Two separate lawsuits have been filed in San Francisco Superior Court, involving two trusts set up by U.S. Sen. Dianne Feinstein’s (D-Calif.) and her late husband Richard Blum. Both actions were filed by Feinstein’s daughter, Katherine Feinstein, on her mother’s behalf. The move has raised additional questions about the 90-year-old senator’s health and capacity to hold office, as she’s still facing complication from her bout with shingles and encephalitis earlier this year.
According to the San Francisco Chronicle, both trusts, which hold only a small portion of the couple’s vast wealth, were set up so that in the event Richard predeceased Feinstein, she would receive all income from the remaining community property assets during her lifetime (her share of the community property would flow into her own separate trust after Blum’s death), with any remaining assets after her death primarily going to Richard’s daughters.
The most recent lawsuit alleges that the individuals serving as trustees of Richard Blum’s trust aren’t making the necessary distributions to reimburse Feinstein for her medical expenses. Additionally, the lawsuit argues that the trustees, Mark Klein, Richard’s former long-time attorney, and Marc Scholvinck, who was chief financial officer at Richard’s private equity firm, weren’t named in the 1996 Marital Trust at issue and therefore were improperly appointed. Instead, the petition is asking the court to appoint Katherine as successor trustee of the trust, which holds proceeds of a life insurance policy on Blum’s life.
According to the Los Angeles Times, an attorney for Klein and Scholvinck has stated that the trust has never denied any disbursements to Feinstein and that his clients remain hopeful that the lawsuit is simply a misunderstanding rather than “a stepdaughter engaging in some kind of misguided attempt to gain control over trust assets to which she is not entitled.” He also questions why a sitting senator would need someone to have power of attorney over her and notes that he hasn’t been shown any evidence of Katherine being granted such power.
“While Feinstein’s request on its face may be justified under the terms of the trust, it should probably be denied by neutral trustees on the basis that Feinstein has sufficient assets and doesn’t need it,” opined Marc M. Stern, partner at Greenberg Glusker in Los Angeles.
Stinson Beach House
In a separate lawsuit last month, involving a trust that holds three homes and various bank accounts, Katherine accuses Klein (who became co-trustee with Feinstein after Richard’s death) of refusing to execute the necessary steps to allow Feinstein to sell a Stinson Beach home that she owned with Richard. Per the Los Angeles Times, she alleges that Richard’s daughters want to make use of the home at Feinstein’s expense. According to the complaint, Feinstein, on the other hand, doesn’t want to pay for half the property’s carrying costs and desires to sell the property as soon as possible to take advantage of the prime selling season. California law also requires trustees to make trust property productive; the petition claims that the Stinson Beach property is currently unproductive, and that significant expenditure would be required to make it productive.
Can Disputes Be Prevented?
One of the purposes of using trusts to pass down assets is often to retain privacy, especially when prominent or famous individuals are involved. That purpose gets circumvented, however, when things don’t go according to plan, and the family turns to the courts to resolve their disputes. Estate planning and dividing assets among children can often be contentious, but matters are particularly more complicated when blended families are involved.
In this case, Feinstein and her daughter’s interests are likely at odds with Richard’s daughters from his first marriage. For example, the daughters want to maximize principal growth while it’s in Feinstein’s (and Katherine’s) best interest to generate as much distributable income from the assets during her lifetime as possible.
It can’t be reiterated enough the importance of having conversations about who gets what while a client is still alive. “Clear and unambiguous directions in the testator/settlor’s estate planning documents can also help avoid disputes,” said Stern. “However, clear directions can also breed their own disputes when the expected circumstances don’t materialize and there’s no flexibility to deal with unanticipated events.” In this situation, for example, perhaps some of the tension could have been avoided if Richard stipulated for the sale of the property and distribution of the proceeds in equal shares rather than leaving it as a trust asset.
One solution to settle a dispute of this nature, according to Stern, is to convert the income interest in the trust for the surviving spouse to a unitrust under California law (Probate Code Section 16336.4). “Whereas under a ‘traditional’ trust there are competing desires for income and principal growth, a unitrust aligns the interests of the income and remainder beneficiaries. Under a unitrust, income is measured as a fixed percentage of the trust’s assets revalued annually,” explained Stern.
“By using a unitrust, both the income beneficiary and the remainder beneficiary have the same goal: to maximize the trust’s total return, regardless of whether that return would traditionally be considered income or principal. Maximizing the value of the trust not only generates more income for the unitrust income beneficiary but also maximizes the principal value for the remainder beneficiary,” he added.
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