Finding multiple breaches of fiduciary duty, a California court orders the trustee of a special needs trust (SNT) to pay a surcharge of more than $92,000. Scott v. McDonald (Cal. Ct. App, 4th, Div. 2, No. E062672, Aug. 22, 2018).

The proceeds of a medical malpractice lawsuit settlement were placed into an SNT to benefit A’Yanna McDonald. The court order establishing the trust in December 2004 appointed Melodie Scott as trustee and nearly $221,500 was deposited into the SNT.

Although the court was to approve biennial accountings, Ms. Scott filed her first accounting in July 2012 along with a petition for settlement and termination of the trust, which had had a balance of $15,574.85 before being distributed to Ms. McDonald’s mother to purchase a home. Ms. Scott reported expenditures from December 2004 up to the filing, listing payments for rent; vacations to Jamaica, London and Hawaii; living expenses, including clothes and long-distance phone bills; vehicle expenses; day and evening care for Ms. McDonald; education; and the final distribution to Ms. McDonald’s mother.  She also requested a $34,229.55 fee.

Ms. McDonald, through her attorney, filed multiple objections to the report, the settlement and termination. She generally claimed that many of the disbursements were not reasonable nor made solely for her benefit, there were no records to support Ms. Scott’s fee request, and there was no court order authorizing the final distribution. Ms. McDonald requested that Ms. Scott be surcharged $259,309.  The trustee opposed all objections.

Evidence established that Ms. Scott never read the trust instrument, nor did she have the proper licensure from January 2009 to May 2011.  Moreover, she paid herself $34,229 in fees without court order and made no showing that Ms. McDonald benefitted from many expenditures, including the vacations and final distribution of funds.  The probate court approved the first report subject to a $93,036 surcharge against Ms. Scott. She appealed the decision, claiming that the court applied the wrong legal standard because she neither abused her discretion nor acted in bad faith, that there was insubstantial evidence that she breached her fiduciary duty, and that the court erred by disallowing her compensation.

The California Court of Appeals, Fourth District, modifies the surcharge to $92,036 and affirms the judgment of the probate court in all other respects. The court concludes that Ms. Scott made multiple disbursements without care or justification and without reference to the trust instrument. In particular, the court finds that disbursements for rent, clothing, several vacations, a new vehicle, and the final distribution were not reasonably necessary to provide for Ms. McDonald’s disabilities, constituting a breach of fiduciary duty. Ms. Scott is not entitled to compensation because of her multiple failures in administering the trust.

To see the court’s full opinion, click here.