## Facts

- George and Barbara Heaps created a revocable living trust in 1985, with both spouses as trustees, that became irrevocable upon the death of either spouse and then required division into a family subtrust and a marital subtrust.
- The trust named the surviving spouse plus the couple’s son and son-in-law as co-trustees of the family subtrust, while the surviving spouse would act as sole trustee of the marital subtrust.
- The trust granted the surviving spouse a limited right to withdraw principal from the family subtrust annually, up to the greater of 5% or $5,000, only if requested by a stated yearly deadline.
- The principal trust asset was the Circle Haven residence, transferred into the trust by quitclaim deed in 1985; the deed was held by the attorney and not recorded.
- In 1990, George and Barbara sold the residence and received a note and an all-inclusive deed of trust, taken in their names as joint tenants.
- Barbara died in 1994, making the 1985 trust irrevocable and triggering the division into family and marital subtrusts.
- George later married Mary Ann and, in 1996, George and Mary Ann created a new trust and transferred assets into it, including proceeds traceable to the Circle Haven sale.
- After George died in 2002, Barbara’s children asserted the traceable proceeds remained property of the 1985 trust; the trial court agreed and ordered Mary Ann to return or account for the assets.
- Mary Ann appealed, challenging the construction of the 1985 trust and asserting error related to the trial court’s statement of decision.

## Issues

1. Whether assets traceable to the sale of real property originally transferred to a revocable trust remained trust property after the sale when the replacement asset was titled as joint tenants.
2. Whether, after the first spouse’s death rendered the trust irrevocable, the surviving spouse (and later spouse) could transfer such traceable assets into a new trust for different beneficiaries.
3. Whether alleged defects in the timing or content of the trial court’s statement of decision required reversal.

## Decision

- The Court of Appeal affirmed the judgment for Barbara’s children.
- The court held the Circle Haven sale proceeds (and traceable replacements) remained assets of the 1985 trust notwithstanding joint-tenancy record title.
- The court concluded that once the 1985 trust became irrevocable at Barbara’s death, George lacked authority to divert those assets to a later trust except as the 1985 trust instrument specifically permitted.
- The court rejected Mary Ann’s objections to the statement of decision, finding no prejudicial error warranting reversal.

## Legal Principles

- Where a trust instrument broadly authorizes trust property to be held in various forms of record title, a change in form of title alone does not remove property from the trust.
- Trust property sold during the trust’s operation may remain subject to the trust as substituted property when proceeds are traceable and the trust terms indicate continued trust ownership.
- After a revocable trust becomes irrevocable upon a settlor’s death, the surviving spouse cannot unilaterally redirect or transfer trust principal to defeat the beneficiaries’ interests, except to the extent expressly authorized by the trust.
- A statement of decision warrants reversal only upon a showing of prejudicial error; technical defects or omissions are insufficient without demonstrated impact on the outcome.

## Conclusion

The court enforced the terms of an irrevocable trust against a later spouse by treating sale proceeds of trust real property as continuing trust assets despite joint-tenancy titling and a later transfer into a new marital trust, and it upheld the judgment because asserted statement-of-decision defects were not shown to be prejudicial.


Heaps v. Heaps, 124 Cal. App. 4th 286, 21 Cal. Rptr. 3d 239 (Cal. Ct. App. 2004)