Trustees & Beneficiaries

 

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Hi, this is Keith Davidson at Albertson & Davidson.  In this video, I want to discuss whether the successor trustee of a trust has an obligation to declare the trust settlor incompetent.

Let me explain some of those terms before we get started. The settlor is the person who creates the trust. Typically, when people create these revocable living trusts, they’re the settlor, the creator, and the are also the trustee during their lifetime, so they manage those trust assets.  Somebody is usually named the successor trustee for when the original trustee either loses capacity or dies.

The question is: if you are named as a successor trustee, and you’re seeing the trust settlor is fading and losing capacity, is there an obligation to step in and take action?  This usually happens within families. For example: your father creates a trust, he’s the trustee, and you’re one of three children and named as the successor trustee. You can see that Dad is fading, and starting to lose capacity, and that he is having a hard time managing the finances.  Do you, as a successor trustee, have an obligation to step in and take action?

The interesting thing is that from a legal perspective, you don’t have any legal obligation to step in. A successor trustee doesn’t have any duties, responsibilities, or obligations until they agree to act as trustee.

But, then there’s the moral obligation.  You know that if the trustee can’t manage finances, he going to cause harm to himself because his finances won’t be properly managed, and he’s also going to cause harm to the other trust beneficiaries receiving these assets after he passes away.  And from that perspective, maybe you do have a moral obligation to step in.

The good news: that most trusts usually have a section that tells you what you need to do to have the settlor deemed incompetent. Once you do those things, the settlor is no longer trustee and the successor can step in and start acting.

Many trust documents say you need a letter or declaration from at least one or two treating physicians.  And that’s all you need.  Once you have that letter from the doctor deeming the settlor incompetent, the successor trustee can step into place.  It’s just that simple.  You don’t have to go to court to get an incapacity declaration or a conservatorship. Just follow the steps in the trust.

If your trust doesn’t have instructions on how to have the trustee declared incapacitated, then you do have to go to court.  This is harder and can be a problem.  However, I estimate 90% of trusts have instructions on how to handle the settlor’s incapacity.

So, take a look at your trust. See what it says, and follow those steps. Then, the successor trustee can step in, control and properly manage the assets, and make sure that the trust is stable moving forward.

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Hi, this is Stewart Albertson with Albertson & Davidson and I want to talk to you about undue influence cases.  What makes a good undue influence case and what makes a not-so-good undue influence case?  And let me just set this out as we meet with lots of people that come into our office saying, “Hey, I want to contest my mom or dad’s trust or their will because I know that my brother Bob exercised undue influence over my parents and I’ve been written out of the will or the trust and I will receive no inheritance and I’ve got the best evidence you’ve ever seen Mr. Albertson, or Mr. Davidson, and we’re going to come in here and we’re just, this is going to be a slam-dunk.  You’re going to have no problem winning this case!”

The type of evidence you need to have a good undue influence case, it’s a high bar.  The burden of proof that’s required for you is high.  It’s not easy to invalidate a trust or a will.  So that begs the question, “OK, well then what makes a good undue influence cases versus a not-so-good undue influence case?”

Well, let’s talk about some of the elements that you need to meet to prove that undue influence did, in fact, take place.  One of the first things we have to show is we have to show that the decedent, your parent in this case, was a vulnerable individual.  We can show that several ways.  The most easy way to show that is that they’re over the age of 65 or they’re a dependent adult.  So if they’re over 65, chances are, you could show that they have some vulnerable to them.  The State of California has addressed financial elder abuse and said, “Look, we see a lot of financial elder abuse happening in our state, so we want to stop that.  And so what we’ve done is we’ve set out some criteria for people to look at.  This, these are the elements that we look to to prove an undue influence claim.”

The other way you can look to see if a person is vulnerable is what if they have some type of a medical issue?  What if they have some diagnosis for dementia or Alzheimer’s or anything of the like that affects their mental cognition?  That is something that also will support the element of the decedent being vulnerable.

We also want to look to other elements.  What about the actions or the tactics of the wrongdoer?  The wrongdoer is the person that exercised undue influence over the decedent.  And a lot of times this is not something that you see that’s nefarious or evil or somebody yelling or screaming at the decedent, it’s actually done in a very nice manner.  And it happens like this:  The wrongdoer comes to the decedent while they’re still living and says, “How come your son, Johnny, doesn’t come visit you anymore?  Oh, you know, I don’t think Johnny cares about you.  It’s too bad that Johnny’s not here to take care of you like I’m taking care of you.”  And it’s just done over time.  And, of course, this person already – the decedent already is vulnerable, because they’re older, over 65 or older, they may have a health issue, and so now you have this person who is doing deceitful actions and tactics to influence the elder that their son Johnny really doesn’t care about them and we see this element time and again in a good undue influence case.

We also want to look to another element and that is what type of authority did the wrongdoer have over the decedent?  And authority can come in many forms.  Authority can be that this is the person’s agent, under their durable power of attorney, or maybe they’re already the trustee of the trust.  They can also be somebody that the decedent relies on for their necessaries of live, such as daily medication.  Somebody to drive them to doctor’s offices.  Somebody to help change their diaper in bed.  Somebody that makes sure that hospice is taking care of them.  Here we see the decedent, the elder, is being very reliable on this person who has this apparent authority over them.

The last element that you want to flush out in a good undue influence case is there is an inequitable result.  This is most easily shown in cases where the decedent had a preexisting estate plan that gave everything equally to all of their children.  And we see this time and again.  And then just before they die, they make a change to that trust that did give everything equally to all their children, and they give everything to one person, either one of their children or the wrongdoer who has come into their life and has now exercised undue influence over them.

So in order to have a good undue influence case, where you can meet the burden of proof which is a high bar in the State of California, you’re going to have to show that the victim was vulnerable, that the wrongdoer used actions or tactics that were deceitful, that the wrongdoer had apparent authority over the decedent, and the results that the wrongdoer got was inequitable.  If you can pull all of those elements together through a totality of the circumstances and showing the evidence, you probably have a good undue influence case.

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Hi, this is Keith Davidson with Albertson & Davidson. In this video, I want to talk about some of the warning signs that you should be aware of to clue you in that undue influence might be taking place with one of your parents.

As lawyers, when we get undue influence cases we typically get them after everything’s been done and we’re looking at the facts in hindsight. But, as a child, there’s times when things happen, and you might be suspicious of what’s happening, but you’re not sure if it’s something bad or not. That’s what I want to talk about. These are the warning signs that really should be on your radar and start raising red flags when you see them.

For example, let’s say you have a parent, and you can tell that they’re kind of slowing down, and you notice that somebody (like a neighbor, a caregiver, or a stranger who you don’t even know), starts spending a lot of time with that parent at their house, and then they start helping the parent write checks or go to medical appointments. That could be a real red flag of somebody who’s trying to cozy into the parent and slowly take control.

Typically, the way undue influence works is: somebody starts off by being just a friend, and then a helper, and then they start taking over everything; check-writing, finances, medications, doctor visits, even communications. That’s another warning sign.

Let’s say that you are finding it difficult to talk to your parent. You try calling them and somebody else answers the phone and won’t let you speak. Or, when you talk to your parent, there’s somebody else who’s always on the other line, listening in. That’s a huge red flag that somebody is probably trying to control the flow of information to the parent. That could be a real problem. So that’s another big warning sign.

One of the elements of undue influence is that somebody controls the necessities of life; food, medication, all those sorts of things. So if you see somebody who you aren’t that familiar with, and they’re doing all the grocery shopping for your parent they’re making meals for the parent they might be doing something that’s really nice and maybe there’s nothing wrong with that, or they might be doing something where they’re controlling the flow of food to the parent which is one way to manipulate somebody who is old and not able to resist undue influence. But, that doesn’t mean that every time you see one of these things that it’s bad, but it definitely should raise your attention and you should look into it.

So those are some of the warning signs that you should be on the lookout for in possible undue influence against one of your loved ones.

 

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This is Stewart Albertson with Albertson and Davidson, and I want to talk to you about an issue that we do see from time to time called advances on inheritance. Advances on inheritance are essentially a loan that mom or dad makes to one child. They don’t want to be unfair in giving that loan to one of their children when they have several other children. So they basically tell the person they made the loan to, well that is an advance on your inheritance so that when I die, you’re going to have to take that into account based upon whatever your share of my estate is.

There’s a real problem with advances on inheritance though because the probate code has some technical requirements that must be met to qualify as an advance on inheritance. Otherwise, that payment of money from a parent to a child will be looked at as a gift.  If it’s a gift that makes a big difference because when the estate is distributed after mom and dad have passed away it’ll be distributed equally between all of the children without taking into account the “loan” that was made to one of the children during lifetime.

So how can you tell the difference between an advance on inheritance and a gift? The advance on inheritance can be proven in three primary ways. There’s actually a fourth way, but that gets a little complicated. If you really want to look into this, you can go to Probate Code section 21135, and you can read how you establish an advance on inheritance there.

Generally, the way you prove an advance on inheritance is:

  1. The trust or will terms themselves have in there saying, I’m giving $100,000 loan to my son Johnny, and when I die, this counts as part of his inheritance at the time he receives his ultimate distribution. That’s the first way that an advance on inheritance can be included and be supported by the evidence.
  2. The next way you can establish an advance on inheritance is did your mom or dad have a writing outside the trust or will that simply says: I hereby am making a loan to Johnny and after I die, that should be considered as part of his inheritance for distribution purposes. That would be the second way that you can establish an advance on inheritance.
  3. The third way is you have Johnny acknowledged in a writing that he’s already receiving some of his inheritance by way of a loan prior to mom and dad passing.

If you have any of those three, chances are you can establish an advance on inheritance.

As you can see, this is not always easy to do. If there is money that is given to one child, a lot of money, say several hundreds of thousands of dollars to one child and not to the other, and there’s nothing to establish an advance on inheritance, what is the argument the child makes who received the money during the parents’ lifetime? And that is, it was a gift. If it’s a gift, it won’t be chargeable against their share of the estate. It won’t be an advance on inheritance.

 

Would you

There are times when a Trust settlor names a successor Trustee who is not a beneficiary of the Trust. This is often a great idea because naming a child as Trustee can be disastrous. And naming two or more children as Co-Trustees is a fantastic idea if you want to keep lawyers fully employed (and who doesn’t want that???).

The problem, however, is when the non-beneficiary Trustee is challenged by a Trust beneficiary. For instance, if a warring beneficiary is determined to exert control over the Trust, he or she may challenge the appointment of the successor Trustee when the time comes for that Trustee to act. What incentive does a third-party have to fight to be Trustee when there’s nothing in it for them?

Fighting to block a named successor Trustee from acting is not an easy thing to do depending on the Trust terms. Most Trust terms do not allow a beneficiary to remove and appoint a new Trustee. That means a Trustee has a right to act provided there are no “skeletons” in the Trustee’s closet. What type of skeletons would block the appointment of a Trustee?

Probate Code section 15642 provides the grounds for Trustee removal, which can be used at times to block a named successor Trustee from acting in the first instance. The grounds include things like insolvency of the Trustee, unfit to act (whatever “unfit” means), where the Trustee committed a breach of trust, where the person cannot resist fraud or undue influence, and the like.

The problem arises where a named successor Trustee has not yet taken control of the Trust assets, but is challenged by a beneficiary from acting. The named successor may not be able to access and use Trust funds to fight the beneficiary over appointment as Trustee. And a non-beneficiary Trustee has no financial stake in the outcome of his or her appointment. In other words, the named Trustee is put in the unusual position of paying out of her own pocket for the right to take on a thankless job with an unruly beneficiary to deal with.

So why would anyone take on such a fight? It comes down to principal. Sometimes standing up for what the Settlor wanted is more important than the personal sacrifices incurred in such a fight.

The better approach for all concerned is to have an easy way out—a safety valve that will allow someone to step in and cure the problem without excessive fighting. And that brings us to the unique, and rarely used, idea of a “special” Trustee or a Trust protector. For our discussion here, both terms can do the same function; namely exercise the power to remove and appoint Trustees.

If a beneficiary insists on fighting against a named successor, then give the power to remove and appoint to a neutral third-party (called a Trust protector or special Trustee) who can choose an alternate Trustee. This approach satisfies the beneficiary by preventing the named Trustee from acting, but it also prevents the beneficiary from effectively controlling the Trust by appointing a pliable lackey as Trustee. Instead, the Trust protector can independently choose a competent person to act as Trustee who is NOT beholden to the beneficiary for his or her job.

Just another example of how well laid plans can help avoid disaster.

Will your Trustee

You may be surprised to learn that there are a number of ways that a bad Trustee can escape liability in Court. For starters, if the Trustee disclosed a questionable transaction in writing to you, you only have three years in which to file a lawsuit. But that’s just the start.

Consent, release, and exculpation come next. If you consented to a transaction before it was taken, you may have waived your right to complain about that transaction in the future. The same applies with a release, if you signed a release of liability, then you may have waived any lawsuit against the Trustee for wrongdoing. Luckily, both consents and releases require that you be given full disclosure of all material facts and circumstances surrounding a transaction; otherwise the consent or release is invalid.

And then we come to exculpation. Exculpation is a terrible Trust provision that says a Trustee does not have to take responsibility for being negligent with Trust property. That means a Trustee can violate any of his or her duties as Trustee, and there is nothing you can do about it. There is one catch, every Trustee is still liable for gross negligence, recklessness, and intentional harm. But each of those claims are harder to prove than basic negligence. In order for exculpation to work, the Trust has to specifically provide for it in the Trust document. Most people who create Trusts that contain an exculpation clauses have no idea the clause is there or what it even means.  Unfortunately, exculpation can cause more harm than good to the Trust assets.

Finally, there is good-old fashioned equity. If all else fails to let a Trustee off the hook, the Court is authorized, in its discretion, to excuse any Trustee wrongdoing. Probate Court’s are courts of equity, meaning they do not just apply to the law, they also are given wide discretion to determine what is fair and reasonable in a given situation.  If a Trustee has breached a legal duty to the Trust and caused damage, the Court still has the power to excuse the Trustee’s breach if the Court believes it fair to do so.  This can be a huge loophole that allows Trustees to escape legal liability for their mistakes.

The bottom line: it is not so easy to hold a Trustee accountable.  There are many ways in which a Trustee can escape liability even where harm is caused to the Trust assets.  That means it is up to you to build your case, and tell your story to the Court, so equity falls in your favor instead.

What's your-2

“If you got it, flaunt it baby!” That’s one of my favorite lines from the movie The Producers by Mel Brooks. The same can be said of California Trustees (although not referring to their looks of course). For Trustees, if you have a special skill you are expected to use them.

For example, if you are an expert in investing, then you have to use those skills for the advantage of the Trust. And you will be judged based on your increased skills if anything should go wrong.  If you are a CPA or lawyer and you undertake Trusteeship of a California Trust, then you will be expected to use your professional skills to administer the Trust.

For example, lawyers should have a higher degree of knowledge of the Trust laws, especially Trust lawyers. So when a Trust lawyer acts as Trustee, those skills must be used. And if anything goes wrong, the Trustee will be judged based on a higher standard of skills than an ordinary Trustee.

Having a Trustee with special skills that helps in Trust administration is a great idea. For example, a Trust that is heavily invested in commercial real estate would do well to have a Trustee who is skilled in commercial real estate. Settlors oftentimes look for this type of expertise when selecting a successor Trustee.  Or at least they should look for this special skill when selecting a Trustee.  After all, many Trust lawsuits involve Trustees who did NOT handle Trust investments properly because they simply did not know what they were doing.

But that extra level of skill comes with a catch—a higher expectation under Trust law. So if you are an expert, you must be aware that your expertise can be a benefit to the Trust, or a burden to you if things go wrong.  You are not going to be judged as your average-Joe Trustee, but as your highly skilled Trustee.

The best protection against a lawsuit for a skilled Trustee (or any Trustee for that matter) is to have a process in place that you use to mange the Trust assets and make decisions.  The exact details of the process are not as important as having a process at all.  So many individual Trustees will make decisions and invest assets without any written game plan.  When investments take a dive, the Trustee is immediately accused of making a mistake and with no written process in place, the Trustee has nothing to point to as being the basis for the decisions that were made.

Having skills is a mixed blessing.  It is great for the beneficiaries, when those skills are put to good use managing the Trust assets.  But when things go wrong, those same skills may create a higher threshold to escape legal liability than would otherwise apply.

Is your co-trustee

Acrimony between Co-Trustees can raise significant problems. Co-Trustees each have a duty to participate in the administration of the Trust (PC 16013). A Co-Trustee also has a duty to prevent the other Co-Trustee from committing a breach of Trust, and compel a Co-Trustee to repay damages caused by a breach of Trust.  That can be a tall order when dealing with a difficult Co-Trustee.

Let’s start with participation. Each Co-Trustee has an affirmative duty to participate in the administration of the Trust. That makes sense in theory because there is no reason to have two or more Co-Trustees if any of them refuses to participate (might as well just name one Trustee).  But in practice it may be difficult for two Co-Trustee to participate, especially if they do not get along. This happens quite a bit when two siblings are appointed as Co-Trustees. There can be (in some families) a built-in animosity between the parties that causes the Trust administration to stand still.

Worse yet, if one Co-Trustee actively tries to exclude the other Co-Trustee from participating, then this duty to participate is impossible to meet. In most cases where two or more Co-Trustees cannot get along, one of them has to go.

This brings us to the next part of the duty, to stop a breach of trust. That can be a real problem when you have a runaway Co-Trustee. Difficult Co-Trustees are not so easy to control, let alone preventing a breach. In most cases, the only way to stop a breach is to file in Probate Court and seek an order against the Co-Trustee. And as long as you continue to be a Trustee, you have an affirmative duty to take action—including Court action—if necessary.

The same is true of a Trustee’s duty to force a Co-Trustee to pay back any damages caused by a breach. In most cases, Court action will be required to accomplish this duty. Most Co-Trustees who cause harm to a Trust are not going to pay for the damage willingly. It does happen at times, but more often it is a lawsuit waiting to happen. But happen it must, because a Co-Trustee has a duty to seek the repayment of damages.

It is not so easy being a Trustee, and that is especially true of Co-Trustees. It is important to know your duties, and then keep a watchful eye on your Co-Trustee.

harrytruman

Funny thing about Trustees, they are expected to seek help, just not too much help.  Generally, Trustees are not allowed to delegate their duties (see Probate Code section 16012).  The rules state that anything the Trustee can “reasonably” be required to personally perform cannot be delegated.  And the Trustee can never delegate the entire administration of the Trust to someone else.

Where a Trustee does delegate some matter to an agent or co-Trustee, the Trustee still has a duty to supervise that person in the performance of the delegated matter.  That means a Trustee cannot simply delegate and forget about it.  The Trustee is required to oversee the agent and make sure that the job is being done in the best interests of the Trust.

There is one big loophole this the nondelegation rule: investment and management decisions.  Under the Uniform Prudent Investor act, a Trustee has the power to delegate certain financial decisions (see Probate Code section 16052).  This exception allows a Trustee to delegate financial decisions “as prudent under the circumstances.”  But the Trustee retains the duty to (1) select a good agent to act for the Trust, (2) establish the scope and terms of the delegation, and (3) periodically review the agent’s performance.

Here’s where things get interesting.  Where a Trustee has properly delegated financial decisions to an agent, the Trustee CANNOT be held liable for those investment decisions.  That can be a shocking result for a beneficiary who seeks to hold a Trustee liable for bad investment decisions.  Of course, the agent to whom investment decisions were delegated can be held liable for bad investment decisions.  But that just means the beneficiary may find himself suing a large financial firm rather than the Trustee.

The good news is that financial advisors rarely will agree to accept delegated financial responsibility for a Trust–primarily because of the liability involved in doing so.  Yet, so often Trustees who make bad investment choices will try to pass the buck to the financial advisor.  It then becomes the beneficiaries job to determine whether the investment power was delegated or not.  It could mean the difference between suing a Trustee or suing a large financial institution.

If you happen to be a Trustee, choose your delegation wisely.  Even with the job being handed off to someone else, you may still be on the hook for a bad decision.

 

bakery

As Trustee, you have a duty to defend the Trust in actions and lawsuits filed against it. This duty is the flip side of a Trustee’s duty to enforce claims, where a Trustee must sue to enforce a debt owed to the Trust.

The duty to defend requires the Trustee to take all reasonable action to protect and preserve the rights of the Trust. If a lawsuit is filed against the Trustee, then the Trustee must act to defend that lawsuit. Of course, the Trustee is allowed to use Trust monies for this purpose. And we generally want Trustees to do that so a proper defense can be paid for by the Trust.

Unfortunately, the Trustee’s ability to pay for a defense from the Trust funds can work against a beneficiary who is suing the Trustee. It is one thing for the Trustee to defend a lawsuit from an outsider, but to use Trust money to defend a lawsuit brought by a beneficiary is not so good. Yet that is the scenario faced by nearly every beneficiary suing a Trustee.

The court does have the power to surcharge a Trustee who wrongly uses Trust funds to defend themselves.  A surcharge is just a judgment against the Trustee personally that must be paid to the Trust.  While this sounds promising to suing beneficiaries, it presents two large problems: (1) this determination only comes at the END of a lawsuit (meaning a Trustee can use money during the suit), and (2) courts rarely make a finding of personal surcharge.  Why no surcharge?  Because the court has wide discretion to decide when and if the Trustee wrongly spent Trust money on legal fees.  And California courts tend to be conservative when requiring a Trustee to pay back legal fees.

Bottom line: only in the most egregious cases will a personal surcharge against a Trustee be imposed.  Of course, you can still ask for a surcharge, just don’t count on that happening any time soon (if it happens at all).

In the meantime, any third-parties who sue the Trust are in for a fight…assuming the Trustee lives up the the very important duty to defend the Trust.