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.

An interesting case, Diaz v. Bukey, was decided on May 10, 2011 by California’s Second Appellate District pertaining to the issue of whether a mandatory arbitration clause in a trust applies to a trust beneficiary. Justice Steven Z. Perren, writing for a unanimous Court, held that the beneficiary of a trust who did not agree to arbitrate disputes arising under the trust may not be compelled to do so. And this decision makes sense. Under California law, only parties to an arbitration contract may enforce it or be required to arbitrate.

The Case Facts. In Diaz, parents set up a trust, which included an arbitration provision that required all disputes arising in connection with the parents’ trust, including disputes between a trustee and a beneficiary, to be settled by arbitration. After the parents’ deaths, a trust beneficiary made a filing with the probate court demanding an accounting from the trustee of the Diaz Trust. In response, the trustee filed a demurrer (a request to have the beneficiary’s filing summarily thrown out of court without a trial) and a petition asking the probate court to order the trust beneficiary to arbitrate the dispute. The trust beneficiary opposed the demurrer and the petition to compel arbitration, basing his argument on the facts that he had not agreed to nor was he a signatory to the arbitration provision in the Diaz Trust. The probate court agreed with the trust beneficiary overruling the trustee’s demurrer and denying the trustee’s petition to force arbitration. The probate court reasoned that the beneficiary was not contractually bound to submit disputes with the trustee to arbitration. The Court of Appeal agreed with the probate court and affirmed its decision.  

The Parents’ Intent. After reading Diaz, I thought about the parents “intent” being defeated by legal rules they likely were not aware of when they created the trust. All the parents knew, at the time they created the trust, was that they wanted to require all disputes pertaining to the trust to be decided at a private arbitration, rather than in the probate court. The idea behind this is that generally arbitration costs less than a full blown trial in the probate court. In any event, the parents’ intent, as reflected in their trust, was to require less formal adjudication of all disputes pertaining to their trust. Clearly that did not happen in Diaz.

Possible Solutions. How should attorneys draft arbitration clauses in trusts after Diaz? I think arbitration provisions could still be used in trusts and made enforceable against non-signatory beneficiaries after Diaz. But how? By requiring the beneficiary to agree to arbitration as a condition of receiving their gift under the Trust.  For example, if one additional sentence had been added to the arbitration provision in Diaz, I believe the beneficiary would have agreed to the arbitration. That sentence is:

“If any beneficiary under this trust refuses to agree to arbitrate any and all disputes pertaining to the trust, then that beneficiary’s (or beneficiaries’) distribution shall not be made, and that beneficiary lose any and all interests in the trust estate and shall not share in any portion of the trust estate.”

Would a trust beneficiary, who did not sign the arbitration agreement in the trust, be willing to risk an inheritance by not agreeing to binding arbitration? Not likely.