What to do if the other party is acting on the docs, pulling assets, selling homes, and you are still preparing your case?

Last week I discussed some of the ways in which Trust and Estate assets can be frozen pending a lawsuit.  In my previous post I discussed Liens and restraining orders/injunctions.  In this post, volume 2, I have a few more ideas:

1.     Petition for Instructions and Blocked Accounts.  California Probate Code Section 17200(b)(6)provides a procedure where a beneficiary can ask the Court to instruct a Trustee to do certain things, such as follow the Trust terms.  And the Court has a good deal of leeway in fashioning remedies to help protect Trust and Estate assets.  One example is the use of Blocked Accounts. 

A Blocked Account is just a bank account set up by the Trustee or Executor into which the estate funds are deposited.  Once on deposit, the money cannot be withdrawn, transferred, spent, etc. without a Court order authorizing the action.  In other words, the account is blocked in the sense that it cannot be accessed without the Court’s approval.  As you might imagine, a blocked account is very helpful in terms of freezing liquid (i.e., cash) assets pending a lawsuit.  Of course, you need a good reason for the Court to order a blocked account.  But where facts are present that Trust assets are being wasted or spent inappropriately, it is a helpful remedy to ensure the funds are not dissipated pending the lawsuit.

2.     Ex Parte Petition to Suspend Trustee.  Many beneficiaries wish to remove the Trustee when the trust administration goes badly.  And the probate Court does allow removal for various reasons (see our earlier blog post on Trustee removal).  But a removal petition takes time to prosecute because the Court ultimately needs to set if for trial and that can take a while (i.e., one to four years!!).  In the meantime, the Trustee is still in office and potentially able to do more damage.

The solution is to seek a suspension of the Trustee.  The Court can temporarily suspend a Trustee and appoint a neutral third party to act as Trustee until such time as the Trustee removal petition is heard at trial (See Probate Code Section 15642(e)).  The benefit of suspension is that it can occur without a full-blown trial because it is just a temporary measure meant to maintain the Trust in its current position without any further harm.  The detriment of suspension is that it’s not always easy to obtain from the Court. 

The easiest way to obtain a Trustee suspension is to show that the Trustee is misappropriating funds (see my earlier blog post of this topic).  With the right set of facts, a Trustee can be temporarily suspended, which makes the beneficiaries breath a little easier during a lawsuit.

3.     Trustee’s Bond.  Requesting that a Trustee be bonded is not so much an asset freeze technique, but rather a safeguard against wrongdoing.  A bond (called a surety bond) is merely a way in which the wrongful acts of the Trustee can be paid by the bonding company.  However, unlike insurance, once a bond pays out, the bonding company has the right to sue the Trustee personally to get its money back.

The benefit of the bond is that it provides a deep pocket from which damages can be paid for any breaches of trust committed by the Trustee.  Most Trusts specifically waive bond for a Trustee, but a Court can still requiring a bond if necessary to protect beneficiaries.

The downside of a bond is that you must prove that the Trustee did breach his or her fiduciary duties before the bond is liable to pay anything.  So you won’t know if money will be paid on the bond until you go through trial and, hopefully, prevail.  And since the bonding company is on the hook if you do prevail at trial, they have the right to have their own attorney at the trial to help defend the Trustee.