California Trust, Estate & Probate Litigation

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.  

California Trust and Will litigation is like building a puzzle.  There are a lot of moving parts in most cases and trying to figure out how and when to put the parts together can be confusing.

The Fourth District Court of Appeals recently set Trust litigators straight on how and when a Trustee can be sued by Trust beneficiaries, in a case titled “Estate of William A. Giraldin” (2011, No. G041811).  Associate Justice William W. Bedsworth authored the opinion that holds beneficiaries have no standing to sue a Trustee for alleged breaches of fiduciary duty that occurred while the Settlor (which is the Trust creator) is still alive and had the power to revoke the Trust.  My first reaction: What???

In Estate of Giraldin, the decedent, William Giraldin had created a revocable, living trust.  Although he was the “Settlor”, because he created the Trust, he appointed one of his five sons, Tim, as the successor Trustee.  The Trust was revocable by William Giraldin during his lifetime and, therefore, under Probate Code Section 15800, the Trustee, while acting as Trustee during William’s lifetime, only owed duties to William—not the named Trust beneficiaries (Williams’ other four sons)..  In other words, the Probate Code specifically states that the Trustee does not owe any fiduciary duties to the children of William (who are “contingent” beneficiaries so long as William is alive) until after William’s death.

The problem in Estate of Giraldin revolved around a large investment William made, over $4 million, into a start-up company owned, in part, by his son Tim.  After William created the Trust, and made his investment in Tim’s company, William stepped down as Trustee and allowed Tim to act as Trustee of his Trust.  But Tim was acting at William’s direction.

As might be expected, the start-up company William invested $4 million in did not survive, and William’s wealth plummeted as a result.  After William’s death, the other siblings were not happy that William invested so much of his money into Tim’s company only to have it disappear (I would imagine that had Tim’s company been successful, the other siblings would have been quite happy).  So Tim’s siblings sued Tim for breach of Trust claiming, among other things, that Tim never should have allowed William to invest in the company and lose his $4 million.

The Trial court agreed with Tim’s siblings and awarded a surcharge against Tim in excess of $4 million (yikes!).  Tim naturally chose to appeal that ruling and Justice Bedsworth gives us new law with a ground-breaking result for Trust litigation issues—he reversed the surcharge.  Tim owes nothing!

Before Estate of Giraldin, it was generally assumed that while beneficiaries could not sue a Trustee while the Settlor was alive, they could do so after the Settlor’s death.  The beneficiary could receive both an accounting of actions that took place before the Settlor’s death and even ask for a surcharge for any breach of Trust that occurred during that time.  This was based on Evangelho vs. Presoto (1998) 67 Cal. Appl. 4^th 615.  Not so fast, says Justice Bedsworth.  He overrules the concepts set down in Evangelho.

Instead, the Court states that when a Trust is revocable by a Settlor, the only duty a Trustee owes is to that Settlor.  Therefore, there is no basis, and even no standing(!), for beneficiaries to seek an accounting of Trust actions or assert a breach of Trust for actions taken during that time.  What about breaches that the Trustee incurs, but the Settlor could not assert due to the ill-health or lack of capacity of the Settlor?  The Court says that can be taken up by the Settlor’ successor’s-in-interest, which usually means his Executor or surviving heirs.  But that type of action must assert wrongs against the Settlor, which did not occur in this case.

In fact, in the Estate of Giraldin matter, the only wrongs asserted by the beneficiaries is that they should have had an extra $4 million to split among themselves.  Everyone agreed that the Settlor wanted to invest in Tim’s company and had the capacity to do so.  They merely asserted that Tim should have stopped William from investing how he liked.  The Court disagreed, saying that during the Settlor’s lifetime, since the Settlor has the power to revoke the trust, the Trustee must do as the Settlor directs.  This is true even if the investing decisions are foolish. 

Had the beneficiaries been asserting wrongs committed as against William, then it may have been a different story.  Or if the investing had occurred after William died, when the Trustee owned a duty to his siblings as vested trust beneficiaries, there would have been a different outcome.  But under these facts, the Trustee gets a free-pass because he based his actions on the directions of the Settlor.

Giraldin is a well-reasoned and well-written opinion and makes sense on the facts of that case.  But the downside of a case like this is that the new argument for every Trustee acting while the Settlor is alive is going to be “the Settlor made me do it”—no matter whether that is true or not.  It will then be up to the beneficiaries to show whether that is true. 

Our latest video post provides a discussion of the challenges faced by a beneficiary in trying to remove a Trustee of a California Trust.  For those of you viewing this blog post by email subscription, you can click on the title for a link to the video.

The omnipresent no-contest clause (originally called in terrorum clauses--as in to terrify one's beneficiaries) is meant to prevent lawsuits. The idea being that if a beneficiary contests a California Will or Trust containing the clause, then that beneficiary is entirely disinherited and loses his gift under the document (see our previous blog post on how no contest clauses work and their practical application).

But does a no contest clause apply to a beneficiary's challenge of a Trustee's actions as Trustee (i.e., challenging the management of the Trust)?  The simple answer is no.  As a matter of public policy, California law specifically precludes the application of no contest clause to the actions of fiduciaries, including Trustees and Executors (or Administrators) of Wills. In fact, the law wants beneficiaries to have the right to question fiduciaries and to contest a fiduciary's actions in managing a Trust or administering a Will, provided the contest is not frivolous.

What does this mean for beneficiaries?  Question your Trustee or Executor all you want. Nothing in the Trust or Will can stop a California beneficiary from asking about the management, investment, distributions, bookkeeping, professional fees, etc., of a Trust or Will. 

Unfortunately, many fiduciaries, especially when they are individuals, do not understand that the no-contest clause does not apply to questioning their actions and they will threaten a beneficiary with the no contest clause as a way to prevent questioning.  But this is an empty threat.

What does this mean for fiduciaries?  You must be completely transparent in your actions as Trustee or Executor. Everything you do is subject to review and questioning. Worse yet, it is the Trustee's duty to prove they acted reasonably (see our prior blog post on trustees duty). 

Being a fiduciary can be a thankless job because the fiduciary has all the burdens and responsibilities and very few benefits.

One of the advantages of creating a revocable, living Trust is the ability of the successor Trustee to quickly and smoothly take control of the Trust assets after the Settlor (i.e., Trust creator) dies.  But this can also be a burden to a beneficiary, or a disinherited heir, who intends to contest the Trust terms.  It takes time to prepare, file, and have the Court hear a Trust contest.  In the meantime, the Trustee of the Trust is typically free to go about her business managing, and even distributing, Trust assets to the named beneficiaries—an alarming prospect to a contesting beneficiary.  The Trustee may even be able to empty the Trust of assets before the Trust contest is ever resolved.

Therefore, it is the contesting beneficiary’s duty to seek assistance from the Court to freeze the Trust assets, or at least put restraints on their transfer, pending the outcome of a Trust contest (many of the same methods also apply to Will contests, but a Will cannot be administered until after an Executor is appointed and the contest will prevent an Executor from being appointed—not so in Trust administrations).

What can a contesting beneficiary do in this situation? 

In California, the rules of general civil procedure apply to Trust and Will cases.  This allows a party to a Trust or Will matter to use civil discovery procedure, civil motions, and other forms of pre-judgment relief, such as Temporary Restraining Orders and Preliminary Injunctions (CCP 525 et seq.).  Here are a few actions a party can take to preserve Trust assets:

1.            Lien on Real Property– Notice of Pendency of Action (or “Lis Pendens”, I’ll refer to it as a lien in this post) is one of the easiest ways to secure real property pending the outcome of an underlying Trust and/or Will action.  But there’s a catch.  The underlying lawsuit must involve a Real Property Claim, which is defined as one that would affect title to, or the right to possession of, specific real property.  See California CCP 405.4.  In other words, the lawsuit must directly relate to who will possess title to the real property.  Thus, suing a Trust that has real property may or may not be enough to establish a Real Property Claim. 

For example, suing a Trustee for not managing rental property correctly is not a Real Property Claim because you would not be challenging who holds title, your just challenging the management of the real property by the Trustee.  Whereas, suing a Trust for exclusion of a beneficiary who would have had a right to receive title to real property had the Trust not been improperly amended shortly before death would qualify as a Real Property Claim because it affects who ultimately will hold title to the subject real property.

The advantage of using a Lis Pendens lien is that it is easy to prepare and record.  Once recorded it automatically secures the real property and prevents the property from being sold or refinanced until the lien is released.  The disadvantage of using a lien is that if you file one without a Real Property Claim at issue in the underlying suit, then you can be held liable for the opposing party’s attorneys’ fees and costs incurred to set aside the lien.  So this type of lien should only be used when there is a proper basis to do so.

2.            TRO and Preliminary Injunctions.  Trust and Will cases can be subject to Temporary Restraining Orders (TRO) and Preliminary Injunction to ensure that the Trust assets are not wasted.  But just as in civil matters, TRO’s and injunctions are not easy to obtain from the Court.  They are considered extraordinary remedies and you must establish (i) a likelihood of prevailing on your claim, and (ii) a right that cannot be adequately compensated by money damages.  The classic example is real property, which is considered unique under the law. 

However, it is possible, and I have had cases, where a TRO and injunction are ordered by the Court to ensure that a Trustee is not personally taking money from the Trust.  There has to be proof that the Trustee is taking money, but with that proof it is a possibility to obtain an injunction that will protect Trust assets until the underlying contest is resolved. 

My next post of this topic (Volume 2) will include:  (1) Petition for Instructions and Blocked Accounts, (2) Ex Parte Petition to Suspend Trustee and (3) Trustee’s Bond.

Two things will get a Trustee removed quickly: death and stealing.  By stealing I mean really stealing—like tens or even hundreds of thousands of dollars missing or misappropriated. 

But what about Trustees who violate their fiduciary duties but haven’t (1) died, or (2) stolen large sums of money?  Those Trustees can be harder to remove from office.  You as a beneficiary may believe, for good reason, that a Trustee is acting improperly and should be removed.  In fact, a large numbers of private Trustees fail to meet their fiduciary duties primarily because they don’t know what those duties are (see our earlier post on this topic).  But assembling the necessary evidence and arguments to justify removing a Trustee before the Court can be tricky and time consuming.

A client of mine told me that Trustee removal seems to be a case of death by a thousand lashes.  In other words, the removal must be supported by building a case using as many fiduciary violations as you can find.  After a good number of violations are assembled, then you have a shot at Trustee removal.  This does not mean that it is hard to hold a Trustee liable for his or her breaches.  Finding that a Trustee is personally liable for a given breach can be easier than having the Trustee removed.

In my experience, it can be hard to remove a Trustee because the Court puts a good deal of emphasis on the Settlor’s choice of that Trustee in the first place.  Also, many Courts are reluctant to suspend or remove a Trustee temporarily, absent death or substantial stealing, because they don’t want to “shoot from the hip.”  This means that the Trustee removal issue must go to trial where proper evidence can be presented by both parties to determine if removal is warranted.

Under the California Probate Code, Court’s have wide discretion to remove Trustees.  Removal can be based on the following grounds:

1. Any provision in the Trust document for removal (some Trust’s will specify a removal procedure),
2. Where a Trustee has committed a breach of Trust (again must have a number of examples of this to be effective, absent death or substantial stealing),
3. Where the Trustee is insolvent or unfit to administer the Trust (a loose standard to show a Trustee is “unfit”),
4. Where hostility or lack of cooperation among Co-Trustees impairs the administration of the Trust,
5. Where the Trustee fails or declines to act,
6. Where the Trustee’s compensation is excessive under the circumstances,
7. Where the Trustee is the same person who drafted the Trust (or related to the person who drafted the Trust).

Many times beneficiaries will focus on one item, such as where a Trustee has committed a breach, and think that the one occurrence they have witnessed is sufficient for removal.  But if the Court is reluctant to force removal (which most Court’s are), then how big of a breach does it have to be to justify removal?  That depends on the facts of the case.  The more examples you have of a Trustee breaching his duty, and the more severe each example is, the more likely you are to obtain Trustee removal.  Hence, the death by a thousand lashes.  On the other hand, if you have one big breach, then that single lash may be enough to rid the Trustee from office.

You work hard to create your Trust and your estate plan and you want the terms of your Trust carried out the way they were drafted.  But how can you be sure your named Trustee will perform as instructed after your death or upon incapacity?  Sure you may have chosen a trusted person to act as Trustee, but how will they actually perform?  And how will their performance be viewed by the Trust beneficiaries (i.e., usually your children and other family members)?

There are times when a Successor Trustee either violates their duties (whether it be intentional or unintentional--by not taking the proper actions), or the beneficiaries have the belief that a Trustee is not acting fairly (especially if the Trustee is also a beneficiary as when a single sibling acts as Trustee for his brothers and sisters). It does not much matter whether a breach of trust is actual or perceived because litigation (lawsuits) can result from either situation.

In comes the Trust Protector. A Trust protector is simply a special Trustee.  Someone appointed in the Trust document for a very limited and specific purpose. For example, the Protector could have the final say in when to make distributions from the Trust and how much should be distributed. This provides the appearance (and actuality) of a neutral third party making an important decision rather than a self-interested Trustee.

But the Trust Protector can be used for more than that. The Trust Protector can:

1. Make or consult on investment decisions,
2. Have veto power over certain (or all) decisions of the Trustee,
3. Have veto power over distributions to the Trustee,
4. Be a tie-breaker vote between two Co-Trustees,
5. Set compensation levels and advise on hiring professionals, and
6. Manage certain Trust assets.

In other words, the Trust Protector can be used however you like, the sky is the limit. In fact, each time I incorporate a Trust Protector into a Trust I am amazed at how versatile the concept is and how many different ways it can be used. It is a very personal device that can provide peace of mind, along with actual peace between the beneficiaries, when the time arrives.

So get creative and find ways to help protect your Trust for the benefit of your family and beneficiaries.

Bad trustees always seem to waste trust money defending their improper actions. Once a trust beneficiary challenges a trustee’s improper actions (breaches of trust), the trustee retaliates against the beneficiary. For example, the trustee may choose to suspend current monthly distributions, or in more extreme cases, attempt to have a no contest clause in a trust enforced against the beneficiary for challenging the trustee’s improper actions. But California law does not allow trustees to use trust money to defend themselves for their improper acts.

For example, a trustee may have failed to diversify the trust’s asset holdings resulting in significant losses to a beneficiary’s interest in the trust due to the current economic environment. (Think of what happened to trust portfolios holding primarily real property assets in the fall of 2008.) When these significant losses occur, the beneficiary is upset and wants to hold the trustee accountable for the trustee’s improper actions. The beneficiary files a lawsuit based on the trustee’s failure to diversify the trust assets (something trustees are required to do), and the trustee immediately begins to spend large amounts of trust assets to pay for the litigation (or in reality to pay an attorney to defend the trustee’s improper actions).

But trustees are not supposed to burn through trust money to protect themselves for the mistakes they make. Recently, the California Court of Appeal held that where litigation is necessary for the preservation of the trust, the trustee is entitled to reimbursement for his or her expenditures from the trust; however, if the litigation is specifically for the benefit of the trustee, the trustee must bear his or her own costs incurred, and is not entitled to reimbursement from the trust.

Beneficiaries should be sure to request that the Probate Court closely review all litigation expenditures to make sure trustees are not using trust funds to protect themselves from the mistakes they make.