.  The company failed and the trust lost substantial value.  The trust terms included fairly standard revocable trust language which attempts to relieve some of the duties and liabilities of the trustee during the settlor's lifetime, namely, waiving accounting duties, relaxing the prudent investor rule, discounting the importance of the remainder beneficiaries and making the trustee's distribution decisions binding on all beneficiaries.  The four children of the settlor's first marriage sued Timothy in his capacity as trustee alleging that his self-interested investments in his and Patrick's unsuccessful company and the personal loans that the trust made to both Timothy and Patrick had deprived the other seven children of their inheritance.  The trial court sided with the plaintiffs, order Timothy to be removed as trustee, provide an accounting to the beneficiaries and to be surcharged for his various breaches of fiduciary duties. 
 

On appeal, Timothy argued that the plaintiffs did not have standing to sue him and the Court of Appeal agreed, explaining that the plaintiffs' claims consisted of breaches of fiduciary duties allegedly owed to the plaintiffs themselves, rather than breaches in the trustee's fiduciary duties owed to William, stating that the trustee's "duties as trustee were owed solely to [William] during [the time William was alive], and not to the trust beneficiaries…" 

The California Supreme Court's limited review of the standing question resulted in a reversal of the Court of Appeal's decision. The Court disagreed with the Court of Appeal and found that the plaintiffs had actually alleged breaches of fiduciary duties owed directly to William as the settlor of the trust during his lifetime.  Thus, the Court's question was only whether the plaintiffs had standing to bring a lawsuit based on a trustee's breaches of fiduciary duties owed to a now deceased settlor which occurred during the settlor's lifetime. The Court answered yes, stating that the beneficiaries had standing to sue, "[b]ecause 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."  The Court did not however address the question of whether or not the alleged breaches of fiduciary duties had in fact occurred and remanded the case with instruction to rule on this issue in a manner consistent with their ruling.

 

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Autumn Ronda Speaks to the California Society of CPAs, Estate Planning Committee

Tax and Estate Planning attorney Autumn Ronda, spoke to the California Society of CPAs, Estate Planning Committee at an August 8, 2012 panel titled "Wealth Transfer Strategies in Low-Interest Rate Environment." 

The program detailed those advanced estate planning strategies that are specifically helped by the recent historically low interest rates, including Grantor Retained Annuity Trusts, Charitable Lead Annuity Trusts, Sales to Intentionally Defective Grantor Trusts and Intra Family Loans.

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Philip S. Magaram to Speak in Jewish Community Foundation Speaker Series

Senior Tax and & Wealth Planning partner, Philip S. Magaram, will be a featured speaker at the upcoming seminar series presented by the Jewish Community Foundation, Los Angeles.  The series will focus on Tax Planning and Charitable Giving and provide attendees with information on various topics, including benefit corporations, charitable trusts, charitable gifts, ethical challenges of estate planning and administration and recent developments in these practice areas.

Mr. Magaram’s presentation, entitled “Portability or Exemption Trust – Which is Better?,” will take place on June 13, 2012 in Beverly Hills and June 20, 2012 in Woodland Hills.  Both presentations are from 7:30 a.m. to 9:30 a.m.  For more information on the series or to register, visit the Jewish Community Foundation website at www.jewishfoundationla.org/2012PASS.

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