Can Trust Disputes be Resolved by the California Probate Court?

In the recent decision in Stadel Art Museum v. Mulvihill, Städel Art Museum (the Museum) was the sole residuary beneficiary of the Peter Boesch Revocable Trust(Boesch Trust).

The principal assets of the Boesch Trust are a 50 percent ownership interest in each of four real properties located in San Francisco (hereafter the subject properties). The other 50 percent interests are held by the Darril Hudson Revocable Trust, dated March 9, 1994 (Hudson Trust).

Thomas Mulvihill, successor trustee of both trusts, initiated the underlying action by filing a petition under section 17200 of the Probate Code seeking instructions from the probate court due to a potential conflict in administering the trusts in the best interests of the respective beneficiaries.

According to the petition, the Museum had requested that the acquisition indebtedness on the subject properties be paid off in full and that the Boesch Trust make an in-kind distribution of its interests to the Museum so that the Museum may, as a tax-exempt organization, sell the interests without suffering certain tax consequences.

The Hudson Trust beneficiaries, which did not face the same tax consequences, prefered that the trusts sell the subject properties undivided and distribute the proceeds.

After a hearing on the petition, the probate court instructed Mulvihill to immediately sell the properties and distribute the proceeds to the respective beneficiaries.

On appeal, the Museum made three contentions. First, the probate court’s interpretation of the Boesch Trust was erroneous because it improperly rewrote trust language to require the trustee to immediately sell the subject properties instead of requiring the trustee to restructure the distribution to make an in-kind distribution to minimize tax consequences.

Second, the court improperly considered the interests of the Hudson Trust beneficiaries in interpreting the Boesch Trust.

Third, the court should have removed Mulvihill as trustee and appointed an independent special trustee due to Mulvihill’s conflicted dual trusteeship.

The appellate court agreed with the Museum that in light of a trust provision granting the trustee “sole discretion” to distribute trust property in cash or in kind, the probate court erred in interpreting the trust instrument to require an immediate sale of the subject properties.

Given that Mulvihill never purported to exercise that discretion, the appellate court reversed and remanded the case with directions that, barring any conflict of interest matters that may arise on remand, Mulvihill be instructed to exercise his discretion to grant or deny the Museum’s request for an in-kind distribution of the trust’s property interests.

Generally, the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent is the fair market value of the property at the date of the decedent’s death.

Accordingly, Mulvihill requested an order from the probate court instructing him as to (1) the resolution of the mortgage debt against the subject properties; (2) the manner of distribution to be made to the Museum pursuant to the terms of the Boesch Trust; and (3) an allocation of his attorney fees and costs between the two trusts.

Under section 17200, a trust beneficiary may petition the probate court regarding matters affecting “the internal affairs of the trust.”

Among other powers, the probate court has the authority to determine “questions of construction of a trust instrument” and instruct the trustee.

The primary rule in construction of trusts is the court must, if possible, ascertain and effectuate the intention of the trustor or settlor. The intention of the transferor as expressed in the trust instrument controls the legal effect of the dispositions made in the instrument.

The centerpiece of interpretation, of course, is the language contained in the trust document. One of the axioms is that words are to be taken in their ordinary and grammatical sense, unless a clear intention to the contrary can be ascertained.

Furthermore, the words of an instrument are to receive an interpretation that will give every expression some effect, rather than one that will render any of the expressions inoperative.

All parts of an instrument are to be construed in relation to each other and so as, if possible, to form a consistent whole. If the meaning of any part of an instrument is ambiguous or doubtful, it may be explained by any reference to or recital of that part in another part of the instrument.

Read together, the trust provisions permit the trustee, upon the later of Boesch’s or Hudson’s death, to exercise his discretion to make an in-kind distribution of the trust’s ownership share of the subject properties to the beneficiary in lieu of a direct sale and distribution of proceeds.

In the instant matter, the petition made it clear that Mulvihill never purported to exercise the discretion conferred upon him by the trust instrument to grant or deny the Museum’s request for an in-kind distribution of the trust’s property interests.

Under these circumstances, and in light of the interpretation of the trust instrument, the appropriate response to the petition would have been to instruct Mulvihill to exercise the discretion conferred upon him under the Boesch Trust, consistent with his overall duty to administer the trust according to its terms and applicable law.

The law is settled that a trustee has a duty to administer the trust solely in the interest of the beneficiaries.

Although this duty is frequently invoked as a protection against creating conflicts between a trustee’s fiduciary duties and personal interests, it is also understood to protect against improper influence generally.

Thus, actions by a trustee may be considered improper if they are taken either for the purpose of benefiting a third person (whether or not a party to the transaction) rather than the trust estate or for the purpose of advancing an objective other than the purposes of the trust.

A trustee may be removed in accordance with the trust instrument, by the court on its own motion, or on petition of a settlor, cotrustee, or beneficiary.

 The statutory grounds for removal of a trustee by the probate court include where the trustee fails or declines to act, and for other good cause.

The trial court’s power to remove a trustee is a power that the court should not lightly exercise, and whether or not such action should be taken rests largely in the discretion of the trial court.

Furthermore, the court will not ordinarily remove a trustee appointed by the creator of the trust, and will never remove a trustee named by the settlor for potential conflict of interest but only for demonstrated abuse of power detrimental to the trust.

LESSONS:

1.         Under section 17200, a trust beneficiary may petition the probate court regarding matters affecting “the internal affairs of the trust.”

2          Among other powers, the probate court has the authority to determine “questions of construction of a trust instrument” and instruct the trustee.

3.         The primary rule in construction of trusts is that the court must, if possible, ascertain and effectuate the intention of the trustor or settlor. The intention of the transferor as expressed in the trust instrument controls the legal effect of the dispositions made in the instrument.

4.         The law is settled that a trustee has a duty to administer the trust solely in the interest of the beneficiaries.

5.         A trustee may be removed in accordance with the trust instrument, by the court on its own motion, or on petition of a settlor, cotrustee, or beneficiary.

 6.        The statutory grounds for removal of a trustee by the probate court include where the trustee fails or declines to act, and for other good cause.