2010 Cal. App. Lexis 1668 (September 24, 2010)

On October 12, 1996, Sue Weinberger created a trust and executed a quitclaim deed transferring her North Hollywood real property to the trust. The deed to the trust was recorded on October 31, 1996. Sue was initial trustee of the trust and her daughter, Sheila, was named as successor trustee, followed by her daughter’s fiancée, Lee. The trust gave the trustee power to dispose of all assets in the trust without court approval. The trust also provided at Sue’s death for the distribution of the trust assets to Sheila, or if she was not living at the time of final distribution of trust assets, to Lee. If both Sheila and Lee died prior to the final distribution, the trust assets were to be distributed to Sue’s heirs at law. Sue had another child, Robert, whom she expressly excluded from the trust. Until final distribution of trust assets, the trustee was permitted to make distributions for the health, support, maintenance, and education of the beneficiaries.  

Sue died in May of 1997 and thereafter Sheila recorded an Affidavit of Death of Trustor as trustee. After recording the affidavit, Sheila never executed, delivered, or recorded any documents transferring the North Hollywood property out of the trust to herself as the sole trust beneficiary. Sheila died in 2002.  

In 2005, Lee petitioned to probate Sheila’s will. Sheila’s brother filed a contest to Sheila’s will. Thereafter, Lee recorded an Affidavit of Death of Trustor disclosing that Sheila had passed away, and as successor trustee of Sue’s trust, executed and recorded a deed transferring the North Hollywood property to himself.

In 2006, Lee obtained a “reverse mortgage” loan from Pacific Reverse Mortgage Inc. that was secured by a deed of trust against the North Hollywood property. The deed of trust was recorded.  

The probate court denied Lee’s petition to probate Sheila’s will and also denied Robert’s contest of Sheila’s will. Robert then sued Lee, his attorney, and Pacific alleging that: (1) Lee and his attorney had falsely represented that the probate suit would resolve whether the North Hollywood property had passed to Lee; (2) the false representations had been made for the purpose of inducing Robert to delay efforts to enforce his interest in the property; and (3) Lee used this period of delay to extract the equity from the property by way of the reverse mortgage with Pacific. Robert claimed to own the North Hollywood property because the trust made Lee only a contingent remainder beneficiary who would receive the property only if Sheila predeceased Sue, a condition which did not occur. Robert claimed that because this condition had not occurred, the property had passed to Robert as Sheila’s heir at law.

The trial court rejected Robert’s arguments and determined that Lee was the beneficiary of the trust. Robert appealed. On appeal, Robert claimed that the trust assets irrevocably vested in Sheila on Sue’s death under the doctrine of merger. Under the doctrine of merger, when the sole trustee of a trust and the sole beneficiary of a trust become one and the same person, the duties and interests merge and the trust terminates as a matter of law with the trust’s assets irrevocably vesting in the beneficiary.

The California Court of Appeals rejected this argument on the grounds that: (1) Sue’s death did not transfer the real property out of the trust; (2) on Sheila’s death, the real property continued to remain in trust and was later distributed by Lee acting as trustee of the trust to himself; (3) because the trust terms provided for a beneficiary after Sheila’s death, the doctrine of merger was inapplicable; (4) and the trust terms did not require the trustee to make a prompt distribution of trust assets to Sheila upon Sue’s death, and instead included express language governing the contingency of Sheila’s death prior to a distribution of trust assets to her.