Fresno Lawyer – Randolf Krbechek

Trusts have been employed in the English legal system for hundreds of years.  In 1979, Prof. R.H. Hehnholz reviewed court records to examine the early history of trusts.

Prof. Hehnholz started by noting, “As a means of avoiding feudal incidents and of evading the common law rule prohibiting devises of freehold land, the feoffment to uses, ancestor of the modem trust, enjoyed a popularity at least from the reign of Edward I (1327-1377).”

The question is, How were they enforced?  “Enforcement of the feoffor’s directions, however, long posed a problem.  What of the feoffee who refused to carry out those directions after the feoffor’s death?”

“How can so important and so widespread an institution have existed without legal sanction?  Can its effectiveness really have rested solely on the conscience and good sense of the feoffees prior to the time the Chancellor began to intervene? This seems implausible.”

Jurisdiction over decedent’s estates was, in the early years, an ecclesiastical matter.  “As is well known, the English Church exercised probate jurisdiction throughout the Middle Ages, and even afterwards.  One of the responsibilities attendant upon that jurisdiction, in the eyes of the men who exercised it, was the duty to secure a person’s final wishes.”

“In an age when the grant of land need not have been by deed, and in which the Church courts would enforce the wishes of a dying man with no requirement of a testamentary writing, there was inevitably much room for uncertainty and disagreement.”

Prof. Hehnholz finds that the historical record reflects the long-standing enforcement of the use.  “In fact, good evidence to support the suggestion does exist: the court records from the ecclesiastical courts of the dioceses of Canterbury and Rochester contain many cases involving feoffments to uses.  The records are in manuscript.  They are hard to read, and often difficult to interpret.”

Humorous aside: G.R. Elton has described these early court records as “among the more strikingly repulsive of all the relics of the past.”  G. ELTON, ENGLAND, 1200-1600, at 105 (1969).

Prof. Hehnholz explains that “the records furnish the best test of the actual scope of the Church’s jurisdiction, and although they do not allow for absolutely confident generalization, they tend to prove that some English Church courts regularly enforced feoffments to uses.”

“For example, in a suit brought at Canterbury in 1416, the Act book records that ‘the aforesaid Henry was ordered to restore the three virgates of woodland’ . . . The records unfortunately supply no evidence on what remedies the Church courts offered in more complicated cases, if indeed any was available . . . Nor is there any sign of the recovery of money damages from defaulting feoffees.  So far as the records reveal, an order for specific performance was the sole remedy available.”

Violation of the church order meant that “they were excommunicated.  What action they had to take to have the sentence lifted, and whether or not they took it, unfortunately does not appear in the surviving records.”

However, the evidence is limited.  “The fact that all the evidence comes from the two English dioceses that lay within the county of Kent is undeniably troublesome.  The pre-eminent influence there of the archbishop of Canterbury, not only England’s most powerful churchman but also a powerful secular landlord within the county, suggests at least the possibility of a special place for the Church courts in his diocese.  Not every man would question the rights of an archbishop who happened also to be his lord.”

As time passed, the enforcement of the use/trust shifted to courts administered by the crown (as opposed to courts administered by the church).  “Cases involving feoffnents to uses cease to appear in the court records after the middle third of the fifteenth century.  The last unambiguous example found comes from 1465 . . . By that date, of course, the jurisdiction of Chancery over uses had been established.”

And, of course, there were lobbyists 500 years ago.  “The Statute of Uses (1536), was passed specifically to put an end to these evasions of the common law.  The ability to devise lands was quickly restored, because of pressure from the land-owning classes, in the Statute of Wills (1540).”

R. H. Hehnholz, The Early Enforcement of Uses, in 79 Columbia Law Review 1503 (1979)

The California Supreme Court recently considered when a transfer of ownership occurs in the context of an estate planning trust.  The dispute arose in under Proposition 13, which sets the rules for property tax reassessment.

According to the court, “When Helfrick died, the residence’s assessed value for tax purposes was $96,638, with total taxes due of $1,105.  Upon her death, defendant County of Los Angeles reassessed the residence and increased its valuation for tax purposes to $499,000.  For the next three tax years, the County sent property tax bills of, respectively, $5,492, $5,764, and $6,245.”

That’s the dispute – do the property taxes increase by 500% upon the owner’s death?  Stated the court, “The starting point for our conclusion lies in the fact that, during her lifetime, Helfrick transferred the residence to a trust of which she was the sole present beneficiary and as to which she held the power to revoke.”

The court explained that “under general principles of trust law, trust beneficiaries . . . are regarded as the real owners of that property . . . Moreover, property transferred to, or held in, a revocable inter vivos trust is deemed the property of the settlor.”

The court cited to a legislative task force, which had explained that:  “Revocable living trusts are merely a substitute for a will.  The gifts over to persons other than the trustor are contingent; the trust can be revoked or those beneficiaries may predecease the trustor.”

According to the court, “although transferring legal title to the residence to herself as trustee, Helfrick, as sole trust beneficiary and holder of the revocation power, continued to hold the entire equitable estate personally and effectively retained full ownership of the residence.”

It’s a relief to see such a clear statement from the California Supreme Court.  A living trust is established for estate planning purposes as a will substitute.  Such a trust can be amended or revoked by the trustor (i.e., the property owner) during the his or her lifetime, just like a will.  In the court’s explanation, “Any interest that beneficiaries of a revocable trust have in trust property is ‘merely potential’ and can evaporate in a moment at the whim of the settlor.”

What happens to the property after death?  At this point, the trust cannot be modified.  “Upon Helfrick’s death, the trust became irrevocable and the entire equitable estate in the residence, which Helfrick had personally held during her lifetime, transferred from Helfrick to Steinhart and her siblings (or their issue) as beneficiaries of the irrevocable trust.”

The same thing with a will – the instrument becomes permanent at death, and the property passes to the persons named as the beneficiaries.  Here’s the point at which the court had to make a slight leap.

With a will, Probate Code section 7000 states that, “title to a decedent’s property passes on the decedent’s death to the person to whom it is devised in the decedent’s last will.”  However, there is no statutory counterpart in California’s trust laws.  Hence, the court filled the gap by holding that, “upon [the] settlor’s death, [the] trust became irrevocable and the full beneficial interests in the property transferred to the residual beneficiaries of the trust.”

Thus, during her lifetime, “Helfrick personally held the entire equitable estate in the residence and was regarded as the residence’s real owner.  Under the terms of the trust, upon her death, Helfrick transferred not just a life estate, but the entire fee interest – i.e., the full bundle of rights – to, collectively, Steinhart and her siblings (or their issue) . . . Helfrick, who was the sole beneficial owner of the residence before her death, retained no interest in the residence after her death.”

In the case before the court, the decedent left a life estate to one heir, with the remainder interest passing to certain siblings.  The life estate tenant claimed that the property was not subject to reappraisal until her death.  The court disagreed:  “That circumstance does not alter the fact that, upon Helfrick’s death, the entire equitable estate in the residence was transferred from Helfrick to, collectively, Steinhart and her siblings (or their issue) as beneficiaries of the irrevocable trust . . . This transfer constituted a ‘change in ownership’ within the [meaning of Proposition 13].”

The holding is not surprising but again reflects the legal tensions that arise from the use of a trust agreement as a substitute for a will.

Steinhart v. County of Los Angeles, 2010 DJDAR 1913 (Feb. 5, 2010)

Legal scholar John Langbein addresses a question that has been on my mind – When did trust agreements evolve from classic fiduciary relationships into will substitutes?

The answer is – a long time ago.  Explains Prof. Langbein, “Trust law is an ancient field.  The enforcement of trusts in the English court of Chancery can be traced back to the late fourteenth century, and there is some indication that the courts of the English church may have been enforcing trusts even earlier.”

Trusts have long been used to circumvent probate administration.  Thus, “The trust originated as a device for transferring real property[.]  Trust conveyancing allowed an owner to escape the medieval rule, which lasted into the seventeenth century, that freehold land was not devisable.”

Stop right there.  Land in the feudal English system could not be conveyed by will, which restriction lasted into the 1600s.  Instead, “land that was transferred on death had to descend by intestacy rather than pass by will.”

Such transfers were subject to many restrictions.  “A widow was restricted to the one-third life estate called dower; primogeniture awarded the entire remaining estate to the eldest male heir if any; transfer taxes known as feudal incidents were exacted when an heir succeeded to an ancestor’s estate; and minors and unmarried females suffered further disadvantages in heirship.”

For this reason, attorneys several hundred years ago employed a trust to evade the limitations established by law.  Prof. Langbein notes that, “Trust conveyancing deftly evaded this medieval law of succession.  The owner of land, the person whom we now call the settlor, would transfer the land to a trustee or trustees, who were commonly relatives or gentlemen friends, subject to trust terms that functioned like a will.”

Of course, the trust only works if some court will enforce it after the settlor’s death, which was the early purview of the ecclesiastical courts.   “There is nothing novel [ ] about our modern understanding that a trust can function as a will substitute.  What is new is that the characteristic trust asset has ceased to be ancestral land and has become instead a portfolio of marketable securities.  Long into the nineteenth century, the trust was still primarily a branch of the law of conveyancing, that is, the law of real property . . . The modern trust, by contrast, is primarily a management device for assembling and administering a portfolio of financial assets . . . as the predominant form of personal wealth.”

“Why Did Trust Law Become Statute Law in the United States?” by  Prof. John H. Langbein (Yale University) Ala. Law Rev. Vol. 58:5, page 1069 (2007)

A second recent opinion reinforces the fundamental rule that an inter-vivos revocable trust is not an entity separate from the trustee.  In Presta v. Tepper, 2009 DJDAR 16603 (Nov. 27, 2009), the court provided the following analysis:

“Two men enter into a real estate investment partnership, each acting in his capacity of trustee of a family trust.  The question is: who are the ‘partners,’ the men, or the trusts?

“The answer is ‘the men.’  A trust of the type formed by both men in this case is simply a fiduciary relationship, governed by the Probate Code, by which one person or entity owns and controls property for the benefit of another.  Such a trust is not an entity separate from its trustee, and cannot independently do anything – it cannot sue or be sued; it cannot enter into agreements; and it cannot fulfill the fiduciary duties of a partner.”

Oh boy.  You can’t say it much more clearly than that.

The litigation followed the death of one of the partners.  The partnership was formed by Ronald and Robert, each of whom signed the partnership agreement on behalf of his respective estate planning trust.  The court made short order of the argument that the trust, not the individual, was the partner.  Said the court.

“We have no trouble concluding, as a matter of law, that it was they, and not their respective ‘trusts,’ who were the partners in the two agreements at issue herein.

“The fundamental flaw in Renee’s argument is that it assumes a trust is an entity, like a corporation, which is capable of entering into a business relationship such as a partnership.  It is not.  It has long been established under California law that an express trust of the type created by Presta and Tepper is merely a relationship by which one person or entity holds property for the benefit of some other person or entity:  A trust is any arrangement which exists whereby property is transferred with an intention that it be held and administered by the transferee (trustee) for the benefit of another.”

The court further explained that the tax status of the trusts did not change its analysis in one iota.  True, the trust had its own taxpayer identification number and true again, the trust was required to report income and file a tax return.  Yet, the court sliced to the heart of the matter, explaining that:

“The tax status of these trusts is nothing more than a reflection of their essential purpose:  to establish a special category of property ownership by which the property is divided between the trustee who holds record title and controls it, and those who are entitled to receive its benefits.

“The fact that the taxing authorities chose to create a separate category for assessing the tax liabilities associated with such properties suggests nothing more than a determination that there are tax liabilities associated with such properties – and that since neither the trustee nor the beneficiaries owns the entirety of the trust property, those liabilities cannot simply be assigned to either of those in their individual capacities.  Nothing in that determination changes the nature of such trust relationships, nor conveys ‘entity’ status upon them.”

Hooray for the court, which got it right on all points.  The popular revocable estate planning trust is not an entity, it is a relationship.  (Of course, the trust also partakes of contract, but many obligations arise outside of the contract.)

A pair of decisions from last month reinforce the fundamental rule that an inter-vivos revocable trust is not an entity separate from the trustee.  The first opinion, 1680 Property Trust v. Newman Trust, 2009 DJDAR 16161 (Nov. 17, 2009) states the rule with elegant simplicity, to wit:

“Unlike a corporation, a trust is not a legal entity.  Legal title to property owned by a trust is held by the trustee.  A trust is simply a collection of assets and liabilities.  As such, it has no capacity to sue or be sued, or to defend an action.”

In 1680 Property Trust, it was alleged that the trustee had made fraudulent statements.  The trustee had died more than one year before the lawsuit was filed.  California law provides that an action against the decedent must be filed within one year from the date of death.  (The one-year rule applies to claims that existed as of the date of death.  If the claim arises subsequent to death, then an action can be filed after the general one-year period.)

To circumvent the application of the one-year rule, plaintiff sought to sue the trust itself.  The court held that there were no such claims against the trust, only claims against the trustee.  And, because the trustee had died more than one year before the lawsuit was filed, the action was barred.

Explained that the court, “It appears that whatever its form, the substance of the claims in this case is for the personal misconduct of the settlor/trustee on behalf of and for the benefit of the trust, that was completed entirely before the settlor/trustee died, and for which the settlor/trustee could have been held personally liable.  The action is one that could have been ‘brought on a liability of the person’ (Code of Civil Procedure section  366.2, subd. (a)), and is based ‘on a debt of the decedent’ even though brought against the successor trustee . . . Section 366.2 was intended to impose a time limit on such claims, regardless of whom the action was brought against.  Accordingly, the claims against Newman Trust are barred by section 366.2.”

Let’s say that again so we all understand it:  An estate planning trust is a legal fiction.  It is not an entity.  Period.  The trust has no separate existence, no matter what promises may be peddled by asset-protection salesman.  For all intents and purposes, the trust and the trustee are identical.

A decision handed down this month involved an all-too-common situation.  In King v.  Johnson, 2009 DJDAR 15871 (Nov. 9, 2009), the husband provided for a testamentary trust.  After the husband’s death in 1991, his widow became the trustee.  The widow later suffered from declining health.  One of the daughters was apparently close to her mother.  The daughter influenced the widow to transfer property out of the trust.

Stop me if this story sounds familiar.  The widow also took out a personal loan secured by the property she transferred out of trust.  When the loan went into delinquency, the lender foreclosed and took title to the property.  Not surprisingly, the daughter benefitted from this arrangement, as she inherited 100% of the widow’s separate property, but held only a 30% interest in the former trust property.

Another child, who was also a beneficiary under the trust, brought an action against daughter based on these facts.  The trial court found that “[daughter] actively participated in [widow’s] breaches of fiduciary duty . . . Specifically, the court found that [daughter] was involved in the transactions that resulted in [widow] transferring property out of the trust without consideration at a time when [widow] was in failing physical and mental health, and that [daughter] exercised undue influence over [widow] with regard to these transactions.”

However, the trial court found that plaintiff lacked standing, because a successor trustee had been appointed.  On appeal, the decision was reversed in favor of the aggrieved beneficiary.

The appellate court explained that, “As a general rule, the trustee is the real party in interest with standing to sue and defend on the trust’s behalf.  Conversely, a trust beneficiary cannot sue in the name of the trust.”

This rule did not preclude the action against the daughter.  Thus, “a trust beneficiary can bring a proceeding against a trustee for breach of trust.  Moreover, it is well established [ ] that a trust beneficiary can pursue a cause of action against a third party who actively participates in or knowingly benefits from a trustee’s breach of trust.”

In this case, a successor trustee had taken office, and he had not sued daughter for her wrongful acts.  The court expressly held that “a beneficiary may bring a claim against a third party who participated in a trustee’s breach of trust, despite the appointment of a successor trustee.”

Explained the court, “Ordinarily, when a third party acts to further his or her own economic interests by participating with a trustee in such a breach of trust, the beneficiary will bring suit against both the trustee and the third party.

“However, it is not necessary to join the trustee in the suit, because primarily it is the beneficiaries who are wronged and who are entitled to sue.  The liability of the third party is to the beneficiaries, rather than to the trustee, and the right of the beneficiaries against the third party is a direct right and not one that is derivative through the trustee.”

Even more, the court held that “evidence of a conspiracy is [not] required in order to hold a third party liable for participating in or benefitting from a trustee’s breach of trust . . . Although the trial court in this case determined that [plaintiff] had not proved the existence of an actual conspiracy between [widow] and [daughter], this is of no consequence to [the beneficiary’s] standing to bring a claim against [daughter] for [her] role as a third-party participant in [widow’s] breach of trust.”

The court also addressed the liability of the daughter for her conduct as de facto trustee after her mother’s death.  During this period, the daughter collected rents for which she did not account.  This conduct also gave rise to a claim against the daughter.

Explained the court, “a trustee de son tort [is] a person who is treated as a trustee because of his wrongdoing with respect to property entrusted to him or over which he exercised authority which he lacked.”

Added the court, “It is a well settled rule in the law of trusts that if a person not being in fact a trustee acts as such by mistake or intentionally, he thereby becomes a trustee de son tort . .  A person may become a trustee by construction, by intermeddling with and assuming the management of property without authority.

“Such persons are trustees de son tort just as persons who  assume to deal with a deceased person’s estate without authority are administrators de son tort.  During the possession and management by such constructive trustees they are subject to the same rules and remedies as other trustees.”

Proof yet again that trusts can be a hotbed for litigation.  The lack of court supervision over an estate can lead family members to take advantage of the situation.  This court drew a firm line against such wrongful conduct.