Can a Trustee Deduct Years of Rent From Your Trust Share?

Jean Sandford had five children and one instruction for what should happen to her money. Divide it evenly. Her trust also carried a short equalization provision, the kind that appears in a large share of California family trusts, letting the trustee reduce a child's share for unpaid loans and for gifts that had gone to some children and not others.

Two of her sons ended up more than $1.6 million lighter for it. Not because of loans. Because a court read that provision to authorize an audit of every dollar that had moved through the family for twenty years, then charged them for rent they had collected on the family's rental properties going back to 2002. On September 2, 2026, the Court of Appeal reversed nearly all of it.

The decision is worth understanding whether you are the beneficiary being charged or the one arguing your sibling should be. It draws a line that most equalization clauses do not draw for themselves.

What an equalization clause is supposed to do

A parent lends one child $50,000 for a business and never asks for it back. Another child gets help with a down payment. A third gets nothing, because a third never needed anything. The parent still wants the estate to come out even.

An equalization clause is the fix. It tells the trustee to treat that lifetime help as an advance on the child's inheritance and to adjust the shares at distribution so the total each child received across the parent's lifetime and death comes out roughly equal. Used as intended, it is a peacemaking device. It lets a parent be generous during life without accidentally disinheriting the children who never asked.

The trouble starts because these clauses are usually three sentences long, they are drafted decades before anyone reads them in anger, and by the time they are read, the family has had thirty years of informal money moving in every direction.

What Jean's trust actually said

Here is the operative language, quoted from the opinion:

"If Trustor has loaned funds to a child or a child's family, . . . any unpaid loan shall be distributed as part of that child's share. If Trustor has made unequal gifts to Trustor's children or their respective spouses . . . those gifts shall be treated as advances toward each child's equal share and the Trustee shall make reasonable distribution adjustments to equalize overall the gifts and inheritance of each child's share."

Read it slowly and notice what it names. Loans. Gifts. That is the entire list.

How that became a twenty year audit

The facts around the clause were messy in the way real families are messy. Jean and her late husband had owned several Orange County properties. After his death in 1988, interests in those properties were split among the five children. In the 1990s the children signed quitclaim deeds back to Jean so she could refinance. Starting around 2002, as Jean's memory failed, two of the sons, Mark and Michael, took over managing the properties and the accounts. Michael, a lawyer, handled a condemnation sale of one property; the court found that Jean's signature on a power of attorney used to close that sale was forged and that Michael knew it. Michael also claimed to have reinvested Jean's share of the proceeds in a tax deferred exchange, then later admitted that was not true and that the money had gone to Mark instead.

Two of the daughters petitioned the Orange County Superior Court in 2018. The trial ran 22 nonconsecutive days and produced a 64 page statement of decision. The appellate record exceeded 20,000 pages.

The trial court found the daughters credible and the sons not credible, and it read the equalization provision broadly: any financial benefit a beneficiary had taken from the trust had to be accounted for and deducted. Applying that reading, it ordered charges against the two sons that included $107,537.50 each in rental proceeds from one property between 2002 and 2008, $537,930 against Mark for rent on another from 2002 through 2020, $145,620 each on a third property, and $601,560 against Mark for rent on a fourth from 2002 through 2018.

Here is the part that made the ruling vulnerable. The same trial court had already found that the daughters' actual claims for wrongdoing, financial elder abuse and breach of fiduciary duty, were barred by the statute of limitations. Those claims accrued no later than 2009. The petition came in 2018. So the misconduct claims were gone, and the equalization provision was doing the work instead.

What the Court of Appeal held

Justice Servino, writing for Division Three of the Fourth Appellate District, reversed the rental and sale proceeds orders. The reasoning is short because the court thought the text was clear.

Trust interpretation starts with the words. Probate Code section 21102, subdivision (a) provides that the transferor's intention as expressed in the instrument controls. Section 21122 provides that words get their ordinary and grammatical meaning unless a different meaning is clear. Where interpretation does not turn on contested extrinsic evidence, the appellate court reviews it independently rather than deferring to the trial judge.

Applied here: "The ordinary meaning of the words in this provision requires an adjustment for unpaid loans and for gifts, and nothing more."

The trial court had leaned on the circumstances surrounding the trust's execution, and there were plenty. Jean had made large loans to Mark and Michael in the 1990s. Her financial advisor testified that unpaid loans to them had created a liquidity problem in her retirement account. Her estate planning attorney's 1998 letter described the trust as accomplishing "your objectives of making sure that the loans you have advanced to the boys are allocated to their shares." The Court of Appeal agreed all of that was real, and then pointed out it proved the opposite of what the trial court used it for. Every piece of that evidence was about loans. It confirmed the plain language rather than expanding it.

Then the court made an argument that is the most quotable thing in the opinion. The trial court had separately found that Jean "did not want her children to fight over her money after she dies." The Court of Appeal turned that finding around:

"In our view, Jean's intent to eliminate conflicts between her children is wholly inconsistent with an interpretation of the equalization provision that mandates a 20 year audit of informal financial arrangements. If that is what she meant, she all but guaranteed conflict between the children."

A finding about a mother's peacemaking motive became a reason to read her clause narrowly. That is a move worth remembering, because trial courts hear that kind of testimony in almost every trust case and it usually gets cited in favor of whichever party is more sympathetic.

The surprise: a trust can reach a debt the courts would not enforce

The sons also argued the loans were too old to touch. Some dated to 1993. Every limitations period had run.

The court rejected that, and this half of the ruling deserves as much attention as the reversal. It followed Cook v. Cook (2009) 177 Cal.App.4th 1436, where a trust directed the trustee to allocate "any debts owed to the settlors" against the debtor beneficiary's share. The debt there was roughly twenty years old by the time the settlors died. The Court of Appeal enforced the offset anyway, reasoning that "[t]he settlors did not qualify the debts by stating that the trustee must offset only enforceable debts."

Sandford adopted that reasoning outright. A settlor may distribute her property as she wishes within the bounds of legality, and Probate Code section 15203 permits a trust for any purpose that is not illegal or against public policy. If she wants to reduce a child's share because of a loan the courts could no longer collect on, and her trust says so, that is her right. The court is not enforcing a stale debt. It is carrying out a distribution plan.

So the orders charging Michael for unpaid loans survived, including a $60,000 loan from 1993, a further $79,504.21, and an unpaid 2016 loan of $42,274.16. Roughly $182,000 in loan charges stood while more than $1.6 million in rent and sale proceed charges fell.

One caution about Cook that client facing summaries tend to skip. Cook also held that the beneficiary's argument that his debts were unenforceable violated the trust's no contest clause as an indirect contest. That part of Cook applied the no contest law that preceded the current statute. Probate Code section 21311, operative in 2010, now enforces a no contest clause only against a direct contest brought without probable cause, a pleading challenging a transfer on the ground the property was not the transferor's, and a creditor's claim, with the last two enforceable only if the clause expressly says so. Do not assume Cook's no contest result carries over to an instrument governed by the current scheme. Ask before you file.

What a clause can and cannot rescue

The two halves of the ruling fit together into a principle that is more useful than either alone.

A well drafted equalization clause can reach a debt that has gone stale. It cannot resurrect a claim that has gone stale.

The daughters had a genuine grievance. Two brothers took over their mother's finances while her memory was failing, and the family lost track of hundreds of thousands of dollars. The remedy for that was a breach of fiduciary duty action, and it existed. It simply had to be filed within the limitations period, and it was not. As the court put it, to the extent the sons breached their duties in those transactions, "Jean or a successor trustee would have had a cause of action against them. But as the trial court found, and as everyone acknowledges on appeal, the statute of limitations had long since run on such claims."

The equalization provision could not be stretched into a substitute. That is the whole case in one sentence.

Worth noting on the procedure: the court also confirmed that a petition under Probate Code section 17200, subdivision (b)(6) for instructions to a trustee carries no limitations period of its own. That is why the daughters' approach was not frivolous. It just could not deliver more than the trust's own text allowed.

The fact patterns where this comes up

Equalization fights follow a small number of shapes, and most of them are now easier to predict:

1. A child lived in the parent's house without paying rent. Very common, and under a loans and gifts clause the answer depends entirely on whether the free occupancy was a gift the parent intended, not on what the fair rental value was. Occupancy is not automatically chargeable.
2. A child managed the parent's rental properties and kept or commingled the income. After Sandford, that is a breach of fiduciary duty question with its own limitations clock, not an equalization question, unless the trust says otherwise.
3. A child received sale proceeds from a family property years ago. Same answer. Proceeds are not loans and they are not gifts from the trustor unless the facts show the parent intended a gift.
4. A parent paid one child's tuition, wedding, or medical bills. These are the classic gifts an equalization clause is written for, and they are chargeable if the clause reaches gifts.
5. The loan is documented but ancient. Under Cook and now Sandford, an unqualified reference to unpaid loans reaches it. Age is not a defense.
6. The loan was never documented at all. The trustee still has to prove it was a loan rather than a gift, and in a family that kept no records, that proof is often the entire fight.

A quitclaim deed signed to help with a refinance is still a deed

One more holding in Sandford, and it is the one most likely to catch a Los Angeles family off guard.

Mark had originally owned half of one of the properties. In 1993 he and his siblings signed quitclaim deeds to their mother so she could refinance it, and the deeds recited that they were given for "no consideration, inter-family transfer." Decades later he asked the court to quiet title in his favor, arguing the deed had passed bare legal title only.

He lost, and the Court of Appeal affirmed. Evidence Code section 662 provides that the owner of legal title is presumed to be the owner of full beneficial title, and that presumption can be rebutted only by clear and convincing proof. Mark's main evidence was his own testimony, which the trial court found not credible, plus his mother's later tax returns showing a smaller ownership percentage. The court noted there is no authority making tax returns presumptively correct, citing the analysis in In re Marriage of Hein (2020) 52 Cal.App.5th 519, and observed that this family's returns had in fact been manipulated at least once.

Mark also conceded he had intended a reconveyance but "probably forgot about it," and did nothing about the title from 1993 until 2019.

If you sign a deed inside your family to make a lender's paperwork easier, get the reconveyance in writing at the same time. A recital of no consideration does not preserve your interest, and clear and convincing evidence is a heavy burden to carry twenty six years later against a presumption that runs the other way. Our discussion of quiet title actions between co owners covers the mechanics.

What to do now

If you are a beneficiary facing a proposed reduction. Ask for the trust language in writing and read the operative clause yourself before you argue about numbers. If it names loans and gifts, the trustee is not entitled to charge you for rent, occupancy, or sale proceeds simply because those dollars passed through your hands. Ask which category each proposed charge falls into and on what evidence. If the answer is that you behaved badly, that may be true and it may also be a claim that expired years ago.

If you are the beneficiary who thinks a sibling took advantage. File early. This is the lesson the daughters paid for. They were largely right about the underlying conduct and they still lost most of the recovery, because their fiduciary duty and elder abuse claims accrued no later than 2009 and the petition came in 2018. A clause in the trust is not a substitute for a timely claim. If you suspect a sibling is mishandling a parent's assets now, the time to act is now. See our discussion of the deadlines to contest a trust in California and what fiduciary duties a trustee owes beneficiaries.

If you are the trustee. You are caught between beneficiaries demanding an audit and beneficiaries insisting the clause is narrow. A petition for instructions under section 17200 is the right tool, and Sandford confirms it carries no limitations period. Bring the question to the court rather than deciding it yourself and absorbing the surcharge risk. Note also that the Court of Appeal reversed the trial court's attorney fee awards because the balance of success had shifted, and pointedly declined to decide whether Probate Code section 1002's reference to "costs" even includes attorney fees, leaving the parties to litigate that on remand. Fee exposure in probate is less settled than most people assume.

If you are the parent still writing the trust. This is the cheapest place to solve the problem. If you want a child's rent free occupancy, or the proceeds of a property you helped them buy, charged against their share, say so in the document by name. "Equalize the gifts" will not get you there. And if you want a loan charged even though it is decades old and legally uncollectible, say that too, because Cook and Sandford both turn on the absence of any qualifier limiting offsets to enforceable debts. For related reading on trustee conduct, see how to remove a trustee in California and when a lis pendens belongs in a trust dispute.

Talk to a Los Angeles trust litigation attorney

The Darvish Firm's Los Angeles trust and estate litigation attorneys represent beneficiaries and trustees in distribution disputes, accountings, surcharge claims, and trust interpretation petitions. Call (310) 677-3512 or request a consultation.

This article is general information about California law, not legal advice, and reading it does not create an attorney-client relationship. Every case depends on its facts. Consult an attorney about your specific situation.