California Trust Case: Presta v. Tepper, 179 Cal. App. 4th 909 (Oct. 28, 2009)

January 20, 2010

Robert Tepper and Ronald Presta invested in real estate together through several partnerships. They entered into two of these partnership agreements as trustees of their respective trusts. The agreements contained provisions requiring the partnership to purchase the partnership interest of any deceased partner.

Tepper died. In her capacity as successor trustee of Tepper’s two trusts, his widow refused to sell the two partnership interests. She argued that it was the trusts, rather than the individual, who had been the partners, and there had been no death of a trust partner, so she could not be compelled to sell the trusts’ interests in the partnerships.

The Court of Appeal confirmed the trial court’s holding that an express trust of the type created by Tepper is not a person, but merely a fiduciary relationship with respect to property. Tepper’s trust was formed under the Probate Code, presumably for estate planning purposes, and the court contrasted this type of trust with the examples of a trust company formed under the Financial Code, and a real estate investment trust formed under the Corporations Code.

The court found that the type of trust created by Tepper is not an entity like a corporation that is capable of entering into a business relationship such as a partnership, or that is capable of suing or being sued, and that it was Tepper the individual, rather than his respective trusts, who was the partner under the agreements.

The court clarified that it did not suggest that the trusts were invalid or that Tepper should lose whatever probate avoidance or tax advantage applied. The court also recognized that certain trusts, as distinguished from the trustee, can qualify as the type of entity capable of forming a partnership under California partnership law.

The court only held that “when a trustee of an ordinary express trust enters into a partnership relationship in his capacity as trustee, it is he, and not ‘the trust’ which is the party to that agreement.” The court therefore ruled that the provision in the partnership agreements was triggered by Tepper’s death, and required the partnerships to purchase the partnership interests of the deceased partner.

This case reinforces the rule that an ordinary express trust, such as an inter vivos revocable trust used for estate planning, is not an entity separate from its trustee.

Kelly L. Hellmuth is the principal author of this release.