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.

Time's Up!

When faced with a Probate Court Petition that you do not agree with, you must object. Luckily, in California you have some leeway on when you can object because our Probate Code allows interested parties to object orally at the initial hearing. In other words, you technically do not have to have a written objection before the initial hearing date.

But that does not mean that objecting orally is the best way to go. In most cases, we prefer to file a written objection at least five days before the hearing date to ensure that the objections are preserved.

Probate court is a court of equity—meaning the court can take action, issue orders, and approve petitions anytime there are no objections. Even when there are objections the court can overrule the objections and issue orders—although the law requires a trial at which to present evidence to decide most probate court matters.

The point is that if you fail to object in writing, and if you fail to show up on time at the probate court hearing, then you may be out of luck. Once the court issues orders or approves a petition, it takes a good deal of work to overturn the result—assuming you can overturn it at all.

If you are going to rely on an oral objection at a probate court hearing, then be sure to show up on time. If you want to play it safe, then file your written objection well before the hearing date so the judge will be sure to read it.

Release Trap

  • The waiver and release problem

The Trustee wants to be done with the Trust administration and decides to have the beneficiaries sign a waiver and release so a final Trust distribution can be made. But waivers and releases are not always the best way to proceed in Trust matters because they can be challenged and overturned by a beneficiary after the Trust assets are distributed.

The law places a heavy burden on Trustees to ensure releases are not obtained unfairly. Since Trustees are in a position of power over beneficiaries (and control the purse strings of the Trust), any waiver or release obtained from a beneficiary in favor of a Trustee is suspect.

  • How waivers and releases fail

For starters, Probate Code section 16004.5 states that any release that is conditioned on a beneficiary receiving an otherwise required Trust distribution is invalid. And that scenario happens all the time—a Trustee demands a signed release before making a distribution. That is a clear recipe for disaster because the release will fail and a future lawsuit will occur.

Furthermore, Probate Code section 16464, provides more ways in which to set aside a release, which include:

  1. the incapacity of the beneficiary,
  2. where a release was obtained by a bad act of the Trustee,
  3. where the release involves a bargain that is not “fair”, or
  4. where the beneficiary was not fully informed of his rights and all the necessary material facts.

That’s a lot of ways out of a release!

  • So how do you properly end a Trust administration?

Since a release can be overturned many different ways, the best approach is to seek court approval of a Trust accounting because that closes the door to future lawsuits by the beneficiaries without any doubt. But if an accounting is out of the question, then at least approach a release in the best way possible.

First, never condition a release on the distribution of Trust assets. In fact, make a preliminary distribution of assets BEFORE asking for a release. That will prove that the Trust distribution was not conditioned on a distribution of Trust assets.

Second, have the beneficiary review the release with a lawyer of their choosing so they cannot complain later of not understanding the implications of the release.

Third, disclose as much information about the Trust and Trust assets to the beneficiary before asking for a release. Since a release can be set aside if the beneficiary was not fully informed of all rights and material facts, it is imperative that the Trustee disclose all known information to a beneficiary before asking for a release. And the disclosure should be done in writing so you have proof of what was disclosed.

  • Don’t sign what you don’t understand

If you are a beneficiary and have been asked to sign a release or waiver under suspicious or unfair circumstances, do not sign anything until you have a lawyer review the release with you. This is especially true where the Trustee conditions a Trust distribution to you on your signing a waiver and release.  While there are ways to overturn a release, you do not want to have the burden of doing so if you don’t have to.

  • The bottom line

Court-approved accountings are the best protection a Trustee can have against later beneficiary lawsuits. But if you want to go the waiver and release route, at least be sure to follow the rules and create a waiver and release that is likely to be upheld if you are ever sued by a beneficiary in the future.

 

 

Does your Trust Accounting...

As a beneficiary of a California Trust, you have the right to information and a full and complete Trust accounting.  So often, however, this information is never provided to the Trust beneficiaries.  When that happens, it is up to you to force the Trustee to account.  And once you are in Court, you can issue subpoenas to obtain all the back-up information necessary to double check the Trustee’s numbers.

Bad Trustees = Bad Investing!!!

Trustees have a staggering number of duties and obligations when it comes to investing California Trust assets.  The California Uniform Prudent Investor Act outlines these duties, many of which are simply not followed by individual Trustees.  In this video, partner Stewart Albertson discusses the duties of Trust investing for California Trustees.

For more information, please visit:  http://www.aldavlaw.com/practice-areas/trustee-surcharge-litigation/

Where in the World do I file my Lawsuit?

Where do you sue your Trustee?  If you want to sue a Trustee in California, there are two issues you need to consider: (1) jurisdiction, and (2) venue. Jurisdiction is the big question—can this Trustee be sued in California? Venue is the smaller question—where in California must this Trustee be sued?

Jurisdiction — The Big Question

Under Probate Code section 17300, any person who accepts trusteeship of a Trust having its principal place of administration in California submits personally to the jurisdiction of the California courts. In other words, if you choose to become Trustee of a Trust that is being administered in California at the time you take over, then you agree to come to court in California if there is ever a problem in the future.

That is a pretty broad standard. But it gets broader still under Probate Code section 17004, which allows the court to exercise jurisdiction under any basis that can be used for civil lawsuits under Code of Civil Procedure section 410.10. Section 410.10 is California’s so-called Long Arm Statute that allows jurisdiction where people have sufficient minimum contacts with this state. This includes concepts like “in-rem” jurisdiction that allows California to hear cases involving California real property in this state. In short, if you are Trustee of a California Trust or a Trust that has California real property, pack your toothbrush because you’re coming to California if you are ever sued.

Venue — The Small Question

Once jurisdiction is established, you then have to consider where to sue—that’s a matter of venue. Under Probate Code section 17005, the proper county in which to sue a Trustee is where the place of Trust administration is located. The place of administration is where the Trustee resides or where they do business. If you have more than one Trustee, then it is where either of the two Trustees reside or do business. If there is no Trustee, then venue is proper where any assets of the Trust are located. This standard is different from probate estates—where the proper venue is where the decedent resided at the time of death. For Trusts, you go where the Trustee is in order to file suit. If the Trustee is out of state, then follow the Trust assets for filing suit.

We seem to be seeing more instances of people moving out of state after accepting to act as Trustee of a California Trust. Now you know that just because the Trustee is no longer in California, California courts may still be the correct jurisdiction and venue in which to file a lawsuit.

Does the Trustee Have to Know???

 

Can a new Trust be created and assets transferred without telling the Trustee?

Once a Trust has assets titled in the name of the Trustee, that named Trustee becomes the legal owner of the assets. The beneficial owner of the assets is whoever is named as beneficiary. In the case of revocable trust (also called living trusts), the Settlors are also the beneficiaries. Settlors are often the Trustees too, but there are instances when a different person or Trust company is named as Trustee.

Since the Trustee is the legal owner of Trust assets, the Trustee technically is the one who has to transfer assets out of the Trust. But what should happen, and what does happen, can be two different things.

We have often seen assets taken out of a Trust by the Trust Settlors without telling a Trustee. Those assets are then transferred to a new Trust naming a new Trustee. This can occur because (1) the Trust allows the Settlor to do so, (2) the assets are not held in the Trust to begin with, or (3) the financial institution simply allows the Settlor to make the transfer.

Technically speaking, most Trusts require that a Trust revocation be served on a Trustee. And removing assets from a Trust is the equivalent to revoking the Trusts as to those assets. As for a distribution of assets from the Trust, that is usually done by the actions of the Trustee.

So is there anything wrong with a Settlor taking assets out of a revocable Trust? Generally, no there is not. Most Settlors retain the right to revoke the Trust. Taking assets out of the Trust, even if not done with technical correctness, is “no harm, no foul.”

That does not apply, however, if only one Settlor takes assets belonging to both Settlors (such as community property). That can be a problem. Or where a Settlor takes assets from a part of a revocable Trust that has become irrevocable due to the death of one spouse. That is also a problem. But absent a special problem, the act of taking assets out of a revocable Trust is perfectly acceptable.

Are You Being Threatened with a Trust

Nearly everyday I hear from a Trust or Will beneficiary that they have been threatened with the No-Contest clause by their Trustee or Executor.  In today’s legal world, no-contest clauses are rarely enforceable.  And yet, the threat is made.  Learn what you have to fear, if anything, about your Trust or Will no-contest clause.

Can a Bad TrusteeLose it All?

The ever confusing Trust and Will no-contest clause is continually being used and abused in California Trust and Will lawsuits. The irony is that a beneficiary is rarely, if ever, disinherited under a no-contest clause any more because the law is favorably skewed to prevent forfeiture. In other words, no-contest clauses simply do not apply except in the most extreme cases (and your case is not extreme no matter what you think). Not only must you meet the requirements of the Probate Code for a no-contest clause to apply, you must also be acting without probable cause—a nearly impossible standard to meet. If you don’t meet the standard, then you are not in danger of being disinherited regardless of the legal action you file.

But what about a bad Trustee, can he be disinherited under a no-contest clause if he breaches his duties as Trustee? The short answer is no, but why not?

The first rule of no-contest clauses is that you must undertake an action that is specifically listed in the no-contest clause as being a triggering event. More than that, Probate Code section 21310 specifically limits the actions a no-contest clause can affect. Actions that can be used to trigger a no-contest clause are limited to: (1) direct contests of a document (meaning you are trying to overturn a Trust, Will, or Trust or Will amendment), (2) creditors’ claims, and (3) challenging the characterization of property as being either community or separate. Further, a no-contest clause will not apply where someone acts with probable cause of success.

Notice how there is no mention of disinheritance for a bad Trustee?  That’s because there no basis to disinherit a bad Trustee just for breaching a duty to the Trust.  In fact, I have never seen a no-contest clause that includes a provision that triggers disinheritance if a Trustee/beneficiary breaches his duties as Trustee. But even if a Trust or Will no-contest clause had such a provision, it would be unenforceable because only the items outlined in the code can be enforced for no-contest clause purposes.

So that means a bad Trustee who is also a beneficiary will not be disinherited due to his bad actions as Trustee. But the Trustee is not off the hook for engaging in breaches of Trust. The Trustee can still be held liable for any damage that is caused as a result of a breach of Trust, and those damages can be taken out from the bad Trustee’s share of the Trust estate. Unfortunately, that only occurs when a court orders it.  That means the burden is on you to file your lawsuit, prove your case at trial, and get your order surcharging the Trustee for damages.