Answers to Winter 2008
California Bar Exam Questions

Winter 2008 Bar Question 4

Wills, Trusts

In 2001, Wilma, an elderly widow with full mental capacity, put $1,000,000 into a trust (Trust). The Trust instrument named Wilma’s church (Church) as the beneficiary. Although the Trust instrument did not name a trustee, its terms recited that the trustee has broad powers of administration for the benefit of the beneficiary.

In 2002, Wilma’s sister, Sis, began paying a great deal of attention to Wilma, preventing any other friends or relatives from visiting Wilma. In 2003, Wilma reluctantly executed a properly witnessed will leaving her entire estate to Sis. Following the execution of the will, Wilma and Sis began to develop a genuine fondness for each other, engaging in social events frequently and becoming close friends. In 2005 Wilma wrote a note to herself: “Am glad Sis will benefit from my estate.”

In 2007, Wilma named Sis as trustee of the Trust, which was when Sis found out for the first time about the $1,000,000 in the Trust. Without telling Wilma, Sis wrote across the Trust instrument, “This Trust is revoked,” signing her name as trustee.

Shortly thereafter, Wilma died, survived by her daughter, Dora, who had not spoken to Wilma for twenty years, and by Sis.

Church claims that the Trust is valid and remains in effect. Sis and Dora each claim that each is entitled to Wilma’s entire estate.

1. What arguments should Church make in support of its claim, and what is the likely result? Discuss.

2. What arguments should Sis and Dora make in support of their respective claims, and what is the likely result? Discuss.

Answer question number 2 according to California law.

All questions © 2008 California State Bar Exam. All rights reserved

Wills, Trusts
Question 4, Winter 2008

Does inter vivos trust fail due to lack of a trustee?
An intervivos trust must meet five requirements: trust purpose; assets; beneficiary; trustee and intent. Here, the trust purpose is to benefit the Church; it is funded with $1 million, so it has assets and the Church is the beneficiary. These three requirements are met.
 (bullet)Trustee. In an inter vivos trust—one created during the life of the Settlor—failure to name a trustee shows lack of intent and could cause the trust to fail. Here Wilma created this trust in 2001 while she was still alive, so it is an inter vivos trust. Wilma did not name a trustee for six years, indicating she did not really mean to create a trust.
But Wilma did name a trustee during her lifetime. Since her failure to name a trustee does not settle the matter of Wilma’s intent, the court will look to other evidence of intent.
(bullet)Intent. If the Settlor retains control over the trust assets by not segregating the funds from her personal funds that shows lack of intent and the trust fails. Here, we don’t know whether Wilma separated the $1 million trust assets from her own assets. Furthermore, if the Settlor actively manages the trust assets, this shows lack of intent. Here, Wilma had an inter vivos trust for six years without a trustee. It is possible the trust assets were placed in a passive account. It is also possible Wilma actively managed the investment for the first six years. Since further evidence of Wilma’s intent is absent, we cannot reach a conclusion as to whether the trust succeeded or failed.

If the trust is valid, Church benefits as beneficiary.

If trust is not valid, the trust assets will pass to either:
(bullet)Sis as a gift.  If the Settlor delivers the trust assets to the trustee when she attempts to create the intervivos trust, a court could find an outright gift to the trustee. However, here, we do not know if Wilma delivered the assets to Sis or merely appointed Sis the trustee. If Wilma did not convey the assets to Sis, the gift interpretation would fail. Furthermore, Wilma believed she had created a valid trust for six years before naming Sis as trustee. Because of the time delay, a court would be less likely to interpret naming Sis as trustee as an outright gift to Sis.

(bullet)Resulting trust. Where an attempt to create a trust fails, the court imposes the remedy of resulting trust. In a resulting trust the trust assets are returned to the Settlor, and pass first to the residuary clause of the will, if there is one. If there is no residuary clause, the trust assets pass to the Settlor’s heirs by intestacy. Here, the will does not have a residuary clause, since the entire estate goes to Sis. So the assets will pass by intestate succession. The rule is when a decedent has one child and no other direct descendents, the entire estate passes to the child. Here, Wilma has a daughter, Dora. She will take the $1 million.

If there is a valid trust, did Sis revoke it?
A trust cannot be revoked by the trustee. Here, Sis wrote “revoked” on the face of the trust document. This is ineffective to revoke the trust.

Did Sis mislead Wilma into naming her trustee -- Fraud in the inducement?
Where the trustee assures the Settlor that she will carry out the Settlor’s wishes in order to gain control of the funds but she has no intention of carrying them out, the trustee has secured her position by fraud.

From 2002 – 2003, Sis showered Wilma with attention while isolating Wilma from all other friends and relations. Sis did this in order to gain as Wilma’s beneficiary under the will.

On the one hand, Sis and Wilma grew genuinely fond of each other from 2003 – 2007 when Wilma appointed Sis trustee. Wilma even wrote a note saying she was glad Sis benefited under her estate. This indicates Sis was sincere in her affection for Wilma, once her place in the will was secure. However, there are serious doubts about Sis’s sincerity. First, she gained her position in the will by keeping Wilma isolated from friends and Dora. Sis would have to remain close to Wilma to prevent Wilma from re-establishing those contacts and changing her will. Second, Sis revoked the trust as soon as she learned of it and did not tell Wilma. Sis’s course of conduct indicates Sis was never sincere in her role as Wilma’s confidant.

On the other hand, fraud generally requires the defrauder had the objective to gain at the time of the fraud. Here, Sis did not know about the existence of the trust. It can hardly be said she acted as Wilma’s confidant in order to gain control over a trust that she did not know about.

It is difficult to predict how a court would rule on fraud. Sis’s conduct is consistently deceptive whether her objective was the will or the trust. It would take a narrow reading of fraud to hold that Sis did not have a motive to maintain Wilma’s confidence just because Sis did not know about the existence of the trust.

Therefore, a court would probably find that Wilma appointed Sis trustee as a result of Sis’s fraud, even thought Sis did not know about the existence of the trust.

If no fraud is found, the trust is valid and Church is the beneficiary.

If  fraud were found, there are two remedies:
Void the trust. In this case, the trust assets would pass as a resulting trust, as discussed above, and Dora would take by intestacy.

Constructive trust. Often the best remedy to cure the fraud is a constructive trust. The trust remains valid, and the court orders the defrauder to hold the trust assets to benefit the intended beneficiaries. Here, Sis would hold the trust assets for the benefit of the Church.

Did Sis form the intent to misappropriate the trust assets only after she was named trustee--breach of trust?
Where the trustee commits a breach of trust, the trust remains valid, but beneficiaries can seek to have the trustee removed.

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