The "empty Chair": How to Account for the Rights of Contingent Remainder Beneficiaries in the Event of Incapacity

• Publication year: 2018
• Author: By Patrick A. Kohlmann, Esq.*

THE "EMPTY CHAIR": HOW TO ACCOUNT FOR THE RIGHTS OF CONTINGENT REMAINDER BENEFICIARIES IN THE EVENT OF INCAPACITY

By Patrick A. Kohlmann, Esq.*

I. INTRODUCTION

Clients are living longer. An aging populace inevitably means successor trustees taking over during the lifetime of the settlor. When a settlor of a revocable trust has become incompetent, to whom does the successor trustee owe his or her statutory duties? One perspective is that settlor intent should be paramount; if a settlor created a trust and entrusted a successor trustee to manage the trust in a given manner, the analysis should end there. The other view demands that successor trustees be accountable to contingent beneficiaries in order to protect the settlor.

This article reviews how California law and the Uniform Trust Code have addressed this problem.

II. CALIFORNIA LAW

California law pertaining to the rights of remainder beneficiaries of revocable trusts has evolved as a result of recent case law.

A. Evangelho v. Presoto

In Evangelho v. Presoto,¹ the First District Court of Appeal held that while a settlor holding a power to revoke is alive, a trustee has no duty to account to a contingent remainder beneficiary of a revocable trust.² However, once the settlor dies, according to the court's interpretation of Probate Code section 15800, the right to compel an accounting passes to the remainder beneficiaries.³ In other words, under Evangelho, once a remainder beneficiary's rights in the trust vest, the beneficiary has standing to inquire into the trustee's conduct occurring during the settlor's lifetime. Specifically, the trial court ordered the trustee to account for trust funds and transactions involving a bank account for the period prior to the settlor's death.⁴ The First District Court of Appeal affirmed the trial court's ruling.⁵

The court construed Probate Code sections 15800 and 16064, subdivision (b) (now section 16069), to restrict the rights of a beneficiary only with regard to when those rights ripen, that is, the time at which the beneficiary may bring an action for an accounting or to challenge the actions of a trustee is not during the time the trust was revocable.⁶ Those statutes do not, however, abrogate the beneficiary's right ultimately to obtain accountings or information for periods prior to the settlor's death. The court found that the limitations on the beneficiary's rights under section 15800 were lifted upon the death of the settlor.⁷ Upon the trust becoming irrevocable, the beneficiary could obtain an accounting for the entire period the trustee administered the trust.⁸ According to the court, the rights of the now-vested beneficiary stretched back to at least the time that the trustee began administering the trust.⁹

It is important to note that Probate Code section 16069, subdivision (b), still would operate to restrict the beneficiary's right to an accounting to a post-death time period if the settlor personally remained the trustee and sole beneficiary during his or her lifetime.¹⁰

In sum, the First District Court of Appeal found that Probate Code section 15800 refers to rights existing "during the time that a trust is revocable." Therefore, the remainder beneficiaries still had to wait until the settlor's death to pursue these rights.

B. Estate of Giraldin

While the First District Court of Appeal in Evangelho did not expressly hold that the beneficiaries could bring an action against the trustee for alleged breaches during the settlor's lifetime, the California Supreme Court conclusively resolved this issue in Estate of Giraldin.¹¹

The California Supreme Court held in Giraldin that a beneficiary has standing to sue a trustee for breaches of fiduciary duty owed to the settlor during the settlor's lifetime because those breaches could substantially harm the remainder beneficiary by reducing the trust's value against the settlor's wishes.¹² In analyzing Probate Code section 15800, the California Supreme Court reasoned that although section 15800 provides that any fiduciary duty is owed by the trustee solely to the settlor while he or she is alive, the effect of the statute is merely to postpone the remainder beneficiary's enjoyment of his or her rights until after the settlor's death.¹³ The California Supreme Court further reasoned that "[n]othing in section 15800 limits the ability of beneficiaries to petition the court after the trust becomes irrevocable[,]"¹⁴ or, stated differently, after the settlor's death or incapacity.

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In its opinion, the California Supreme Court cited Johnson v. Kotyck¹⁵ to illustrate the difference between the beneficiary's standing before and after the settlor's death. In Johnson, the Second District Court of Appeal held that a beneficiary of a revocable trust cannot petition to compel an accounting while the settlor is living and under a conservatorship.¹⁶ Rather, only the conservator has standing to do so because he or she is the one holding the power to revoke¹⁷ the trust by means of a substituted judgment.¹⁸ In reviewing this decision, the Supreme Court further explained that, as the Johnson court concluded, the "conservator might be liable to the remainder beneficiary later, after the trust becomes irrevocable, for any malfeasance."¹⁹

C. Drake v. Pinkham

Both Evangelho and Giraldin occurred in a post-death environment. Drake v. Pinkham,²⁰ however, expanded the playing field to actions during the settlor's life.

In Drake, a beneficiary alleged that a settlor was incompetent and initiated litigation during the settlor's lifetime.²¹ The parties, however, reached a settlement without a finding on the issue of the settlor's capacity.²² After the settlor's death, the same beneficiary contested the very trust amendments the beneficiary had known of at the time of the initial litigation.²³

The trial court found that the beneficiary was aware of the existence and terms of the trust amendments at the time of the earlier litigation. The earlier allegations of incapacity meant that Probate Code section 15800 did not prohibit the beneficiary from contesting the amendments during the settlor's lifetime.²⁴ The trial court, therefore, ruled that several of the actions were barred by the statute of limitations and collateral estoppel.²⁵

On appeal, the Third District Court of Appeal affirmed, albeit on different grounds, that the actions were barred by the doctrine of laches.²⁶ The court stated that the beneficiary could have brought the underlying action before the settlor's death and the mere fact that the beneficiary "should have had the burden of proving [the settlor's] incompetence to establish her standing to pursue those claims does not excuse her delay."²⁷

In Drake, the decision referenced the non-vested contingent remainder beneficiary's right to petition the court, focusing on the allegation of incompetency taking the matter outside the restrictions of section 15800, and further stating that the beneficiary would have had the "usual rights of trust beneficiaries" if the settlor was incompetent.²⁸ The Drake court quoted the Restatement holding that "[i]f 'the settlor lacks this required capacity, the other beneficiaries are ordinarily entitled to exercise, on their own behalf, the usual rights of trust beneficiaries, and the trustee is ordinarily under a duty to provide them with accountings and other information concerning the trust and its administration.'"²⁹

The implication of Drake is that where a settlor lacks capacity and no other competent party holds the power to revoke, there results an "empty chair." In other words, there is no competent party to whom a trustee owes fiduciary duties and no party to bring an action against the trustee. Under Drake, however, the "empty chair" is filled by the non-vested contingent remainder beneficiaries.³⁰ Indeed, as the Drake court concluded, "[the beneficiary] had the 'usual rights of trust beneficiaries,' if, as she alleges, [the settlor] was incompetent. Thus, nothing in sections 17200 or 15800 precluded her from bringing the underlying action prior to [the settlor's] death."³¹

D. Protected Period and Statutory Law

The general rule under Probate Code section 15800, subdivision (a), is that where a settlor or other holder of the power to revoke is competent,³² he or she is the only one entitled to enforce the duties of a...