Beneficiaries

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While institutional trustees may have once slept soundly considering themselves immune from class action lawsuits relating to the purchase or sale of securities on behalf of a trust, the Ninth Circuit’s recent ruling in Banks v. Northern Trust Corp. (9th Cir. 2019) 929 F.3d 1046, sounds a rousing wake up call for every trustee who professionally manages multiple trusts.

Federal law generally prohibits class actions relating to (1) misrepresentations of material fact in connection with the purchase or sale of a security, and (2) the alleged use of any manipulative device in connection with the purchase or sale of a security.  Thus, for the most part, cases involving these types of allegations can only be brought individually.  While institutional trustees have always had to be careful in what representations they make in the purchase or sale of securities, the potential for massive liability from class action litigation has largely been a non-issue.

However, the court in Banks v. Northern Trust Corp. clarified that this general rule does not apply to claims brought against a trustee by beneficiaries of an irrevocable trust.  Therefore, institutional trustees with a large volume of trust administration files, and especially those associated with an institution that provides investment products, should now be on high alert for the potential for class action claims to be brought against them.    

When a man dies in California, who gets the proceeds of his life insurance policy? The answer seems obvious: the named beneficiaries in the paperwork received and accepted by the life insurance company.

But what if the man gave the policy away during his lifetime? Can he cancel the gift and redirect the proceeds to others?  No, said the California Court of Appeal in Dudek v. Dudek (2019) 34 Cal.App.5th 154. Even though the life insurance company may not have recognized the gift, its recipient can recover the policy proceeds from those who received them.

American courts (including our California state courts), in contrast to courts in England, do not typically award attorneys’ fees to a lawsuit’s “victor.”  There are, of course, exceptions to this so-called “American Rule.”  Among them is the “common fund” exception, which provides that one who incurs fees winning a lawsuit that creates a fund for others may require those passive beneficiaries to bear a fair share of the litigation costs.  As the word “fund” suggests, the benefit must be a tangible, easily calculable sum of money.  Courts have applied this exception to will and trust disputes where one beneficiary’s litigation causes other beneficiaries to receive a larger inheritance than they otherwise would have received.

But what happens when a trust beneficiary prevails in a lawsuit that doesn’t result in a tangible, monetary benefit but rather one such as removing an incompetent trustee or causing a trustee to prepare an accounting?  May beneficiaries who receive such benefits, but who take no part in the litigation, be required to pay for a portion of the litigating beneficiary’s legal expenses?  Last month the California Court of Appeal, in Smith v. Szeyller (2019) 31 Cal.App.5th 450, answered the question with a tantalizing “very possibly.”

Can a disinherited person contest a trust amendment under California Probate Code section 17200?  No, said the Court of Appeal last August in Barefoot v. Jennings (2018) 27 Cal.App.5th 1.

The Barefoot opinion put pending trust contests in jeopardy, as contestants typically have used section 17200 as the procedural hook to challenge trust amendments that disfavored them.  Last week, however, the California Supreme Court granted review of Barefoot such that the opinion no longer has precedential value.

When attorneys advise errant trustees, how vulnerable are they to breach of trust claims by injured beneficiaries?  A case published last week by the California Court of Appeal provides a defensive roadmap to attorneys who are sued for such claims, along with an occasion for golf metaphors.

In Cortese v. Sherwood (2018) 26 Cal.App.5th 445, the appellate court ruled that attorney John Sherwood was protected by California Civil Code section 1714.10, which was enacted in 1988 to combat the use of frivolous conspiracy claims brought as a tactical ploy against attorneys and their clients.  Since the plaintiff failed to obtain the court’s approval before suing the attorney, as the statute required, she could not bring her claim against him.  She could not get off the first tee.

Your ex-spouse may take under your life insurance policy if you do not change your beneficiaries and there’s nothing a California probate court can do about it.  So ruled the Court of Appeal last month in Estate of Post (2018) 24 Cal.App.5th 984.

What Happened?

Kenneth Post had two sons, then married Angela Post. …

No contest clauses are an ever-evolving area of the probate law in California.  The Court of Appeal further refined the rules governing no contest clauses in a decision issued last week, Aviles v. Swearingen (2017) 16 Cal.App.5th 485.  In brief, in order for a no contest clause to apply to a trust amendment, the no contest clause must be stated in the amendment or the amendment must expressly reference the no contest clause set forth in a prior document.

The takeaway from the case for estate planners is that if your client wants a no contest clause, then you must mention the no contest clause in every trust amendment that you draft for the client.  It is not good enough to simply include a no contest clause in the client’s trust and then refer back to that trust, generally, in later amendments.  Each subsequent amendment must either contain its own no contest clause or must expressly reference the no contest clause of the original trust instrument.

One of the most dramatic areas of California trust and estate litigation is no contest clauses.  No contest clauses bring a made-for-tv excitement to the practice of trust and estate law because of the risk of disinheritance.  Yet such clauses are widely misunderstood, even among attorneys.

FAQsIn our Sacramento trust and estate litigation practice there are several questions that come up over and over again.  In many instances, these questions are the building blocks of our practice that lead to more complicated questions that sometimes require the filing of a lawsuit to answer.  As a starting place, below are some of the more common questions we receive from trustees and from beneficiaries.

Diver Down FlagBeneficiaries 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.