Beneficiaries beware: don’t dive in to trust litigation too quickly.  That lesson was learned the hard way, ironically, by a diving heiress in Williamson v. Brooks (2017) 7 Cal.App.5th 1294.  The California Court of Appeal decision, which related to a trust created by the founder of Kirby Morgan Dive Systems, Inc., addresses the question of how much information a trustee must give to a beneficiary, and what consequences may (or may not) befall a noncompliant trustee.

Background

The Williamson case involved the Morgan family and their closely held family business, Kirby Morgan Dive Systems, Inc. (“KMDSI”).  KMDSI, which designs and manufacturers commercial-grade diving helmets, was founded by William Morgan in the 1960s.  Today, the company is worth at least $7.5 million.

In 2008, William engaged in tax-focused estate planning to establish trusts that benefited each of his five adult children.  William’s attorney and accountant were the trustees and the trusts were funded with shares of KMDSI.

William told his children about the trusts.  Specifically, William told his daughter Beverly about the trust in an email and in person.  In 2012, Beverly contacted the accountant-trustee, and received information and documents she requested concerning the trust.

The Dispute

Prior to 2010, Beverly was an employee of KMDSI until she was fired “for refusing to perform any work.” Without her KMDSI income, Beverly was not able to afford the mortgage on a home that she owned with her sister.  Beverly quitclaimed the property over to her sister and moved out, leaving her sister with the entirety of the home and the entirety of the mortgage.

At some point after quitclaiming the property to her sister, Beverly filed suit against the trustees, her father, and her sister.  The gist of Beverly’s claim was that if she had known more information about the trust (and presumably had access to its assets) then she could have avoided losing her home.  Beverly alleged breach of trust/fiduciary duty and other claims in an attempt to make the trustees, her father, and her sister liable for Beverly’s financial loss related to the house.

The Decision

A judge from the Santa Barbara County Superior Court found against Beverly after a four day trial.  The Court of Appeal affirmed the trial court and denied any relief for Beverly on the basis that (1) Beverly did not establish any damages; and (2) the trustees fulfilled their duties related to providing Beverly information about the trust.

Lack of Damages

A trustee has a duty to make trust property productive, and, in doing so, has a duty to invest and manage trust assets as a prudent investor would.  A trustee’s failure to fulfill these duties could make the trustee liable to a beneficiary for financial damage to the trust’s assets.

In Williamson, the Court of Appeal held that a trustee’s duty stopped there.  “[T]rustees accused of breaches of fiduciary duty may only be liable for losses to the trust itself, not for personal damages to a beneficiary.”  That meant Beverly could not hold the trustees liable for Beverly’s personal financial loss related to the house.

Read broadly, this legal principle implies that a trustee need not be concerned with a beneficiary’s financial status as long as the trustee is making appropriate decisions for the trust property.  Would Williamson protect a trustee whose failure to timely distribute trust assets to a beneficiary caused the beneficiary to miss a lucrative investment opportunity?  It certainly seems that way.  But, how future courts apply, or decline to apply, this legal principle will be heavily dependent upon the facts.

Fair or not, the Court of Appeal referenced a number of facts that painted Beverly as a spoiled child: she was on the payroll of her father’s company but refused to do any work; KMDSI gave Beverly a $50,000 gift toward the down payment on the home at issue, her sister paid the rest of the down payment, and yet Beverly “bit the hand that feeds” by filing this lawsuit against both her father and her sister.

What if the petitioner had instead been an 80-year-old widow who lost her home because a trustee wrongfully refused to distribute $1,000 from a trust for her property taxes while she underwent chemotherapy?  In a court of equity, like the probate court, legal principles bend in favor of likable litigants and against unlikable ones.

Trustee Disclosure of Information

Trustees are generally supposed to communicate with beneficiaries in a forthright and complete manner.  A trustee of an irrevocable trust generally has a duty to provide a beneficiary with a copy of the written terms of the trust upon request.  Plus, a trustee is supposed to report to a beneficiary on request by providing information that is relevant to a beneficiary’s interest.  But where does that obligation end?

The Court of Appeal said that “Beverly was entitled to be informed about her subtrust so that she could take action to gain more information,” but nothing more.  The trustees were not required to “tell Beverly every detail of her subtrust,” without her asking.

The trial court found that the only thing impeding Beverly’s access to information was her own lack of due diligence, and the Court of Appeal seemed to agree.  Beverly’s failure to sufficiently “investigate or explore her options” before litigation was likely an important factor in the trial court’s decision to require her to pay more than $500,000 for her opponent’s attorney fees and costs.

Key Takeaways

• Whether you are a trustee or beneficiary, try to have “good facts.” Be forthright, transparent, reasonable, and cooperative, and only proceed to litigation when those efforts have been exhausted.
• A trustee must protect and manage trust assets for the benefit of the beneficiary. A particular beneficiary’s personal financial status and need/desire for money may not require the trustee to make a distribution.
• As a beneficiary, you have a right to request documentation and information from a trustee, and you should endeavor to exhaust that right where possible before resorting to litigation.
• As a trustee, you need not provide a beneficiary with “every detail” of the trust, especially where those details are not relevant to the beneficiary’s interest in the trust.
• Trust and estate litigation is often a costly endeavor. You will want to make sure that you have considered your options before filing a lawsuit.