California Trust, Estate & Probate Litigation

It’s an exciting time to be a Trust and Will litigation lawyer.  Our California Supreme Court recently handed down an opinion on a very pivotal area of Trust litigation—Trustee liability.  Last October we wrote about the case entitled Estate of William Giraldin, where the Fourth District Court of Appeal held that beneficiaries of a revocable trust did NOT have standing to sue a Trustee for acts that occurred while the Trust settlor (the Trust creator) was still alive.

Generally speaking, so long as the settlor is living, the Trustee owes duties ONLY to the settlor and not to any other beneficiaries.  Once the settlor dies, the revocable trust then becomes irrevocable and the beneficiaries’ interest in the Trust vest—making them actual beneficiaries with actual rights as against the Trustee. 

The question raised by the Giraldin case was whether beneficiaries could sue a Trustee for acts that the Trustee undertook while the settlor was still living.  The Appellate Court concluded that beneficiaries can NOT sue a Trustee for pre-death acts because the beneficiaries interests in the trust were not vested at that time.  But the Trustee’s wrong acts that take place before the settlor dies can have serious ramifications and damages to the beneficiaries’ interests after the Settlor dies.  For example, if the Trustee loses $1 million while the settlor is alive (and the settlor does nothing about it), that’s $1 million less for the beneficiaries after the settlor’s death. 

The California Supreme Court has overturned the Appealate Court's ruling in Giraldin, and instead held that beneficiaries do have the right to sue a Trustee for acts that occurred before the settlor died.  But there’s a catch, the suit must be brought to correct any breaches as against the settlor only.  In other words, the beneficiaries have no vested rights while the settlor is alive, so the Trustee, by definition, cannot breach any duty to the beneficiaries during the settlor’s lifetime.  But the Trustee could potentially breach his or her duties as against the settlor, and for that, the Trustee can be sued by the beneficiaries.

For example (these examples are taken from the Supreme Court’s opinion), let’s say a settlor tells the Trustee during the settlor’s lifetime that he wants to withdraw a substantial sum of money to take a final trip around the world.  The Trustee follows the settlor’s direction and the Trust is reduced by the withdrawal.  This act may not be in the best interests of the beneficiaries because it lessens their interest in the Trust, but because the settlor is alive they have no standing to sue.  And since the Trustee would NOT have breached his or her duty to the settlor by following the settlor’s direction to make the withdrawal, there would be no liability as against the Trustee.

In contrast, if the Trustee were to withdraw a large sum of money from the Trust during the settlor’s lifetime and then spend the money on a world trip for the Trustee—not the settlor—that would be a breach of Trust as against the settlor.  And the beneficiaries could sue the Trustsee for that breach even after the settlor dies.

In the end, this is a good result for future cases because under the Appellate Court’s view of the world, a Trustee could have breached his duties and looted a Trust once the settlor was incompetent or just before the settlor’s death and there would be nothing the beneficiaries could do about it.  Now, under the Supreme Court’s ruling, the beneficiaries could assert an action for the breaches the Trustee incurred as against the settlor.  It will help to ensure that last minute breaches that occur when the settlor cannot defend himself or herself will not go uncorrected.

We spend a good deal of time discussing the shortcomings of individual Trustees.  But there are a few tips that beneficiaries should know to try to make a Trust administration go a little smoother.

1. Patience is a Virtue.  It takes time to properly administer a Trust estate.  Assets have to be gathered together, real property has to be refurbished and sold, personal property has to be collected, jewelry has to be appraised, the list goes on and on.  Trustee’s are not allowed to take too much time to administer the Trust, but it can’t be done overnight either.  So how much time does a Trustee have to administer a Trust?  The legal standard is a “reasonable” amount of time.  But there is no definite definition of “reasonable,” it varies from case to case.

For example, a Trust with a single house in it, that needs to be fixed up a little (but not completely refurbished) and then sold, should have the house listed for sale within 3 or 4 months of the Settlor’s date of death.  The entire Trust administration should be concluded within a year or less. 

If there are other issues that need to be resolved, such as multiple real properties, difficult stocks to sell, or anything else out of the ordinary, then a year to 18 months may be more reasonable.

If it is a complex Trust estate that is subject to Federal Estate Taxes, with multiple properties and complicated partnership, then 18 months to 2 years may be more like it. 

The bottom line is to give the Trustee some room to act.  That doesn’t mean you have to wait forever, but a little patience can go a long way.

2. Information Overload.  Every beneficiary has the right to information regarding the assets of the Trust.  Information requests must be reasonable, however.  Beneficiaries are not entitled to see every bank statement every month.  Some Trustees do share that information, and it’s never a bad idea to do so, but the law does not require it.  What the law does require is sharing information when it is reasonably asked for and providing regular (as in annual) accountings of the Trust activity.

3. Back-seat Driver/Arm-Chair Quarterback.  Beneficiaries are not in control of the Trust.  It may seem odd that you have no say over money and assets that belong to you, but that’s how Trusts work.

The Trustee of a Trust is the legal owner of the Trust property; whereas the beneficiaries are the beneficial owners.  That means the Trustee, and only the Trustee, gets to call the shots on how property is held, invested, etc.  Of course, the Trustee can’t just do whatever he or she wants.  A Trustee must follow the Trust document and must adhere to Trust law under the California Probate Code.  Between the Trust and Trust law, there is a mountain of duties and obligations the Trustee must obey—but that’s the Trustee’s job to figure out, not the beneficiaries. 

4. Open Lines of Communication.  Being a Trustee can be a thankless job because Trustee’s have all of the duties.  While Trustees have a duty to communicate with their beneficiaries, beneficiaries should also try to communicate clearly with the Trustee.  That means being clear about what you want, responding to requests for information from the Trustee, and generally being cooperative regarding Trust business—to the extent it is reasonable to do so.  I’m not saying beneficiaries have to go along with whatever the Trustee is doing, but clearly communicating your goals and desires is important. 

5. Call the Professionals.  Trustees have the right to hire professionals to advise them.  This includes lawyers, accountants, and financial planners—all acceptable advisors that a Trustee can hire and pay for out of the Trust estate.  Of course, the Trustee should also follow the professionals’ advice, which is where many Trustees go wrong.

6. Who’s Your Lawyer?  The trustee’s lawyer is NOT your lawyer.  If the Trustee hires a lawyer, the lawyer represents the Trustee, in his or her capacity as Trustee.  The lawyer does NOT represent the Trust or any of the Trust beneficiaries.  This is a common misconception.  Many beneficiaries believe that if a lawyer represents a “Trust” then that lawyer must represent the beneficiaries too.  Not true.  Lawyers don’t represent Trusts, they represent Trustees.  That may not sound like much of a difference, but legally it’s a huge difference.  Trusts are NOT like corporations, they cannot act independently of their Trustee.  Trust’s act through Trustees, and Trustees can hire lawyers and other professionals to represent them—and only them.  Beneficiaries should keep this in mind whenever they talk to the Trustee or the Trustee’s lawyer.  If a beneficiary wants some independent legal advice, he needs to hire his own lawyer for that.

7. The Written Word.  Document everything you do and say during the course of a Trust administration.  It never hurts to keep notes of what has occurred and what action you have taken in response.  While you hope that these cases don’t wind up in Court, Court action is always possible.  And if that occurs, better to be ready for it by having a clear record of what occurred and when. 

Judges don’t like difficult beneficiaries, and it could make the Trustee look sympathetic if he had to deal with difficult beneficiaries.  Better to hold up your end of the Trust, act reasonably, and let the Trustee’s actions speak for itself—good or bad.  It never hurts to be a better beneficiary.

Every Trustee and every Executor owe an absolute duty to account.  And a Trust or probate accounting is a unique animal—it’s unlike any other type of accounting and not every accountant and/or CPA knows how to properly prepare one. 

1.   Charges and Credits: What goes in must equal what goes out.

Unlike a typical business accounting, Trusts and estates don’t have a profit and loss statement or a balance sheet. Instead, they use “Credits” and “Charges.”  In the simplest of terms, they keep track of what goes in and what comes out. 

For example, the Charges are the items that come into the Trust or estate (the things the fiduciary is “charged” with).  They begin with the value of assets on-hand at the beginning of the accounting period.  So if we were preparing a Trust accounting with a period that starts January 1, 2011, then we would need to provide a list of all the assets and their values as of that date.  You then add in all the receipts that come into the Trust or estate (like income payments, dividends, any positive cash flow), and gains on sale (which only applies if any capital assets are sold).  

The Credits, on the other hand, is a list of the things that go out, such as disbursements (a fancy word for bills and expenses that are paid from the Trust or estate), distributions (money paid to beneficiaries), and losses on sale of capital assets (assuming any such assets were sold).  Charges end with the balance of assets on hand at the END of the accounting period.

2.   The Summary Sheet.

Every accounting has a summary sheet that looks like this:

20120611.SummaryOfAcct.pdf

And then there are corresponding schedules where the detailed information is listed.

The trick is that the total Charges (what comes in) must be equal to the total Credits (what goes out + what’s left on hand).  If they are not, then the accounting does not balance—something is missing and has to be tracked down.

3.   The Power of a Calculator: It pays to add.

Whenever I sit down to analyze any Trust or probate accounting the first thing I do is grab my calculator.  It is amazing how much you can learn about the sufficiency of an accounting by doing some simple arithmatic.  This is true even if you prepared the accounting on your own computer.  Since it is relatively easy to have an incorrect formula in a spreadsheet program (such as Excel), a simple little calculator will test the sufficiency of the numbers.

And when put to the test of my simple little calculator, many accountings tell a different tale.  Take a look at this summary sheet, it appears to balance:

20120611.SummaryOfAcctIncorrect.pdf

Yet under the calculator, the numbers don’t jive.  Even though the Total Charges are the same as the Total Credits, the numbers, when added, don’t agree.  There’s obviously a problem with this accounting. 

Next, I turn to the actual schedules and start adding up the numbers and totals listed there.  This can be a daunting task, since some of the schedules are multiple pages long.  Don’t be discoraged, it pays to do your homework.  Keep adding and eventually you’ll discover whether the totals are correct or not.

4.  Finding the Accounting Soft Spot.

Using the incorrect summary sheet above, once you add up the numbers on each schedule you can identify where the problem lies.  Once I know where the problem is, I can either fix it (if I am the one preparing the accounting) or attack it (if I am probing the accounting prepared by someone else). 

What if all the numbers are correct, but I still think there’s something inaccurate going on behind the scenes?  Well now I know that I have to go outside the accounting document to find it.  That’s valuable information because at least I am not stuck wondering if the problem is evident from the face of the accounting.  Instead, I can get started serving my subpoenas and hunting down the problem elsewhere.

Or sometimes the numbers are correct, I just think the Trustee or Executor spent too much on some expense (such as Trustee fees).  That’s also valuable information because now I know that my entire case exists on the face of the accounting.  The amount of fees is listed, and all I have to do is argue why they are too high.

Without zeroing in on the problem, however, I would have no idea where my point of attack (or revision) would be.  So it pays to simplify the process.  Do the work, and find the soft spot in almost any accounting.  

I get calls every week from California Trust, Last Will, and Estate beneficiaries complaining that they can’t get their brother or sister, who is the Trustee and Executor of their parents’ estate plan, to provide copies of the parents’ estate plan after the parents have died.

I usually suggest the following. First, send a letter to the Trustee and Executor politely requesting the entire Trust, including amendments, and Last Will for both parents. Include the following language in the letter: 

A.         Please Provide True Copy of California Will

Under California Probate Code Section 8200, you, as Executor of Mom’s and Dad’s estates, are required to deliver mom’s and dad’s Last Wills to the County Superior Court where mom and dad died within 30 days of mom’s and dad’s respective deaths. Please note, if I am damaged by your failure to deliver moms’ and dad’s Last Wills to the Superior Court you will be liable for my damages. (See Probate Code section 8200(b).)

As you are required to deliver the Wills to the Superior Court, you should have no objection in providing me with true copies at this time. If you do not provide me with a true copy of the Wills I will have no choice but to file a petition in the Probate Court requesting the Court to order you to provide me with true copies of the Wills. Please note, if I’m forced to file a petition, I will request that the Court order you to pay for the attorneys’ fees and costs associated with my petition. I hope I am not required to file a petition and you will simply provide me with true copies of the Wills on or before DATE. 

B.         Please Provide True Copy of California Trust

Under California Probate Code Section 16061.7, you, as Trustee of Mom’s and Dad’s Trust, are required to provide all beneficiaries of the Trust and all of Mom’s and Dad’s heirs with a true copy of the Trust documents, including any amendments, 60 days after Mom’s and Dad’s respective deaths.

As you are required to provide Mom’s and Dad’s Trust after 60 days of their respective deaths you should have no objection in providing me with true copies of the Trust, and any amendments, at this time. If you do not provide me with a true copy of Mom’s and Dad’s Trust, and any amendments, I will have no choice but to file a petition in the Probate Court requesting the Court to order you to provide me with a true copy. Please note, if I’m forced to file a petition, I will request that the Court order you to pay for the attorneys’ fees and costs associated with my petition. I hope I am not required to file a petition and you will simply provide me, as an heir and/or beneficiary of the Trust, a true copy of the Trust, and any amendments, on or before DATE.

If you include the above-referenced language in your letter to the Trustee, more times than not you will be successful in getting the Trustee to turn over the Trust and Will documents.

If the Trustee still refuses to provide the Will and Trust, then you must seek help from the Probate Court to force the Trustee and Executor to hand over these documents. I will explain in a future post how you get the Court’s help for obtaining these documents. 

This is a guest post prepared by our friends and colleagues at Hackard Law, whose office is located in the Sacramento, California area.  They also practice in the area of Trust and Will litigation and they are outstanding attorneys.  We asked Michael Hackard and Quinn Chevalier to share some of their experience and wisdom with us and they graciously agreed to do so.  Hope you enjoy.   

The emotional and financial costs spawned by a trustee removal fight can be overwhelming. Beneficiaries often feel much maligned or even cheated. In these broken and volatile relationships, beneficiaries don’t want a trustee to go away mad, they just want them to go away. Often feeling chosen, duty bound or privileged by their appointed status, trustees do not easily surrender their reins of power. However inept, embedded trustees often threaten the rapid dissipation of trust assets by burgeoning legal bills.

The Costs of Trustee Removal: a zero sum game

We have seen the trust dissipation threat in action. Attorneys who litigate trust disputes enjoy the challenges and intricacies of trust law. This enthusiasm is understandable. Ethical rules provide  guideposts for aggressive and fair representation. Threatening to ravage trust assets to pay for the defense of an errant trustee does not fit well within these guideposts.

 While trustees are entitled to defend charges of alleged wrongdoing, the payment for the defense should be fairly allocated to the trust or to the trustee. The trustee and his/her attorneys should initially and periodically assess whether the asserted defenses are meant for the trust’s advantage versus those meant for the personal benefit of the trustee. However inconvenient and frustrating to often bereaved beneficiaries, it can take years before a court determines whether trust payments for attorney’s fees were spent to protect the interests of a flawed trustee or the interests of the trust.

Affronted beneficiaries willing to litigate a trustee removal action should be ready for the time delays and legal expenses common to the wrangling over the peculiarities of trust law and administration. California courts have experienced severe budget cuts and have responded accordingly by closing courtrooms and terminating employees. The time lags from the filing of a petition for removal to an evidentiary hearing can easily be a year or more. Petitions for appointment of interim trustees face higher legal hurdles. Courts are reluctant to appoint interim trustees absent clear wrongdoing that puts the trust or its beneficiaries in great peril.  

Attorneys hired to pursue or defend trust litigation have obligations to the court as well as to their clients. Professionalism can often support a call to be “above the fray,” yet the realities of exhausting litigation can affect the most stable of constituents, and particularly the trustees. It is not unusual for trustees to be totally unprepared for the tasks required after the death of a settlor. Affected beneficiaries, while not knowing the specific tasks required for trust settlements, can still readily observe that the trustee’s actions or inactions epitomize “amateur hour.” 

The Nuclear Option: destroying both victor and vanquished

Trust litigation contains the risk of “catastrophic victory.” Such victory can evolve from multiparty litigation that includes trustees, co-trustees, successor trustees, proposed independent trustees, beneficiaries, spouses of beneficiaries and their respective counsel. Litigators on their own initiative or that of their clients can engage in “scorched earth” tactics designed to enrage and exhaust their opponents. Such tactics often have the same effects as short range nuclear weapons, destroying both the victors and the vanquished.

Catastrophic victory aside, the removal of a trustee by its nature involves a good deal of energy. Trust provisions, statutes and case law provide a laundry list of reasons for the removal of a trustee. Clients can look at the list and mentally check the appropriate boxes. Believing, knowing, and proving, however, are three different things. The belief of trustee wrongdoing can be followed by informal and formal discovery that translates belief into knowledge. Transferring knowledge into judicial proof is a different process – one protected by rights of due process and time constrained by discovery processes, court schedules and statutory mandates.

The Undue Burden of Due Process of Law

In trust litigation, just like any litigation, writing a letter to a local court detailing what you know does not meet the demands of judicial due process. This is something not always understood by clients. In other aspects of their lives, changes can often be more timely and directly influenced by vigor and clarity of purpose. Such is not always (or ever) the case in litigation. We have all heard a variant of “the wheels of justice grind slowly.” There is truth behind the aphorism. This truth particularly tests the patience of wronged beneficiaries. Trustee fights can mimic civil war with all of its emotions and tragedies. Trust litigators are best when they can fairly and wisely advance their clients’ interests while at the same time exercise vigilance for opportunities of fair compromise or settlement. Litigation should not be a mindless and hardened exercise in wealth dissipation. As litigation battle lines are fixed and change, the end game should always be kept in mind. Catastrophic victory is no victory at all.

© Copyright Michael A. Hackard and Quinn Chevalier, 2012. All rights reserved.  Hackard Law, 10630 Mather Boulevard, Mather, California 95655

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.

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.

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.

California Trustees, Executors and Conservators have a legal duty to manage assets conservatively and "prudently."  The rules are set out in the California Probate Code under the Uniform Prudent Investor Act.  In this video we have a brief discussion of Trust investing.  For those viewing this blog by email subscription, you can click on the title for a link to the video.

California Trust and Will beneficiaries are subject to abuse in some cases at the hands of a rogue Trustee.  This video explains our view of an abused beneficiary.  It is important to acknowledge these cases and we fight hard to help beneficiaies who are abused.  For those viewing this blog by email subscription, you can click on the title for a link to the video.

It is shocking to me how many Trustees violate their fiduciary duties.  Under California Probate Code Section 16000 et seq. there are voluminous sections on all the duties, responsibilities, and liabilities Trustees must comply with to property administrate a Trust.  There are rules on just about every action a Trustee must take, and on actions the Trustee must NOT take, from proper investing (under the Uniform Prudent Investor Act ), to allocation of items between income and principal, to every other action or inaction required of a Trustee.  Yet, so often these many duties and responsibilities are simply ignored, or worse, not known by the individual trustees. 

And when a Trustee violates his duty, and if that violation is challenged in Court, it is the Trustee’s burden to prove that he met the standards required of him under the California Probate Code.  This is why being a Trustee is a thankless job.

But why do so many Trustees get it wrong?  The biggest problem is lack of knowledge. Many individuals acting as Trustees have no idea that they have a boat-load of requirements to follow under the Probate Code, and likely under the Trust document.  They have never been educated, advised, or inquired about their duties at all.  It seems shocking just how many people willingly assume the many duties as Trustee, but have no idea what those duties are. 

A common misconception is that the person acting as Trustee is in control and can do whatever he likes, even continuing to own and invest the way the Trust creator (called a Settlor) did prior to his death.  Not so.  A Trustee cannot do whatever he likes and he cannot continue to invest or even hold assets that the Settlor acquired during life.  This is because the duties of investing for a Trustee are vastly different from those allowed by individual Settlors who created the Trust in the first place.

As a Settlor, the person is entitled to invest however they like (this assumes we are discussing a typical revocable living trust used in estate planning).  The only duties a Settlor has is to herself.  She does not hold assets for anyone other than herself and the Probate Code says she only is responsible to herself.  But once the Trustee passes and a successor Trustee takes over, the ground rules change substantially. 

For example, an individual Settlor has no duty to diversify assets.  She can hold 100% of the Trust assets in a single asset class (such as real estate), or even in a single stock (i.e. Enron) if she likes.  But when a successor Trustee takes over, a duty to diversify the Trust assets comes into effect.  That means the new Trustee must take immediate action to sell a portion of the Trust assets and diversify those investments as required by the Probate Code—there is no leeway here.  Assets MUST be diversified by Trustees!

If I had to guess how many private, individual Trustees are in breach of trust (this does not include professional fiduciaries or corporate fiduciaries), I would say from 80% to 90% of them.  Sounds extreme?  Maybe, but my experience with individual Trustees would suggest that 100% of them are in breach of trust as to at least some aspect of their duties. 

So when you are asked to act as Trustee of a California Trust, the first thing you should do is find out what duties and responsibilities you have.  You’ll be glad you did because it will be up to you alone to prove you complied with those duties.  And it’s much easier to comply with duties you know about than duties you don’t.

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.