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Trustees in California trust disputes should not overlook the power of the constructive trust remedy as a way to recover errant trust assets.  That’s a takeaway from Higgins v. Higgins (2017) 11 Cal.App.5th 648, an opinion in a trust litigation case published last week by the California Court of Appeal.

A Los Angeles Superior Court trial judge found a “clear moral obligation” on the part of Lupe Higgins to return several hundred thousand dollars to the Higgins Family Trust, but could not find a legal obligation, so the judge apologized to the Higgins family for being powerless to restore the funds.  The appellate court did not like the sound of that music and came to the rescue, ruling that the trial court had discretion to compel Lupe to transfer the money to the trustee of the Trust.

How Did Maria’s Money Almost Go Astray?

California trusts often go off the rails when accounts are not properly titled in the name of the trustees of the trust.  Estate planners counsel clients to “fund” their trusts by specifically titling accounts to establish that they are held in trust.  Even if clients initially follow such instructions, as the years pass there is often a failure to maintain trust designations, risking the loss of funds.

The Higgins case illustrates this problem.  Maria and Bartlett Higgins created an estate plan in 1994 that included the Higgins Family Trust.  Bartlett died a year later.  By 2007, Maria (then age 91) was complaining about problems with her short-term memory and her doctor prescribed medication for patients with Alzheimer’s disease.  In 2009, as Maria’s mental capacity continued to decline, she executed new signature cards that added her step-son Clive as a joint account holder to her checking and savings accounts.  (Instead, she should have named Clive in his trustee capacity as the account holder.)

As bad luck would have it, Clive was diagnosed with cancer in 2012.  He became completely dependent on his wife Lupe and care from hospice.  He could no longer attend to Maria’s finances.  Accordingly, he closed Maria’s checking, savings and CD accounts, and he opened new ones, titling the accounts as Clive and Lupe “ITF: Maria Lopez Higgins.”  Lupe signed the signature cards with the understanding that the funds were “for Maria to take care of Maria.”  The accounts held about $400,000.

The account agreements permitted the accounts to be designated as (1) Totten trusts, (2) subject to a trust under a separate agreement, or (3) subject to a pay on death designation, but none of these boxes were checked.  Lupe should not have been listed as an account holder because she was not a trustee of the Higgins Family Trust – presumably, Clive failed to get legal advice in this regard.

After Clive died, Lupe went to the bank and put the checking/savings accounts in her name as the sole account holder.  Maria died a few months later.  Lupe paid for Maria’s funeral expenses and distributed out $10,000 each to Maria’s eight grandchildren, all using funds from the checking account in Lupe’s name.

Lupe treated the remaining funds as her own, which led the successor trustee of the Higgins Family Trust (Clive’s brother Arthur) to sue her to recover the money.  In trial testimony, Lupe testified that she thought the funds in the accounts transferred to her when Maria died, though she acknowledged that she had given $80,000 to Maria’s grandchildren because it was Maria’s money.

Lupe’s counsel argued that a claim did not run against Lupe because there was no evidence of fraud or undue influence by her with respect to Maria.

The trial judge concluded that since Clive made Lupe a joint account holder she had the right to do as she pleased with respect to the funds in the accounts, and thus ruled in favor of Lupe.

So, How Do You Solve a Problem Like Maria?

“For every wrong there’s a remedy.”  So goes a maxim of jurisprudence, enshrined in California Civil Code section 3523, which is not always true in practice.  In this case, the appellate court was able to chart a path to the equitable result.

Under California law, as codified in Civil Code sections 2223 and 2224, a judge may impose a constructive trust to transfer a property interest to whom it rightfully belongs.  The plaintiff must show: (1) a specific, identifiable property interest, (2) the plaintiff’s right to the property interest, and (3) the defendant’s acquisition or detention of the interest by some wrongful act.

Disagreeing with the trial judge, the appellate court found that a constructive trust could be imposed because Lupe had repudiated her agreement to hold funds in trust for Maria.  When Clive transferred funds to accounts in trust for (“ITF”) Maria, Lupe consented to the terms of that trusts by executing the signature cards.  A constructive trust was appropriate to prevent unjust enrichment to Maria.

The clear and convincing evidence at trial showed that Clive and Lupe intended to create irrevocable trust accounts in which Maria had a present beneficial interest in the funds on deposit.  The accounts could not be deemed Totten trust accounts because there was nothing tentative about the commitment to hold Maria’s funds in trust for Maria.   (When creating a Totten trust account, the depositor retains the power to withdraw funds during the depositor’s lifetime.)

Since Clive and Lupe effectively held legal title to the accounts as co-trustees, Clive’s death had no effect on Maria’s beneficial ownership of the accounts.  Lupe continued to hold the funds in trust for Maria after Clive’s death so Lupe could not use the funds for her own purposes.  Lupe’s repudiation of the trust was a wrongful act that warranted a constructive trust.

Under California Probate Code section 16460, Arthur as successor trustee had three years from the date that Lupe repudiated her trust obligations to bring his action for constructive trust.  Per Maria’s will, her property at death was to be added to the Higgins Family Trust and administered under its terms.  Accordingly, Arthur could seek to recover Maria’s interest in the accounts for the beneficiaries of the Trust.

A Happy Ending, But the Drama Could Have Been Avoided

Clive should not have put his wife Lupe’s name on the accounts because she was not a trustee.  Still, since he indicated that the accounts were held in trust for Maria, there was enough linkage to Maria to preserve her beneficial interest in the funds.

The Higgins case offers two lessons, as well as an occasion to riff on The Sound of Music.  First, by carefully titling assets in their trusts, those who create and administer trusts can ensure that funds pass smoothly to the proper beneficiaries, thereby avoiding uncertain and expensive litigation over entitlement to the funds.  The Higgins family beneficiaries should not have had to traverse the legal Alps to receive Maria’s money.  Second, if there are supporting facts, a judge may employ the constructive trust theory to get funds to the trust where they belong.