It has become more common for trustors to select someone who is not a beneficiary of the trust estate, often a close relative, to serve as trustee. While the “crown” of trusteeship imbues that trustee with tempting powers – including over that mound of “gold” sitting in the trust – it also comes with duties that must be followed. As Uncle Ben cautioned Peter Parker, “With great power comes great responsibility.”
A trustee generally has a duty to remain neutral in a dispute over who is the rightful beneficiary under a trust that involves no attack on the validity or assets of the trust itself. As the courts held in Whittlesey v. Aiello (2002) 104 Cal.App.4th 1221 and Terry v. Conlan (2005) 131 Cal.App.4th 1445, this duty means that a trustee cannot spend from a trust to favor one side over another. But does this duty not to meddle in beneficiary clashes apply even when a trustee is not a beneficiary, with nothing to gain?
In a prior post, we explained how this was one of the questions that Whittlesey and Terry left unresolved. Enter Zahnleuter v. Mueller (2023) 88 Cal.App.5th 1294, an appeal that Downey Brand LLP successfully defended. The Court of Appeal has now held that, yes, the duty to remain neutral applies to all trustees regardless of beneficial interest.
Beneficiaries Clash Over the Validity of a Trust Amendment
Zahnleuter involved a dispute between two sisters, Katherine Zahnleuter and Amy Mueller, over the validity of a trust amendment. Their parents, Joan and Richard Mueller, had created a trust in 2004, which was later amended in 2005. After their mother died, their father amended the trust again in 2017 and 2018.
The last amendment made Katherine and Amy’s uncle, Thomas Mueller, the trustee. The amendment gave Amy a life estate in the family home (the trust’s most valuable asset). The remainder was to be divided equally between Katherine and Amy. This departed from the terms of the prior instruments, under which Katherine and Amy were 50/50 remainder beneficiaries following payment of certain expenses and gifts.
Once Richard died, Katherine received the 2018 amendment, and filed a petition to invalidate it. As trustee, Thomas pursued others’ interests in that litigation, including those of his own two daughters. He claimed that Amy took “precedence” over Katherine and conceded he did not treat the beneficiaries equally, explaining he distributed $135,000 from the trust estate to Amy and $10,000 to each of his two daughters, but not the $100,000 he was “supposed to give Kate” because of what he called the “golden rule” – “he who has the gold rules.”
As it turned out, there were two versions of the 2018 amendment that materially differed, which eventually led the Nevada County Superior Court to invalidate both versions. Thomas was in a thorny predicament. In defending against Katherine’s trust amendment contest, Thomas had spent $201,164.15 on attorney fees from the trust. Katherine therefore filed a petition to surcharge Thomas this entire amount. The Superior Court granted it, reasoning that Thomas was required to act neutrally and not represent the interests of one side over the other.
Appellate Court Agrees Mound of “Gold” Must Be Returned to the Trust
The Third District Court of Appeal agreed. In the process, it filled in hazy contours of the neutrality principle espoused in Whittlesey and Terry.
Thomas had tried to distinguish his quandary from Whittlesey and Terry by arguing he did not have a “beneficial interest” in the trust. The court responded: not so fast. Whittlesey and Terry did not turn on whether the trustee advanced his/her own interests over other beneficiaries, but on whether the litigation involved an attack on the validity or assets of the trust itself. Since the Zahnleuter litigation was a trust amendment contest, Thomas was bound to remain neutral and return the $201,164.15 back to the trust.
The court also rejected Thomas’s attempt to jam himself into an exception recognized in Doolittle v. Exchange Bank (2015) 241 Cal.App.4th 529, which observed “unless the language of a trust provides otherwise, a trustee is bound to deal impartially with all beneficiaries.” The Zahnleuter court explained that neither version of the 2018 amendment directed or authorized Thomas to defend any trust amendment contest.
“Fool’s Gold” – Lessons Learned
Zahnleuter serves as a cautionary tale, particularly for estate planners and trustees.
First, when drafting trust instruments, estate planners would be wise to include an express authorization and directive to defend trust amendments at the trust’s expense. The Zahnleuter court observed that authoritative practice guides recommend such a provision.
Second, trustees should pause before incurring and paying legal expenses from trust assets, and should seek advice from a trust attorney as to the applicable rules. While it may be tempting for a trustee to participate in a dispute between beneficiaries – especially when a pot of gold is available to fund the litigation adventure – the trustee may end up having to reimburse the trust from the trustee’s personal stack of coins and also may lose any entitlement to a trustee’s fee.
For trustees, the true golden rule is one of neutrality.