Trustee is a beneficiary--self-interest?

[msbliss]

California--

My mother died last October. Her live-in partner of 14 years is the trustee and a beneficiary of a "lifetime income." My brother and I are the beneficiaries after he dies.

We're having problems because the Trustee broke our handshake-agreement & hasn't kept us informed about MAJOR decisions. We found out he's liquidated half of our $630k estate. This week, my brother & I called for an annual accounting (as per the trust) and the trustee didn't bring the checkbook or records of any kind. We're concerned about a few things. Here are the 2 biggies:

1) The trustee's explanation of how his "lifetime income" is calculated doesn't match what my mom told me before she died. Here's the paragraph in question if anyone wants to try to explain it to me:

"income for his lifetime ( a life estate) genergated by the investment of the remaninder equities in my estate following the settlement of my estate. As part of his liftime income (life estate) he may have the trustee acquire a property he wishes to reside in and thereby forgo that portion of income generated from the estate in the same amount as needed to pay for housing for himself. This income for his ifetime shall be distributed to my companion (name deleted.)"

The trustee paid off the house he is living in, so that he may live rent-free, as per the above paragaraph. I don't understand what other money his is entitled to. What is the "forgo..."part about?

2) My mom's estate was invested in 2 houses, which were gaining equity for my brother & my future. The trustee liquidated one and invested $90k in an interest-bearing note. He gets the interest on the note, we lost our equity. This seems like self-dealing to us.

Any help appreciated.

 

[loku]

The paragraph you quote gives the trustee the power to invest the property as s/he sees fit (there is a legal restriction that the investments be reasonable and must reasonably preserve the principal in the trust). That means that the trustee had the power to sell the house and invest the proceeds of the sale in an interest-bearing note. Under the life estate, he does get the interest from the note, but you do not lose your equity. At his death you get the note.

As for paying off the house, as you said it was allowed in the clause you quoted, but only up to the extent of the income that he would have been entitled to under the trust. To put it another way, he could use part of the income from the trust that he was entitled to receive to purchase a house to live in. I am not sure, but it sounds like the property would be a trust asset and that it would go to you at his death. “Forgo” income, meant that for example, if the trust has $50,000 income in 2001, and $20,000 of that income was used by the trustee to pay for his house, then he would only get a distribution of the remaining $30,000 for that year.

So far, it looks like you have no case, but there is one possibility I can see, and that is that the trustee can not handle the trust so as to maximize income at the expense of capital appreciation, and he may have done that by selling real estate, which was appreciating, and purchasing a note that presumably is not. It is self-dealing in this case as you said.

It may very well be worth the fee to engage an attorney with a specialty in trusts in California to evaluate this. There may be a lot of change that can be done.

 

[msbliss]

Still CA...

Thanks for taking the time out of your day to reply.

Sounds like you interpret the trust the same way I do, although I'm still a little unsure of how the math works.

Here's the point of disagreement between the trustee and I. Can you see one of us being more correct? I understand that you're not my lawyer, but if you could give me your take on it, that would be helpful.

Trustee's interpretation of the "forgo" part:
He says that since the house he is living in is no longer earning profits (because he lives there rent-free) that he is already forgoing income on that portion of the estate (the house.) And that he is entitled to 100% of whatever profits the trust makes on everything else.

An mathamatical example for his case would be:
$20,000 non-cash income in the form of free rent
+$15,000 cash income earned on the remaining investments.
= $35,000 per year (part rent/part cash)

My interpretation of the "forgo" part:
That the house he lives in is no longer profitable is irrelevant, and that an amount "same as needed to pay for housing for himself" should be deducted from whatever profits the trust makes on everything else.

A mathamatical example of my case would be:
$20,000 non-cash income in the form of rent
+$15,000 cash income earned on the remaining investments
-$20,000 forgone
= $0 per year, unless the cash income earned on the remaining investments is a sum greater than an amount "same as needed to pay for housing for himself," in which case, he would have 100% of any extra income.

Realistically speaking, the house he bought with the trust was not making income, even if we had renters at $20k. The house had a mortgage and the usual bills. So by taking the house option with his math, he is getting $20k worth of benefit every year, instead of what would have been a couple thousand, if any.

Does this make any sense to you or am I in left-field with a wrong interpretation? I'm not exactly neutral, because my interpretation of the trust is founded in what my mom explained to me over several conversations before she died. It's also possible that she changed her mind in the days right before she died, after our conversations months earlier. The trust was written in a hurry, 3 days before she died, by her partner, although that paragraph was written by my mom in her will 12 days before she died, while she was still lucid.

Again, I'm most appreciative of your time. Thank you.

 

[loku]

I want to make it clear that I am not a specialist in interpretation of trusts and so my opinion is not authoritative.

However, in my opinion, the real problem is in the poor language of the clause in question: it is somewhat ambiguous. When I first read the language and before I knew what the issue was in your case, I interpreted it the way the trustee interpreted it to you.

Also, when interpreting the clause, remember that it calls attention to the life estate, which was in the income from the trust. The life estate consisted in all the income from the trust. That means that none of the income was to go to the trust for your future benefit. That is the essence of a life estate. The owner of a life estate gets all the benefits from the property for his/her life, then the reversionary beneficiaries get the title.

I have to agree with the trustee on this issue, but remember, I think the purchase of a note MAY be self-serving in that it may be held to be of benefit to the income holder at the expense of any appreciation of capital, which is prohibited under the California Code.