Law School Case Brief
Terry v. Conlan - 131 Cal. App. 4th 1445, 33 Cal. Rptr. 3d 603 (2005)
Among the ordinary powers and duties of a trustee of a private trust are those of doing all acts necessary and expedient to collect, conserve and protect the property of the trust, to maintain and defend the integrity of the trust for the benefit of the beneficiaries, and to employ such assistants as may be necessary for said purposes. If litigation is necessary for the preservation of the trust, the trustee is entitled to reimbursement for his or her expenditures from the trust; however, if the litigation is specifically for the benefit of the trustee, the trustee must bear his or her own costs incurred, and is not entitled to reimbursement from the trust.
In consolidated appeals of a dispute over the validity of two competing trust instruments, appellant Garth Conlan's widow, Ione N. Conlan, challenged judgments of the Superior Court of Santa Clara County (California), which enforced a settlement agreement between Ione and respondents, Garth's three adult children from a previous marriage, and which permitted the trustee, one of the children, to use trust income to pay attorney fees she had incurred in asserting the children's position. Ione asserted that a material term of the settlement agreement was that the trust would be a Qualified Terminable Interest Property (QTIP) Trust under I.R.C. § 2056(b)(7)(B).
Was the trustee entitled to reimbursement of her litigation costs from the trust?
In finding error in the trial court's judgment on the settlement, the court held that the parties and the trial court clearly contemplated the creation of a QTIP to maximize the tax benefits to Ione. The creation of a QTIP was a material term of the agreement and was not a part of the court-approved trust. Although the parties agreed to the goals of the settlement, they did not agree to the means of achieving the goals, which were material to the settlement because they had a significant financial impact on the parties. The failure to agree to the material means to achieve the goal of the settlement demonstrated the settlement's unenforceability. The court concluded that the trustee had to bear her own litigation costs, rather than be reimbursed from the trust, because she had not participated in the litigation as a neutral trustee to defend the trust and protect its assets; instead, she had consistently pursued her own interests and those of her siblings, to the detriment of the widow.
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