If you have established a trust, such as a revocable living trust, you may have encountered the same issue as the California Court of Appeals in Presta v. Tepper (179 Cal. App. 4th 909 (2009)): what, exactly, is a trust?
In Presta, two men, Mr. Presta and Mr. Tepper, were real estate investment partners. For two of their partnerships, they entered into partnership agreements not in their individual capacities but as trustees of trusts they had created. (For example, “Robert Tepper, as trustee of The Tepper Family Trust of 1982 u/d/t December 10, 1982.”) The partnership agreements provided that in the event one partner died, the partnership must buy the deceased partner’s interest in the partnership. Mr. Tepper died, but his trust continued after his death. So, the question arose: had the partner died?
To decide this, the Presta Court looked at the nature of a trust. While Mr. Tepper’s widow argued that the trusts in question were legal entities (i.e., no partner had died), the Court disagreed. According to the Court, in a case of an “ordinary express trust” such as the ones Mr. Tepper created, the trust is not a legal entity but a relationship, where the trustee holds property (in this case, a partnership interest) for the benefit of others. Put another way, “an ordinary express trust is not an entity separate from its trustees …”, wrote the Court (179 Cal. App. 4th at 914). So, Mr. Tepper’s death meant the death of a partner.
The issue illustrated by Presta is important, and ripe for disputes. Many agreements have buy-sell provisions triggered by a party’s death. And other sorts of provisions can create similar confusion. For example, are restrictions on assignment applicable to the replacement of a trustee?
One wonders whether Presta might have been decided differently under slightly different circumstances. For example, if Mr. Tepper’s accountant had become trustee (for whatever reason) and then died, would the Court still have found that the trustee’s death triggered the sale-on-death provision?
All of this illustrates the importance of considering the impact of the trust vehicle on any agreement to which a trustee signs his or her name. To avoid a problem similar to that faced in Presta, provisions where uncertainty concerning trusts may lead to unintended consequences should be very carefully drafted to reach the outcome expected by the parties involved.
Scott M. Toussaint, Real Estate Group