Answers to Winter 2010
California Bar Exam Questions

The Writing Edge

Winter 2010 Bar Question 3

Wills and Trusts

Hank and Wendy married, had two children, Aaron and Beth, and subsequently had their marriage dissolved.

One year after dissolution of the marriage, Hank placed all his assets in a valid revocable trust and appointed Trustee. Under the trust, Trustee was to pay all income from the trust to Hank during Hank’s life. Upon Hank’s death, the trust was to terminate and Trustee was to distribute the remaining assets as follows: one-half to Hank’s mother, Mom, if she was then living, and the remainder to Aaron and Beth, in equal shares.

Trustee invested all assets of the trust in commercial real estate, which yielded very high income, but suffered rapidly decreasing market value.

Hank, who had never remarried, died three years after establishing the trust. At the time of his death, the trust was valued at $300,000. Subsequently, it was proved by DNA testing that Hank had another child, Carl, who had been conceived during Hank’s marriage to Wendy, but was born following dissolution of the marriage. Wendy, Carl’s mother, had never told Hank about Carl.

Wendy, Mom, Aaron, Beth, and Carl all claim that he or she is entitled to a portion of the trust assets.

1. At Hank’s death, what claims, if any, do the trust beneficiaries have against Trustee? Discuss.

2. How should the trust assets be distributed? Discuss. Answer this question according to California law.

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Wills and Trusts
Question 3, Winter 2010

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Wills and Trusts
Question 3, Winter 2010

1. Beneficiaries’ rights.
In order for Mom, Aaron and Beth to have rights against the trustee, they must be
trust beneficiaries. There are two possible interpretations. The first is the trust ended on Hank’s death and there are no remainder beneficiaries. The second is the trust continued after Hank’s death and Hank directed distribution of the trust res to Mom, Aaron and Beth as remaindermen.

Supporting the first interpretation are the express words of the trust. Courts strive to give effect to the settlor’s intent. Here, Hank’s express directions were to end the trust on his death and then to distribute the trust assets to Mom, Aaron and Beth. If these direction are followed precisely, the trust ended and the trustee had no further authority over the trust property. Under this interpretation, the trust assets would be placed in a resulting trust and would pass by will or through intestate succession. It would mean that Mom, Aaron and Beth are not remainder beneficiaries and have no rights against the trustee.

Further support for the view that there are no remainder beneficiaries is the fact that Hank’s inter vivos trust is revocable. This means Hank could revoke the trust during his life and Mom, Aaron and Beth have no vested interest in the trust’s remainder.

On the other hand, an argument can be made that Hank intended Mom, Aaron and Beth to take the trust assets after his death. Courts attempt to give effect to the settlor’s intent where his words are not clear. Here, there is no doubt that Hank intended a trust and that the trust is valid.  Furthermore, even though Hank phrased the trust directions inartfully, there is little doubt that Hank intended the trust proceeds to be distributed to Mom, Aaron and Beth. Since courts are primarily motivated to achieve the settlor’s intent, this is the better view. Therefore, Mom, Aaron and Beth are remainder beneficiaries and have rights against the trustee.
Conclusion: Since Mom, Aaron and Beth have rights under the trust, they can raise the following claims against the trustee:

Duty of Prudent Investment—Duty to Diversify
A trustee has a duty to invest the trust assets as a reasonably prudent person would in handling his own affairs. This includes a duty to spread the risks by diversifying investments. Here, the trustee put all the trust property in the same type of high-risk, high reward investment. While initially this yielded a high return, the investment lost money over time. Because the trustee did not vary his investments, the trust lost money. Therefore, Hank violated his duty of prudent investment.

Duty of Impartiality
Where a trust has both life beneficiaries and remainder beneficiaries, the trustee has a duty not to choose investments that favor one type of beneficiary over the other. Here, Hank invested in high-risk real estate that yielded high income for Hank but which ultimately depleted the principle to be distributed the remainder beneficiaries. Therefore, Hank violated his duty of impartiality.

2. Trust distribution.
If Hank died without a will, his property will pass by intestate succession. If, however, the direction in the trust is interpreted as a will substitute, Hank died with a will.

Intestate succession.  Under California’s law of intestate succession, when the decedent has children, the children take the entire estate, per capita. The decedent’s parents, brothers and sisters receive nothing.

Here, Hank has three children. All three children are still alive at Hank’s death so there is no need to analyze who takes the share of a deceased child. The three children will each receive one-third of Hank’s estate. Mom and Wendy would take nothing.

Will substitute.  However, an inter vivos trust is a will substitute, even where the trust does not comply with the formalities of a will. Here, Hank executed a valid inter vivos trust and directed the trust assets be distributed on his death. This is probably a will substitute. In that case, the remainder beneficiaries of the trust will take Hank’s estate.

Conclusion: I believe the court would probably treat the trust as a will substitute. In that case, Carl has the following claim.

Carl omitted heir.
Under the California probate code, a child whose existence the testator is unaware of at the time he writes the will is an omitted heir. This provision applies to wills and to any instruments that have a testamentary effect. Here, the trust directs the trustee to distribute the trust property after Hank’s death. This is testamentary in nature, therefore the probate code’s omitted heir provision applies.

Here, Wendy never told Hank of Carol’s existence. Therefore, Carl would be treated as an omitted heir. Unless the presumption that Carl is an omitted heir is overcome,
There are three exceptions to the omitted-heir presumption:

1. The bulk of the estate is left to the spouse and living children are not provided for. This does not apply because Hank does not have a spouse.
2. The will states the testator does not wish to leave to this child. That is not the case here.
3. The omitted child is provided for by other property. Here Hank left all his property in the trust remainder. Therefore, this exception does not apply either.

Therefore, none of the exceptions apply and Carl will take his intestate share.
As stated above, Carl’s share is one-third of Hank’s estate.

Effect on the trust distribution.
General rule. Where the entire estate passes by will, the omitted heir’s share reduces the shares of all other beneficiaries pro rata. Here, Carl would take one third or 100,000. Mom would take one Hankf of what is left, or $100,000. Aaron and Beth would share the remaining one Hankf, or $50,000 each.

Alternative. However, the code provides for an alternative disposition when the above defeats an obvious purpose of the testator. It could be argued that Hank’s directions indicate he wants to give his mother one Hankf of his estate and he wants his children to share equally. If he had known he had had a third child, he may have directed the trustee to distribute one Hankf Mom and one Hankf to be shared equally to my children. A court may choose this alternative distribution if it appears to achieve the testator’s intent.
In that case, Mom would take one Hankf and the three children would share equally in the other Hankf.

Summary of claims: Distributions under a will and by intestacy are both considered below.

Wendy. She takes nothing by will or under intestacy since their marriage dissolved before Hank executed the trust.

Mom.
By will. Takes one-Hankf of the estate that is left after Carl’s one-third is satisfied.
Alternatively, the court may award Mom one-Hankf of the estate if that better achieves Hank’s intent.
By intestacy. Because Hank died with children, Mom takes nothing.

Aaron.
By will. Aaron takes shares one Hankf of the estate with Beth after Carl’s one-third has been deducted.
Alternatively, Aaron takes one third of one-Hankf of Hank’s estate, sharing equally with the other two children.
By intestacy. Aaron takes one-third along with H’s other two children.

Beth. Same as Aaron, above.

Carl.
By will. Carl is an omitted heir and takes his one-third share of Hank’s estate.
Alternatively, a court may treat Carl equally with the other children, so that Carl takes one third of one-Hankf of Hank’s estate.
By intestacy. Carl takes one-third along with Hank’s other two children.

Analysis and Answers © 2010 Vivian Dempsey, The Writing Edge™ All rights reserved.