September 29, 2017

Breach of Fiduciary Duty

A typical arrangement involving a marital trust is for a child to serve as the successor trustee and be a beneficiary. That is, once both parents have passed away, the child steps into the role of trustee and their beneficial interest vests. I'd say the vast majority of marital trusts I've written follow this pattern.

The child, as the successor trustee, is obligated to properly discharge their fiduciary duties or else they can incur liability.

For example, assume the parents selected just Son as the successor trustee, but named Son and Daughter as co-equal beneficiaries. Hence Son would receive 50% and Daughter would receive 50% of the trust estate.

The trust instructs the trustee to sell the marital home within 1 year of the parents passing and to make the property productive prior to the sale. The parents both pass away in a tragic hot air balloon accident on New Year's Eve. Thereafter Son becomes the acting trustee of the trust.

The marital home on January 1 was in a habitable condition and thus could be rented immediately. Son however was addicted to social media, hacky sack and recreational marijuana use so he was unable to rent the property over the next year. The property could have rented for $5,000 a month but Son's misconduct caused any rental income to go up in smoke. 

Additionally, Son did nothing to prepare to sell the house. Although he did plant many cannabis plants on the property. Son also used trust funds to pay for personal expenses such as jazzercise classes, hair gel for his mullet and sleeveless undershirts.

Come December of that year, Daughter had become exasperated that Son had done nothing to make the house productive, wasted trust funds on personal expenses and not prepared the house for sale. 

Daughter filed a petition in probate court to surcharge Son for his breach of fiduciary duty and requested that the surcharge be satisfied from Son's beneficial interest in the trust, i.e. his 50%. Thus, if granted, Son's interest in the trust would be reduced by the amount of damages he had caused the trust. For instance, if Son caused the $200,000 in damages, his interest in the trust would be reduced $200,000 and awarded to Daughter, the aggrieved beneficiary. Such a remedy is available for breach of fiduciary duty where the trustee is also a beneficiary. See Chatard v Oveross (2009) 179 CA4th 1098.