Hi, my name is John T. Anderson. Welcome to my blog! I have been practicing law in California since 1975 and have been the Chairman of the Estate Planning and Probate Section of the Long Beach Bar Association since the mid-1980s. I'm also certified by the State Bar of California Board of Legal Specialization as a specialist in Estate Planning, Trust and Probate Law. On this blog, you will find articles written by me regarding estate planning and probate in California. Many of these articles address recent changes in the law and summaries of the Long Beach Bar Association’s Estate Planning and Probate Section meetings. I hope that you find these articles helpful. If you would like more information about me or my law office, please visit my website at or contact my office at 562.424.8619.

Friday, December 4, 2009

Partnerships Involving Living Trusts: Who Are the Partners?

Probate, Trust and Estate Planning Tidbits.
by John T. Anderson, Chairman
Certified Specialist in Estate Planning, Trust
and Probate Law by the State Bar of California,
Board of Legal Specialization

Partnerships Involving Living Trusts: Who Are the Partners?

NOTE: Darciann Horton, our Long Beach Probate Attorney,  has changed her office hours in Long Beach. They will now be Wednesday from 10-12 and Thursday from 1-3.

Presta v. Tepper (2009) G040427 deals with the issue of terms of a Buy-Sell Agreement which require the sale by deceased partner’s estate to the surviving partner upon the death of a partner.  One-half of the partnership is held in one partner’s trust and one-half was held in the other partner’s trust.  One of the men, Tepper, died.  His surviving spouse agreed to sell to Presta, her husband’s interest in a partnership held in his individual name but refused to sell the interest in other partnerships held in her husband’s trust.  Her position was that the Trust was the partner of the latter partnership and thus there was no death of a partner which would require a sale.

The trial court ruled in favor of plaintiff, Presta, finding a partner had died and a sale was required under the Buy-Sell Agreement.  The Appeals Court affirmed the decision of the trial court.  The opening paragraph of the Appeals Court decision said all that needed to be said:

Two men enter into a real estate investment partnership, each acting in his capacity of trustee of a family trust.  The question is: who are the “partners,” the men, or the trusts?  The answer is “the men.”  A trust of the type formed by both men in this case is simply a fiduciary relationship, governed by the Probate Code, by which one person or entity owns and controls property for the benefit of another.  Such a trust is not an entity separate from its trustee, and cannot independently do anything–it cannot sue or be sued; it cannot enter into agreements; and it cannot fulfill the fiduciary duties of a partner.  Consequently, we agree with the conclusion of the trial court in this case, that the provision of the partnership agreement which required that upon the death of a “partner,” the partnership shall purchase his interest in the partnership, was triggered by the death of one of the two men.  We affirm its judgment.

But, the Court went on and so shall I. The two men executed the partnership agreements as trustees of their respective trusts.  The Agreements state “The parties are sometimes hereinafter individually referred to as ‘Partner” and collectively referred to as ‘Partners.’” By referring to that provision, the court makes it appear that that was a key factor.  I do not believe it is, although that makes the decision easier to see.

The court found that, “as a matter of law” the two men were the partners and not the trusts.  A Trust like the men had creates a relationship, not an entity.  In contrast to a corporation which is a “distinct legal entity separate from its stockholders and from its officers” Merco Constr. Engineers Inc v. Municipal Court (1978) 21 Cal.3d 724, “an ordinary express trust is not an entity separate from it’s trustee . . .”  Powers v. Ashton (1975) Cal.App.3d 783.    “It is for this reason a trust itself can neither sue or be sued in it’s own name.  Instead the real party in interest in litigation involving a trust is always a trustee.”  Powers v. Ashton, supra.

The court suggests that different wording might have made the trusts the parties as opposed to the individuals.  But this was dicta and had no application in determining who a “Partner” was whose death would trigger the buy-out.

Tepper argues that Corp. Code §16101 allows a trust to be a partner.  The court says this has “surface appeal.”  She does not distinguish between types of trusts such as Trust Companies or Real Estate Investment Trusts.  Tepper argues that a Trustee, not an attorney, cannot represent the Trust’s interest in litigation because there are interests of others.  She argues that “others” distinguishes from the Trust and thus the trust is an entity.  But the court says “others” are the Trust beneficiaries.

Tepper argued that IRS recognizes the Trust as a separate entity in that they can be issued taxpayer identification numbers.  The court held that the fact “that the taxing authorities chose to create a separate category for assessing tax liabilities . . .” does not make them a separate entity.

The court gets into semantics indicating the agreements never refer to the partners as “it.”

As I indicated, the opening paragraph said it all.

                John T. Anderson, Section Chair
                Certified Specialist in Probate, Trust and Estate Planning
                By the California State Bar Board of Legal Specialization

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