Planning for Life

Is a Grandchild Born Out of Wedlock a "Grandchild" in a Trust?

Posted by Harry S. Margolis on July 20, 2021

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By Harry S. Margolis

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The sad story of Stephen Bing, a Hollywood impressario who committed suicide last year at age 55 after running through his $600 million inheritance from his real estate mogul grandfather, continues with a court decision disinheriting his out-of-wedlock children.

In 1980, Steve's father, Dr. Peter Bing, created six irrevocable trusts to benefit the first six of his then unborn grandchildren. After that, his daughter Mary had two children with her husband and Steve had two children, Kira Kerkorian and Damian Hurley, with two women to whom he was not married.

The trustees of the trusts asked the court in California for instructions on whether Steve's children qualified as beneficiaries of the two trusts and as remainder beneficiaries of the trusts (whether two or four) for which there are no qualified beneficiaries.

At trial, the court determined that Steve's children do qualify under the trust instruments as grandchildren. On appeal, in Ellis v. Hurley, c/w B300806 (Cal. Ct. App. Nov. 20, 2020), the Court of Appeal reversed, finding that they do not qualify.

What's a Grandchild

Each trust gave the trustee discretion to distribute income and principal to, successively for each trust, Dr. Bing's first-born grandchild, second-born grandchild, and so forth, until October 31, 2020, when the trusts were to distribute their entire principal to the particular grandchild.

The dispute is what the trusts mean by the term "grandchild," which they don't specifically define. The trusts give the the trustee "the power to construe this Declaration of Trust, and any reasonable construction adopted after obtaining the advice of responsible legal counsel shall be binding on all persons claiming an interest in the trust estate as beneficiaries or otherwise."

Further, on September 18, 2018, Dr. Bing signed an affidavit stating that "when I created the 1980 [Grandchildren's] Trusts, I believed that they would not benefit any person born out of wedlock unless that person had lived for a substantial period of time while a minor as a regular member of the household of the natural parent who is a child of mine." He further explained that since Steve Bing never acted as their father, participated in raising them, or shared a household with them, he didn't consider Kira or Damian to be his grandchildren.

Based on Dr. Bing's affidavit and advice of counsel the trustee determined that Kira and Damian did not qualify as grandchildren and sought court confirmation of its determination. As we said above, the trial court disagreed.

The Court's Reasoning

On appeal, the Appeals Court finds that it can only overturn the trustee's determination of the meaning of "grandchild" in the trust if it finds it to be unreasonable. However, the burden is on the trustee to show that's its interpretation of the trust was reasonable.

In analyzing that question, the Court starts by looking at the language of the trust itself, and finds that it provides little or no guidance. Given the lack of an answer from the trust instrument, the Court finds that Dr. Bing's affidavit is "worthy of some level of consideration."

But it gives more weight to a provision of the California Probate Code which reads as follows:

In construing a transfer by a transferor who is not the natural parent, a person born to the  natural parent shall not be considered the child of that parent unless the person lived while a minor as a regular member of the household of the natural parent or of that parent's parent, brother, sister, spouse, or surviving spouse.

"In sum," the Court explains, "the law long before the execution of the trust would have excluded all children born out of wedlock from the definition of 'grandchild,' and the law in effect now has liberalized to the point of including only out-of-wedlock grandchildren who have lived as regular members of the household of the natural parent through whom they claim."

Based on this law and similar case decisions that it reviews, the Court determines that the trustee's decisions to exclude Damian and Kira as grandchildren is reasonable.

Conclusion

We don't know how much these trusts hold, but given that Steve ran through $600 million during his life, we can presume that they're substantial. The Court's decision runs counter to what one might assume, that definitions of relationship would run by bloodline. But given that people can have children, and especially grandchildren, that they don't know about, the California rule may be more reasonable. It's also a reason to make sure these terms are well defined in estate planning documents.

The story of Steve Bing running through his huge inheritance is an argument towards the use of trusts rather than providing outright distributions. When his father created the trusts in question in this case, Steve was just 15 years old, yet he created trusts that would end 40 years later when his grandchildren would likely be relatively young -- a questionable decision.

Related articles:

Be Nice to Your Beneficiaries, or Don't Be Their Trustee

What's a Trustee to Do Without Guidance? Provide a Letter of Wishes

7 Reasons to Create a Family Protection Trust, and 4 Not To

Topics: Grandchildren, irrevocable trust

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