Cooks in the Kitchen

Are six sibling co-trustees too many cooks in the kitchen? Many California trust disputes arise from disagreements among sibling co-trustees over how to administer Mom and Dad’s trust after the parents have passed. They all have a strong sense of what Mom and Dad wanted, but they don’t agree on what it was.  Thus, trust and estate litigators can be described as “sibling lawyers.”

A recent appellate opinion illustrates such co-trustee conflict and shows the unpredictability of our judicial process. In Trolan v. Trolan (2019) 31 Cal.App.5th 939, the California Court of Appeal addressed issues of trust interpretation and trustee removal in a situation where five siblings were aligned against the sixth.

Five Siblings Say Whoa Nellie!

After her husband Howard died, Alice Trolan amended their trust to name all six of their children as successor co-trustees, with the power to act by majority vote.

When Alice died, the trust estate consisted mainly of Comerica Bank stock and real estate. Five of the children wanted to retain the real property in trust, hoping it would appreciate in value. Nellie Trolan, however, wanted to be cashed out. The majority co-trustees could not reach an agreement with Nellie on the value of the real estate as the appraisals came in at varying figures.

Rather than compromise with Nellie, the five siblings filed a petition for instructions under California Probate Code section 17200 in Santa Cruz County Superior Court. They asked the court to determine the value of Nellie’s share. As it would turn out, putting the issue before the court set the wheels turning on litigation that would take a winding and expensive path.

Trial Court Orders Liquidation of All Assets by Successor Trustee

The parties prepared for an evidentiary hearing in September 2016 on the value of the disputed property.  At the outset of the hearing, however, the trial judge issued a tentative ruling stating that the trust required the liquidation and distribution of all assets following Alice’s death.

When the parties after several hours could not reach a compromise based on the tentative ruling, the court ordered the removal of all six sibling co-trustees and appointed a private professional fiduciary to handle the liquidation and distribution of trust assets.

Interestingly, none of the co-trustees had asked the court to remove any of them. Instead, the court acted on its own motion, under California Probate Code section 15642, because they could not reach a compromise and the trial court found that the majority co-trustees had not acted loyally and impartially in failing to distribute the trust assets.

Court of Appeal Partly Reverses Trial Court’s Order

The appellate process generally is not speedy. Hence, over two years after the trial court’s ruling, the Court of Appeal overrode it in part.

The appellate court interpreted the trust on a de novo basis (i.e., without deference to the trial court ruling) because the trial judge had not considered evidence extrinsic to the trust instrument. After reviewing basic principles of trust interpretation, the court found that the trust instrument unambiguously called for the distribution of assets and the termination of the trust if all beneficiaries had attained the age of 30 upon the death of the surviving spouse, as was true when Alice passed.

Under the “specific-general rule” of trust interpretation, which is rooted in California Code of Civil Procedure section 1859, particular expressions of a settlor’s intent control over general ones. Hence, the “Age 30 Provision” in the Trolan Family Trust trumped other general trust language.

The appellate court, however, found that the trust instrument gave the trustees discretion regarding the method of distributing the trust’s assets. Hence, the co-trustees had the ability to proceed by in-kind distribution of assets as opposed to liquidation, and properly could seek a judicial determination of the value of the assets to resolve their disagreement with Nellie. The trial court thus overreached in appointing a successor trustee to proceed with liquidation.

Removal of a trustee is reviewed on appeal for abuse of discretion, which is a high bar for appellants. Yet the removal of the co-trustees in this case appeared to rest on the mistaken premise that they had failed to discharge a duty to liquidate the trust assets. The record showed that the co-trustees proactively were attempting to resolve the value of Nellie’s beneficial interest in the trust. Hence, the co-trustees should not have been removed.

The appellate court also ruled that the trial court should revisit the issue of whether Nellie’s legal expenses should be charged to the trust.

The Cooks Are Back in the Kitchen – What’s Next?

The appellate court reinstated all six siblings as co-trustees, leaving them to negotiate (perhaps with a mediator’s assistance) or further litigate the distribution of the trust’s assets. The co-trustees might agree on either a pro rata distribution such that each of them will receive a one-sixth interest in each asset or on a non-pro rata distribution that will allocate the assets such that they are not co-owners. Alternatively, the co-trustees might ask the court to review and approve the terms of a non-pro rata distribution, which may lead to an evidentiary hearing on asset values.

Overall, the case demonstrates how different family members, and judges, can construe trust terms in varying ways. Putting trust administration disputes before the Superior Court for decision may lead to an unexpected or unwanted outcome, at a high level of expense, so there is much to be said for a negotiated resolution. At the same time, if one party perceives that the other is taking an unreasonably aggressive position in negotiations, the courts are available to adjudicate the dispute.