Financial Audit

Sometimes stepmothers are just misunderstood.

Babbitt v. Superior Court (2016) 246 Cal.App.4th 1135, recently decided by the California Court of Appeal, involves one of the fact patterns that we often see in California trust litigation: children from a decedent’s prior marriage have conflict with their biological parent’s surviving spouse. In other words, after dad passes away, stepmom and the kids do not play nicely.

Background Facts

Leland and Mary Lynne Babbitt had very typical estate planning. They had a trust together and upon the death of the first of them (Leland), the trust split into two trusts: the A Trust and the B Trust. The A Trust was the surviving spouse’s trust. Mary Lynne maintained full rights over the one half of their property that was allocated to the A Trust. She could amend the A Trust. She could even revoke the A Trust.

But, the B Trust was irrevocable. Mary Lynne was entitled to lifetime income from the property allocated to the B Trust, and she could use the principal from the B Trust for certain purposes, but the B Trust was designed to, at least in part, preserve principal so that Leland’s daughter, Carol, would receive an inheritance from her father when Mary Lynne passed away. Mary Lynne could not amend or revoke the B Trust.

Leland died on May 5, 2014. He lived a full life. He served in the Air Force, and later worked in engineering and aviation. He built a 30-foot motor home from scratch! He loved UCLA sports. But apparently there was no love lost between Mary Lynne and Carol. After Leland passed away, Carol requested that her stepmother provide her with an accounting of both the A Trust and B Trust assets, and then filed a Petition for Instructions with the probate court asking that the court require her stepmother to provide that accounting and other information required by California Probate Code section 16061.7.

Mary Lynne opposed Carol’s petition and said that even if Mary Lynne was required to give Carol information concerning the B Trust, the A Trust was still completely revocable and so Carol was not entitled to any information concerning that trust. In reply, Carol suggested that $800,000 in cash accounts was missing from the trusts, and so she asked the court to compel Mary Lynne to account for the three years prior to Leland’s death so that Carol could see how Leland and Mary Lynne had spent those funds.

The trial court granted Carol’s petition and required Mary Lynne to account for the activities of the A Trust and the B Trust from three years prior to Leland’s death to the present. In response, Mary Lynne prepared an accounting for the B Trust for the time since Leland’s date of death, only, and appealed the remainder of the court’s order.

On appeal, the Court of Appeal noted that while the trustors (i.e., the people who created the trust) are alive, the trustee owes a duty to the trustors and not to the beneficiaries, and the beneficiaries (like Carol) are not entitled to either an accounting or information about the trust. Prior to the time that the trust becomes irrevocable, the beneficiaries’ rights are merely potential and those rights could be revoked at any time. As such, Carol was not entitled to an accounting or information concerning the A Trust, even after Leland’s death because that trust was revocable.

The Court of Appeal also held that after a trust becomes irrevocable, and the beneficiary’s right is vested, even then the beneficiary is not entitled to a retrospective accounting for the time period before the trust was irrevocable. Neither Leland nor Mary Lynne could be liable for failing to sufficiently preserve the beneficiaries’ potential future interest in the trust before the trust was irrevocable. The mere fact of Leland’s death did not give Carol the right to investigate the time period prior to Leland’s death in the absence of any claim of incompetency, undue influence, or breach of trust. As such, Carol was not entitled to an accounting for the time period prior to Leland’s death for any portion of the trust.

Analysis

Once a trust becomes irrevocable, a beneficiary is generally entitled to certain information, including: (1) information relating to the administration of the trust that is relevant to the beneficiary’s interest in the trust per California Probate Code section 16061; and (2) an annual account per California Probate Code section 16062. The trustee of an irrevocable trust has the duty to keep the beneficiaries reasonably informed of the trust and its administration per California Probate Code section 16060.

The Babbitt case makes clear that beneficiaries are not entitled to this information and/or an account for the time period before they were a beneficiary, while the trust was still revocable, if the trustors and the trustees are the same person(s).

At first blush something seems amiss about this decision. It is almost as though the decision would enable a surviving spouse wrongdoer to hide information. In practice, the application of the case is too narrow to allow its use for that purpose. The decision does not apply if a third party is serving in the role as trustee. And, the decision only applies in the absence of allegations of mental incompetency, undue influence, or other impropriety. In essence, if dad and stepmom were both in control of their faculties and their finances, and there is no claim or indication that either did anything wrong, then a beneficiary cannot later dig into the specifics of what they did.

The decision is not a shield for a surviving spouse to hide behind after she has wrongfully converted assets that properly belonged to her husband. As made clear in the 2014 case of Lintz v. Lintz, Family Law Code section 721 imposes a duty of good faith and fair dealing between spouses. This decision does not in any way protect surviving spouses from disclosing information concerning breaches of good faith and fair dealing.

Instead, the decision provides a shield to spouses who act together during their lifetimes, and prevents beneficiaries from later second guessing the financial decisions made by and between spouses. The ruling should be a comfort to all those who intend to take the “if I spend it all before I die, then you all can’t fight about it” approach to family conflict management. Of course, Leland Babbitt may have been a follower of that philosophy too.