KAREN THOMAS v. ROBERT A. GUSTAFSON, as Successor Trustee

Filed 7/6/06

CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

THIRD APPELLATE DISTRICT

(Butte)

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APPEAL from a judgment of the Superior Court of Butte County, Steven J. Howell, J. Affirmed as modified.

Law Office of Stephanie J. Finelli and Stephanie J. Finelli for Plaintiff and Appellant.

Marshall, Burghardt, Mieske & Harp and Ernest S. Mieske for Defendant and Respondent.

Devereaux and Marie Lynch, husband and wife, created the Lynch Family Living Trust.^[1] When Devereaux died, leaving Marie as a surviving spouse, the trust, by its terms, became a survivor's trust and a residual trust. The survivor's trust was composed of Marie's separate property and her share of community property. The residual trust was composed of Devereaux's separate property and his share of the community property. Upon Marie's death, what is left in the survivor's trust (which, as will be explained, will most likely be nothing as it is currently entirely or mostly depleted) will go to Marie's daughter from a prior marriage, Karen Thomas (who is also the trustee of the survivor's trust, Marie's guardian ad litem, and the plaintiff in this case). What is left in the residual trust will go to Devereaux's nieces and nephews (he had no children). While she lives, however, Marie is entitled to support from the income of the survivor's trust and the residual trust. The trust document provided that, if the income of the two trusts is insufficient for Marie's support, the principal of, first, the survivor's trust and, second, the residual trust would be used for her support. The focus of this appeal is on whether Marie is entitled to support from the principal of the residual trust.

Karen petitioned for an order requiring Robert Gustafson, the current trustee of the residual trust, to pay for Marie's support out of the principal of the residual trust. She also sought attorney fees, as well as other relief not relevant to this appeal.

After a court trial, the court concluded that Marie is not entitled to support from the principal of the residual trust because she has other assets (namely, a duplex where she no longer resides) available for her support. Additionally, the court found that Karen used the principal of the survivor's trust to purchase and renovate the duplex. Specifically, the court concluded Gustafson did not abuse his discretion in denying Marie's request for support from the principal of the residual trust. As for Gustafson's fees and costs associated with this proceeding, the court ordered those paid, half and half, from the income and principal of the residual trust. Finally, the trial court denied Karen's request for an award of attorney fees. Karen appeals.

We conclude the trial court properly determined Marie's assets can be considered in determining whether the principal of the residual trust should be invaded for Marie's support. It is not necessary to invade the principal while Marie has other assets from which she can support herself. We also conclude the trial court erred in dividing Gustafson's fees and costs between the income and principal of the residual trust. Since this litigation primarily concerns the principal of the residual trust, the fees and costs must be paid from that principal. Finally, we find no abuse of discretion in the trial court's denial of Karen's request for attorney fees.

FACTS

Marie and Devereaux married in 1986. Karen is Marie's only child. Devereaux had no children, but he had several nieces and nephews from his own siblings and from his prior marriage of 45 years. In 1991, Marie and Devereaux created the Lynch Family Living Trust. They amended it in 1992. The trust provided that upon the death of the first spouse, the trust would split into two trusts: the survivor's trust and the residual trust. The survivor's trust was to consist of the survivor's separate assets and his or her share of community property. The survivor was to be supported first by the income from both trusts, then from the assets of the survivor's trust, and finally, from the assets of the residual trust.

The 1992 amendment to the trust provided, in part, that if Marie survived Devereaux, then on Marie's death, the residual trust would be distributed among various beneficiaries, including Devereaux's nieces and nephews, but not Karen or Karen's heirs. The trial court found that Devereaux wanted to leave his assets to his nieces and nephews, and Marie wanted to leave her assets to Karen.

On August 25, 2000, Karen took Marie to a doctor who opined in writing that due to Marie's dementia, she was unable to make decisions regarding health care or finances. Devereaux died on September 19, 2000. One of his separate property assets was a house in Paradise, California, where he and Marie had been living. Shortly after Devereaux's death, the original trustee of the residual trust sold the house in Paradise. The proceeds from the sale were added to the residual trust, bringing its value to approximately $240,000. The survivor's trust was valued at approximately $114,000. On November 13, 2000, Marie resigned as trustee of the survivor's trust and Karen became the trustee.

Within a year of obtaining the doctor's letter stating Marie was incompetent to manage her finances, Karen, acting as trustee of the survivor's trust, depleted all of the money in the survivor's trust. She bought a duplex in Oakland for $200,000 and renovated it for approximately $100,000. Karen recorded the duplex in her name and Marie's, as joint tenants. Karen testified she spent $105,000 of the trust's $114,000 on the duplex. She spent the remaining funds in the survivor's trust on her mother's needs. On cross-examination, Karen was asked about checks totaling over $10,000. The checks, signed by Karen, were drawn from funds in the survivor's trust, payable to Karen. She could not trace any of them back to particular expenses or renovations. The trial court found that Karen used a substantial portion of the survivor's trust funds for the purchase and renovation of the duplex, and the survivor's trust was entirely or almost entirely depleted.

Karen testified the value of the duplex was $400,000. At the time of trial, Karen was living in the duplex. Marie had lived in the duplex for one year, but then Karen permanently relocated her to a care facility. Marie had living expenses of $3,654 per month. She had income from Social Security of $1,294 per month. Her monthly shortfall was $2,360 per month, or $28,320 per year.

After exhausting the survivor's trust, Karen asked Gustafson to invade the principal of the residual trust to cover Marie's living expenses. He declined to invade principal. He decided that the principal of the residual trust should not be invaded for Marie's support because the principal of the survivor's trust had simply been transferred out or gifted away but was still available for Marie's support.

The trial court found that the trust language gave Gustafson discretion to determine (1) whether the income from the survivor's trust and the residual trust is sufficient to provide for Marie's needs or (2) whether it is necessary for Marie's maintenance to invade the principal of the residual trust. The court considered Marie's assets relevant to the income she requires for her support. Specifically, if Marie owns a house that she cannot use as her own residence, that house could be sold to provide for her support. The court found that Gustafson did not abuse his discretion in refusing to invade the residual trust for Marie's support.

The court ordered half of Gustafson's attorney fees and a Kinko's bill of $630.08 to be paid from the income of the residual trust and the other half from the principal of the residual trust. The Kinko's bill was an expense for photocopying the file of a prior attorney for the residual trust. The court denied Karen's request that a portion of her attorney fees be paid from the residual trust.

DISCUSSION

I

Provision for Invasion of Principal

Karen contends that, under the plain language of the trust documents, once the survivor's trust was depleted, Marie was entitled to invade the principal of the residual trust for her support. We disagree.

Article V, paragraph B, of the Lynch Family Living Trust provides: â€