Substantial Benefit Doctrine

   

A trust typically has multiple beneficiaries. For example, parents will often evenly divide their estate amongst their children. Now assume that after both parents have died, only one child out of five is selected as the successor trustee. This child has great difficulty in administering, principally because he has an addiction to classic Nintendo video games such as Gun Smoke, Tecmo Bowl, Contra and Castlevania. This addiction causes the child to neglect his duties as trustee. The trust's rental property falls into disrepair and the tenants refuse to pay rent given the property's condition. 

The other children soon become disgruntled with his mismanagement but only of them is sufficiently disgruntled to retain an attorney to file suit against the trustee. 

The disgruntled child ultimately obtains a favorable judgment against the inept trustee that equally benefits the other beneficiaries. That is, the inept trustee is removed and is surcharged for the damages incurred. The disgruntled child's attorney moves to have their attorney fees reimbursed from the trust. The other children object to having to pay the attorney fees for the disgruntled child.

The general rule is that a trust beneficiary "must generally pay their own attorney's fees incurred challenging a trustee's conduct, even if they succeed." Leader v. Cords (2010) 182 Cal.App.4th 1588. 

However, "under the substantial benefit exception, the trial court may exercise its equitable discretion . . . [to] determine whether the interests of justice require those who received a benefit to contribute to the legal expenses of those who secured the benefit." Pipefitters Local No. 636 Defined Benefit Plan v. Oakley, Inc., (2010) 180 Cal.App.4th 1542, 1547.

In this case, the disgruntled child may be reimbursed for their attorney fees from the trust. The rationale for this is straight-forward. The disgruntled child expended their own money to benefit not only themselves but their siblings as well. To allow them then to piggy-back off the work of the disgruntled child would be improper. They would essentially be free-riders, i.e. they obtained a benefit without paying for it. Or to paraphrase a certain song, "everybody had their cup, but they did not chip in." If you know the name of that song, I commend you.

The substantial benefit doctrine was recently referenced in the appellate case Smith v. Szeyller, (2019) ____ Cal.App.4th ______.

Lapsed Residuary Gift

Occasionally a will names as an individual as a beneficiary who does not survive the testator. For example, Tom writes a will and names his friend Ben as a 20% residual beneficiary of his estate. Ben dies before Tom and there is no clause in the will that states what happens to Ben's 20% interest should he predecease Tom. The following issue arose in a recently decided published appellate opinion in California. 

The case originated in Contra Costa County Superior Court.

Estate of Stockird (2018) _______ CA4th _______

"Cheryl D. Stockird died, leaving a handwritten will that transferred "all my property and everything I may be entitled to inherit" to her life partner, John L. Aguirre, Sr., and an aunt related by marriage, Patricia Ambrose. The will did not include alternative provisions for disposition of the shares if either gift lapsed. Ambrose died before Stockird."

"On February 3, 2014, Stockird executed a holographic will, which provided in its entirety as follows:

"Will

"I Cheryl Denise Stockird declare this as my last will. I am single and I have no children. I hereby leave all my property and everything I may be entitled to inherit to:

"65% John L. Aguirre Sr.

"35% Patricia Ambrose

"I sign this on February 3, 2014.

"[Signature: Cheryl D. Stockird.]"

Aguirre was Stockird's long-time life partner. Ambrose, who was not related by blood to Stockird, had been married to Stockird's predeceased maternal uncle. Ambrose died in June 2014.
Stockird died in January 2015. Stockird's will was admitted to probate, and Aguirre was appointed administrator with will annexed."

"After Stockird died, her will was admitted to probate. Aguirre petitioned the probate court for an order declaring he is entitled to Stockird's entire estate as the sole surviving residuary beneficiary under Probate Code section 21111, subdivision (b) (§ 21111(b)). Stockird's half brother, Bruce Ramsden, filed a petition arguing the lapsed gift to Ambrose must instead pass to Stockird's estate under section 21111, subdivision (a)(3) (§ 21111(a)(3)). Ramsden then asserted that as Stockird's only surviving heir, he is entitled to distribution of Ambrose's share under the laws of intestacy.

The probate court agreed with Ramsden and entered an order transferring the residuary gift that would have passed to Ambrose to Stockird's estate."

The court of appeal reversed, finding that "the plain language of the statute and the clear intent of the Legislature to abolish the no residue of a residue rule and avoid intestacy, we conclude the 35 percent lapsed gift does not go to Stockird's estate under section 21111(a)(3), but, subject to determination of the reformation petition filed by Ambrose's descendants, must pass to Aguirre under section 21111(b)." 

Standing to Challenge a Trust

Standing is the ability of a party to file a lawsuit. It acts as a limitation on the class of litigants that can bring forth claims.
For example, a child has standing to contest a parent's will or a parent has standing to pursue a wrongful death action involving a deceased child. 

Standing is procedural in nature. That is, the substantive merits of a case are inapplicable to determining whether or not a person has standing. 

For instance, assume a concerned neighbor witnessed their neighbor being coerced into signing a will. The coerced neighbor, a parent, was given the ultimatum by their child to sign the will leaving the entire estate to them, or else the wicked child would immediately place them in a retirement home. The coerced neighbor dreaded the idea of living out their life in a retirement home and repeatedly mentioned such to their neighbor. 

The foregoing facts would be highly relevant to a case involving undue influence in regards to the will's execution. However, the neighbor would not have standing to challenge the will's validity, despite their first-hand knowledge, because they lack a familial connection to the neighbor. Conversely, the other children of the coerced neighbor would have standing to challenge the will's validity because they clearly have a familial connection to their parent.

In terms of a trust, assume that a child was named a beneficiary of their parent's trust in earlier versions. Then in later versions, the child is disinherited. Following the parent's death, the child brings a petition to invalidate the trust amendments which disinherited them pursuant to Probate Code § 17200. 

The applicable section reads "Except as provided in Section 15800, a trustee or beneficiary of a trust may petition the court under this chapter concerning the internal affairs of the trust or to determine the existence of the trust." Probate Code § 17200(a).

A California trial court determined, which was upheld by the California Court of Appeal, that the disinherited child could not bring such a petition because they lacked standing. The plain language of Probate Code § 17200 provides standing for only trustees and beneficiaries, of which the disinherited child was neither. Therefore, the petition was dismissed due to lack of standing. 

Barefoot v. Jennings, (2018) 27 Cal. App. 5th 1       

The decision was surprising given that litigants often file suit to challenge a trust's validity based on Probate Code § 17200. Although there had been no case law that supported such an argument until now.

On December 13, 2018, the California Supreme Court granted review for the case. Hence, there will be a future ruling on whether or not a disinherited child has standing to file a petition under Probate Code § 17200.        

Estate Tax in 2019

Since the estate tax exemption amount is currently pegged to inflation, the IRS recently announced the exemption amount for 2019 as detailed below:

Year                   Amount Excluded        Maximum Tax Rate
 
2001                   $675,000                      55%

2002                   $1M                             50%
 
2003                   $1M                             49%
 
2004                   $1M                             48%
 
2005                   $1M                             47%
 
2006                   $2M                             46%
 
2007                   $2M                             45%
 
2008                   $2M                             45%
 
2009                   $3.5M                          45%
 
2010                   Repealed                      0%
 
2011                   $5M                             35%
 
2012                   $5.12M                        35%
 
2013                   $5.25M                        40%
 
2014                   $5.34M                        40%
 
2015                   $5.43M                        40% 
 
2016                   $5.45M                        40%  
 
2017                   $5.49M                        40%         
 
2018                   $11.18M                      40% 

2019                   $11.4M                        40%

Filing a Will

It is seldom a prudent decision to delay filing a document. The law imposes a statute of limitations on parties to submit documents in a timely fashion or else their claim is time-barred. The following unpublished appellate opinion highlights what happens when a party waits too long to file: 

"Appellant Gregory Smith challenges the court's determination that his attempt to introduce a copy of a holographic will into probate of the estate of his mother, Helen Louise Smith, was untimely under Probate Code section 8226. Section 8226, subdivision (c)(1), requires the proponent of a will to petition for probate within 120 days of an order determining the decedent to be intestate. Here, Gregory filed a petition for probate of the holographic will over 11 months after the court determined Helen died intestate. Despite the late filing, Gregory appeals the court's decision that the filing of the petition was untimely even assuming Gregory was entitled to the benefit of equitable tolling to extend the statute of limitations period."

The following excerpt encapsulates Mr. Smith's problem:

"The trial court assumed that attorney Schultz's possession of the holographic will for roughly six months served as an impediment to Gregory's filing the petition for probate. The trial court even further assumed that the tolling event continued until Gregory's March 24, 2016, meeting with Lee, after he received the will back from Schultz on March 7, 2016. At that meeting, Gregory was expressly advised by the estate attorney to get his own attorney if he wished to proceed on the holographic will. Even so, over 120 days passed before Gregory filed the petition for probate. Using the latest possible date of March 24, 2016, the 120-day filing deadline expired on July 22, 2016, and Gregory filed the petition on August 3, 2016.  

At the time of the March 24, 2016, meeting, Gregory was in personal possession of the holographic will. The trial court found that Lee advised Gregory to obtain his own counsel to act should he wish to pursue his rights to admit the holographic will into probate. No impediments prevented Gregory from petitioning the court at that time. His delay of more than 120 days in filing the petition evinces a lack of diligence separate and apart from any impediment created by Schultz. Despite having possession of the holographic will and express notice from Lee that he needed to act should he wish to enter the holographic will into probate, Gregory failed to act promptly."

Estate of Smith, Tuolumne County Superior Court Case # PR11349

Objecting to a Trustee's Accounting

“Don’t throw good money after bad.” 

This idiom can commonly be used in the litigation context. It basically means that a reasonable person would not invest their time, energy and money on an endeavor in which the potential output is outstripped by the input. For example, it would be illogical to invest a substantial sum of money in trying to fix a very old car.   

The following excerpt is from a recently decided unpublished appellate opinion: 

"In 2010, Dorothy resigned as trustee of the Survivor's trust and appointed her accountant, Terry Hinricher, as successor trustee. The trust provides that upon Dorothy's death, its assets shall be equally divided among her children, Jack Goulden, Laurie Goulden, and Elliot Goulden. Dorothy died in 2014.

In 2012, Jack petitioned to compel Hinricher to prepare an accounting of the trust. (Prob. Code, § 17200, subds. (a), (b)(6) & (7)(C).) Hinricher filed the first account, to which Jack objected. The probate court referred the matter to mediation. In 2014, the parties settled the first account, and the court approved the settlement. The same year, the probate court approved the second account. In 2015, Jack signed a written approval of the third through fifth accounts, and those approvals were filed with the court.

In 2016, Hinricher petitioned for approval of the sixth account, which included trustee fees of $78,398.57 and attorney fees and costs of $9,969.23. Jack objected to the sixth account on the grounds that (1) the trustee fees were excessive, and (2) checks from the trust account were missing or out of sequence. Hinricher filed a supplement to the sixth account, which explained that the missing checks were voided.

In 2017, Hinricher petitioned for approval of the seventh account. The account showed that the entire trust estate had been distributed to the beneficiaries. Hinricher requested an order approving trustee fees of $45,065.70 for the seventh account period. He also requested an order approving attorney fees and costs of $21,916.31 incurred as a result of the ongoing litigation with Jack and Laurie. Hinricher had set aside reserve funds for final expenses, but they only covered a portion of the fees and costs. Hinricher requested that the beneficiaries be "personally charged" with the outstanding balance of the fees and costs. Elliot objected on the grounds that only Jack and Laurie should be personally charged for fees and costs because only they were involved in the litigation. No other objections were filed.

After an evidentiary hearing, the probate court approved the sixth and seventh accounts and the trustee and attorney fees. The court sustained Elliot's objection, and it ordered that the trustee fees incurred from defending the first through fifth account be charged only to Jack and Laurie. The court ordered the remaining balance of fees and costs be "charged" equally among all beneficiaries."

Here the beneficiary challenged the trustee's accounting numerous times. Each time the trustee's accounting was approved by the court. One wonders why the beneficiary consistently challenged the trustee's accounting when no wrongdoing was exposed. It is understandable if the trustee botched a prior accounting which engendered mistrust between the trustee and beneficiary. However, that was not the case here. The trustee complied with their fiduciary duties by submitting an appropriate accounting every time. Hence, one wonders why the beneficiary challenged the latest accounting when the trustee had no track record of mismanaging trust assets. In other words, it appears the beneficiary was throwing good money after bad. 

Goulden v. Hinricher, Ventura County Superior Court, Case # 56-2012-00425329-PR-TR-OXN.