The Best (Private) Trustee in the World!

Posted by Keith A. Davidson on April 30, 2012

I happen to represent the best private Trustee in the world.  No offense to professional Trustees—this does not include them.  In the world of private individuals who act as Trustees, not as a professional calling, but by way of happenstance or accident, there aren’t many who do such a good job.  It’s understandable, being a Trustee is hard work, it comes with a mountain of complex obligations and liabilities and very little, if any, appreciation.  As they say, no good deed goes unpunished.

Many private Trustees make the mistake of thinking that they are acting in the shoes of the Settlors (a Settlor is the person or persons who created the Trust).  That is an entirely wrong perspective because the Settlors (being that they created the Trust) have far more leeway and freedom in how they manage the Trust estate and invest the Trust assets—they can be downright reckless if they like.  Whereas a private successor Trustee has no such leeway—they must meet a host of complex duties and obligations under California Trust law, which includes things like (1) prudent investing, (2) treating all the beneficiaries fairly, and (3) avoiding conflicts of interest. 

It is also a mistaken belief that Trustees are like CEOs of companies.  Not true.  Corporate officers operate under the “business judgment rule” that allows them to take risks and make decisions that may or may not be prudent and conservative; provided that they are acting within acceptable business judgment.  Companies are expected to risk capital in order to make money.  Trustees have no such luxury.  Trustees’ duties require them to be far more conservative and risk adverse than a corporation is allowed to be.

One guiding light principle of every Trustee, whether private or professional, should always be that the beneficiaries should be treated with a sense of goodwill and fair play.  Sounds good, but not always easy to do, especially if there is hostility in the Trustee-beneficiary relationship (i.e., sibling rivalry).  But the law does impose a duty on Trustees to treat their beneficiaries fairly—even where the Trustees do not like the beneficiaries for whatever reasons.  Some Trustees do and some most certainly do not.

So how do I know I represent the best private Trustee in the world?  Because the Trustee I am referring to meets all of these requirements.  And this Trustee exudes a constant and consistent sense of goodwill and fair play towards some very difficult beneficiaries.  This does not mean, by the way, that the Trustee is a pushover or does whatever the beneficiaries require.  That would not make for a good Trustee.  Instead, this Trustee makes hard decisions under difficult circumstances and takes all action necessary to keep the Trust administration moving forward and fairly proportioned among all the beneficiaries.  But even after going through a very tough issue, or series of issues, the sense of goodwill and fair play remains ever intact.  This is the way a good Trustee should act.   And yet, it seems to be so rare among private Trustees.  

Troubled Trust Administrations: How to navigate the sometimes dangerous waters of California Trust Administration

Posted by Keith A. Davidson on April 25, 2012

We spend a good deal of time and effort discussing the mistakes Trustee's make in administering California Trust's.  From bad management, to problems investing assets, to misinformed or even bad Trustees.  But not all the blame for ugly Trust administrations lies with Trustees.  Beneficiaries can cause their share of problems too.

That's what I call "Troubled Trust Administrations."  When a Trustee who wants to do the right thing runs into problems with wayward beneficiaries some action needs to be taken.  But it may be something short of going to court and starting a Trust litigation case. 

To be clear, during a Trust administration, the Trustee is in charge.  It is the Trustee, and only the Trustee, who decides what to do and when to do it.  This can be a problem when a bad Trustee fails to follow the rules.  But it can also be a good thing when a good Trustee is in office and is properly handling the Trust affairs.

Beneficiaries need to know that they do have rights, but they don't have legal authority over the Trust.  That's the Trustee's job.  And if the Trustee is following the Trust terms, and administering the assets according to California Trust law, then the Trustee should be allowed to do the work they were appointed to do.  This includes things like, selling real property, investing assets, paying taxes, paying creditors, hiring professional advisors, making preliminary distributions and creating any additional sub-trusts that are reuqired under the Trust document.

And a Trustee has a reasonable timeframe in which to take these actions.  Typically, a Trust administration can take from 3 to 18 months to complete, or sometimes even longer for complex Trust estates, depending on the amount and complexity of the Trust assets.   

When a Trustee hits a roadblock, whether it be an outside issue, issues with a Trust asset, or issues with a beneficiary, then some action may be required.  Hopefully, such action can be done outside of Court, but the Court process is available to a Trustee any time an issue cannot be resoovled through other means.

For example, under Probate Code Section 17200, Trustees have the ability to seek instructions from the Court.  This process allows a Trustee to set forth the issues and gives the beneficiaries an opportunity to either consent to, or object to, the proposed actions of a Trustee.  If the petition is granted, then the Trustee can take the action they asked to take without fear of being sued over it at a later date.

Further, communication between Trustees and beneficiaries is cirtically important to keep an administration on track.  Communication can be hard to maintain in some cases, especially where the Trustee and the beneficiary (or beneficiaries) are hostile towards one another.  But even when relations are strained, communication will go a long way towards keeping a Trust administration out of court and moving forward.

Power to Amend a California Trust NOT the Same as the Power to Revoke

Posted by Keith A. Davidson on April 12, 2012

One of the most obvious features of a revocable living Trust is that you can revoke it.  It’s right there in the name “revocable Trust.”  But you can also amend a revocable Trust because, for a long time, California courts have interpreted the power to revoke (which means to entirely do away with a Trust) as including the lesser power to also amend the Trust.  Sounds reasonable enough.

But that has now changed with the California Court of Appeal’s, Fifth District, ruling in King v. Lynch, which holds that the power to revoke may be different from the power to amend—at least in the way in which each is accomplished.

Prior to 1987, there was no statute that provided the manner in which a Trust revocation could be accomplished.  With the adoption of Probate Code Section 15401, that changed, and the law provided two distinct ways in which to revoke a California Trust: (1) revoke using the manner provided in the Trust instrument, or (2) revoke by any writing (other than a Will) signed by the Settlor and delivered to the trustee during the Settlor’s lifetime.  So if the Trust stated that a revocation required a writing signed and notarized by the Settlor, then you could follow that directive to revoke the Trust.  But you could also simply follow number 2 above and revoke by any writing (other than a Will).  In other words, either manner was available for revocation as long as the Trust did not expressly say that its manner was the exclusive way in which to revoke. 

And it was thought for quite some time that the same rules applied to amending a Trust because under Probate Code Section 15402, it said that the method of amendment is the same and the method of revocation contained in Section 15401.  So you could use the Trust terms to amend, or you could amend by any writing (other than a Will).  Each method was available for amendments as long as the Trust did not expressly say that its method was the only way in which to amend.

But now, Justice Levy has, for the first time, decided that amendment and revocations are not so similar after all.  He holds, under Section 15402 (the amendment language) that a Trust can ONLY be amended by the method specific in the Trust and NOT by any language in Section 15401 that allows any writing other than a Will.  He reaches this decision by quoting the following language of Section 15402:

“unless the trust instrument provides otherwise, if a trust is revocable by the settlor, the settlor may modify the trust by the procedure for revocation.”

He reasons that the term “unless the trust instrument provides otherwise” means that any Trust that has an amendment method stated in the Trust instrument does “provide otherwise” and therefore the statutory language for revocation under Section 15401 cannot be used for Trust amendments.

It seems like an odd ruling because there is no logical reason why the method of revocation should be any different from the methods available for amendments. 

Whatever may be in the Court’s mind, we now have a ruling that says the methods available to amend a Trust are different from the methods available to revoke.  Something good to keep in mind when amending a Trust…or when contesting an amendment to a Trust…food for thought.

Tales of the two-headed Trustee: How Co-Trustees can create a horror show for Trust administration.

Posted by Keith A. Davidson on October 31, 2011

Just in time for Halloween, the creation of the two-headed Trustee.  They say two heads are better than one.  So why not have two Trustees manage your Trust estate, or better yet a two-headed Trustee.

There can be strength in numbers.  And many Trusts are administered with skill and grace with two Trustees at the helm.  But not every partnership is successful.  When a two-headed Trustee decides to argue with itself, disaster abounds.

Sometimes two people appointed to act over a Trust estate simply do not see eye-to-eye.  They may disagree on investments, or distributions, or other management of Trust assets.  They each have duties and obligations to the Trust, but every Trustee can interpret how to act out those duties and obligations differently and still be within the range of reasonableness.

Worse yet, under the default rules of California Trust law, co-trustees must act unanimously if they are to act at all.  This means that one Trustee cannot simply break a deadlock by acting on his own.  One of the Co-Trustees does not have the power and authority to act alone.  Of course, the Trust document can change this requirement and allow one or both of the Co-Trustees to act alone, but Trust provisions rarely provide for that.

If Co-Trustees cannot agree on how to act or how to administer the Trust, then the horror of the two-headed Trustee comes to life because nothing gets done.  Further, the Trust administration can turn into an ugly scene of chaos and destruction taking far more time, money, and emotional toll than is typically required to administer a Trust.

Ultimately, Co-Trustees can either resign or be removed by the Court, but that takes Court action—costing time and a good deal of money.  Plus, you never know how the Court will rule when asking it to intervene in Trust affairs—it may not go your way.

The solution, therefore, lies in choosing the right heads to put together as a two-headed Trustee in the first place.  Naming two people to act just because you think two heads are better than one may back fire if the two heads you name can’t work well together.  Do you want your Co-Trustees to be a successful working partnership or do you want to see the horrors of a bad Trust administration?  The choice is yours, put some thought into the decision and then choose wisely.

Choose Wisely: Some considerations for choosing a good Trustee for a California Trust.

Posted by Keith A. Davidson on October 21, 2011

The biggest decision for anyone creating a revocable, living trust is the choice of Trustee.  A Trustee acts as the manager of the Trust assets.  They call all the shots, make all of the important decisions, and decide when and how the Trust assets will be distributed.  The Trustee is in a very powerful position, and like all positions of power, there are those who abuse their power to the detriment of the Trust beneficiaries.  This is why it is important to have a Trustee that you can trust.

Yet so many people create California Trusts without giving their selection of a Trustee much thought.  In part, this is due to the limited choices most people feel they have in selecting a Trustee.  Typically, the choice is made among the Settlor’s (a Settlor is the person creating a Trust) children.  This may work a majority of times, but it can also lead to a great deal of tension, which then sets the ground-work for lawsuits being filed by Trust beneficiaries against the Trustee.. 

In my opinion, having seen the worst case scenario of Trusteeship time and again, the following are a few of the factors you should consider in selecting your Trustee:

  1. A Capable Trustee.  First, and most importantly, you need a Trustee who can do the job.  Being a Trustee is a thankless position.  It is a position of power over assets, but it comes with a large number of duties and obligations imposed by California law and the Trust document.  If a Trustee fails to perform properly, then he or she is personally liable for any damages caused. 

 

Therefore, you need someone who has the ability to (1) manage financial assets, (2) follow directions as outlined in the Trust terms and the California Probate Code, and (3) manage the personalities of the beneficiaries.  Each of these elements is vitally important to a well-managed Trust.  Does that mean that your oldest child should be Trustee?  Not necessarily.  The more important question is who is capable of being a good Trustee.

 

    2.   An Independent Trustee.  There are choices for a Trustee outside your immediate family.  This includes corporate Trustees and so-called “private professional fiduciaries.” 

 

Corporate Trustees are financial institutions that act as Trustees of Trusts.  Some corporate Trustees require that the Trust have a minimum amount of assets before they will agree to act.  The benefit of a corporate Trustee is that they are in the business of managing Trusts.  They tend to be good at it.  And they have a team of professionals to oversee the Trust administration.  The downside is that they also tend to be the most expensive option—charging anywhere from .75% to 1.5% of the Trust assets on an annual basis. Additionally, Corporate Trustees are unlikely to have a personal relationship with the Trust beneficiaries, which means they will not know the individual needs of Trust beneficiaries like say a family member Trustee would.

 

“Private Professional Fiduciaries” are individuals who make their living acting as Trustee for people.  In California, private professional fiduciaries must be licensed.  Since they are in the business, they are good at managing Trusts and they tend to charge less than a corporate Trustee.  And good private professional Trustees can help manage both the assets and the relationships between the beneficiaries.

 

     3.  A Well Informed Trustee.  Whatever Trustee you choose, don’t forget to find out if that Trustee is well informed about handling Trust administrations.  This goes even for family members.  Why not talk to your child who you have named as successor Trustee to see whether (1) she even wants to act, (2) she knows what her duties are, and (3) she knows what your expectations are for management of the Trust estate.  This rarely occurs, and yet it could be very beneficial to the Trust administration.

The choice of Trustee is yours, but put some thought into that choice and choose wisely. 

Simon says, "California Trustees: Follow the Trust Terms"

Posted by Keith A. Davidson on October 06, 2011

Shouldn't Trust administration be like a game of Simon says?  That's the old school yard game where one person gives an instruction, but you’re only supposed to follow the instruction if it is preceded by the phrase, "Simon says."  For example, Simon says, “Touch your nose.” Simon says, “Touch your toes.” Simon says, “Make proper Trust distributions when directed to do so by the Trust terms.”

A client of mine who was in a dispute with a Trustee pointed out that he received money from life insurance without any problem at all.  A claim was made to the insurance company, a death certificate was submitted, and full payment arrived within a week or two.  Shouldn’t the process of receiving assets from a Trust be similar? 

He makes a good point.  While there is a process that must be used to administer a Trust, the Trustee’s duties are simply to do as the Trust says.  Especially with the voluminous amount of instructions left behind for the Trustee to follow.  There are the Trust terms, which can be anywhere from 20 to 60 or so pages of material.  Then there are the directives in the California Probate Code, which specifies everything from investing, allocating assets between income and principal, and a whole host of other duties and responsibilities of the Trustee.  There couldn’t be much that is not written down for the Trustee to follow.

And yet, California Trust administrations drag on.  Setting aside cases where the Trust terms are being contested (that will take a few years on average to resolve), the typical California revocable, living trust set up by any person prior to death names a successor Trustee.  That successor is supposed to, “marshal” the Trust assets (which just means to gather them together—or take possession of the assets), pay the last debts, file tax returns and pay any taxes (this could take some time if an Estate Tax return is required), sell any Trust property that needs to be sold (such as real property and stocks), and then make the required distributions to the beneficiaries—sounds simple enough. 

All too often Trustees, especially individual Trustees, wander off-course and believe that what the Trust says does not apply to them.  It’s no longer a game of, “Simon says,” but one of “Trustee says.”  Having a position of power, which the Trustee has, does not equate to having the ability to do whatever the Trustee wants.  In fact, the Trustees’ powers are very limited by the Trust terms and the voluminous mandates of the California Probate Code. 

So if you want to be a good Trustee, then play along as the Trust requires.  It will keep the Trustee out of trouble and allow the beneficiaries to receive the benefits of the Trust that they are entitled to under the Trust terms.