THE FOLLOWING IS A TRANSCRIPT OF THIS VIDEO. FOR MORE INFORMATION, CLICK HERE

Hi, this is Keith Davidson from Albertson & Davidson.  In this video, I want to talk about whether or not you, as a trust beneficiary, are entitled to an accounting.  And the answer is maybe – which is a typical lawyer answer.  But let’s go through who is and who is not, necessarily, entitled to a trust accounting.

For starters, all current beneficiaries, income and principal beneficiaries, are entitled to an accounting of the trust assets – unless, the trust actually waives that right.  But if you are a current income or principal beneficiary of a trust, you are entitled to an accounting.  If you’re a remainder beneficiary, meaning that your rights aren’t vested yet, but they’ll come into place a current beneficiary passes away.  Then you may be entitled to an accounting.  But you’re not entitled to an accounting as a matter of right.  It’ll be up to the discretion of the California Probate Court.

What you are entitled to as a remainder beneficiary is information.  So you should be able to get and you are entitled to receive any information about the trust assets, the trust administration, and anything else that deals with the business of the trust.  Now that’s different from an accounting.  An accounting is a formal document that sets out charges and credits in a very systematic way, as required by the Probate Code.  But, information can be just as good if not better.

So for example, if you receive a copy of all the bank statements or all the financial account statements, that might be just as good as an accounting because you can look at those and you can see what’s been happening with the finances of the trust.  So, just because you’re not entitled to an accounting doesn’t mean that you’re left out in the dark.  You might still be entitled to information.

There’s a big caveat here.  Everything I just talked about is for irrevocable trusts.  Those are trusts that can’t be amended or changed.  If the trust is revocable, then the trustee only owes a duty to the person who has the power to revoke it, which typically is the person who created it.  If Mom and Dad create a revocable trust and they named themselves as trustee, they don’t have an obligation to give you information while they’re alive.  But, once they pass, and the trust becomes irrevocable, which is usually what happens, now your rights come into existence and you have a right to either an accounting or information, depending on the type of beneficiary you are.

 

THE FOLLOWING IS A TRANSCRIPT OF THIS VIDEO. FOR MORE INFORMATION, CLICK HERE

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.

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.

Finding Balance...

How accurate does a Trust accounting have to be in order to be approved by the Court? I always say that every accounting balances, it is just a matter of finding the right information. Still, it can be frustrating to put together a year or two (or three or four) of information and not have the accounting balance.

A Trust accounting is a very unique thing. It is unlike any other type of accounting (and very much unlike a corporate accounting). But Trust accountings are also easy to understand—in theory.

Trust Accountings start with the charges—those are the list of things that come into the Trustee’s possession (what the Trustee is charged with possessing). The first charge includes all the assets on hand when the accounting begins. Then you add in all income received and any gains on the sale of assets. Each of these items has a separate schedule showing the detailed information. You then total all these amounts and that gives you the total charges.

Next you look at the total credits. Credits start with disbursements, amounts that are paid out by the Trustee for bills and expenses; then distributions to beneficiaries and losses on sale. The final piece is a list of the assets on hand at the end of the accounting period. Again, each of these items has a corresponding schedule that details the information. You add up the total for each of these items and that gives you the total credits.

For a Trust accounting to balance the charges must equal the credits. The summary of charges and credits typically looks like this:

Charges

Assets on Hand at Beginning of Accounting (Schedule A)……………… $1,000,000

Income Received (Schedule B)…………………………………………………………………………….. $100,000

Gains of Sale (Schedule C)…………………………………………………………………………………………. $50,000

Total Charges……………………………………………………………. $1,150,000

Credits

Disbursements (Schedule D)…………………………………………………………………………………… $75,000

Distributions (Schedule E)……………………………………………………………………………………… $500,000

Losses of Sale (Schedule F)……………………………………………………………………………………….. $25,000

Assets on Hand at End of Accounting (Schedule G)……………………………….. $550,000

Total Credits…………………………………………………………….. $1,150,000

As long as the total charges match the total credits, the accounting balances. If those two numbers are off, then there may be a problem.

But how far off does an accounting have to be in order to have a real problem? Typically small discrepancies will be allowed. For example, a $40 or $50 discrepancy is not enough of a problem to warrant any type of court order. Of course, it really depends on the size of the estate and the judge who is passing judgment on the accounting.

There is always an answer somewhere as to why any accounting is off. Accountings are just a collection of numbers. Usually the problem lies in a missing bank statement that has some bank charges or fees listed on them. Once all the information is located, it can be properly entered and the accounting should balance.

It is not a hard job to prepare an accounting, it just takes a lot of time, patience, and perseverance. Good luck!

If you are the beneficiary of a California Trust, there are a few things you ought to know to help you understand and protect your rights as a Trust beneficiary.  Here’s the Top 10 things you must know as a Trust beneficiary:

1.  Know your Trust.

Read it and then read it again.  If you don’t understand it (and who really does?) have a consult with a lawyer to go over the Trust terms.  If you don’t know what your rights are, you won’t be well armed to protect those rights.

2.  Know your rights as a beneficiary.

Not all beneficial interests are the same.  Some beneficiaries have superior rights than others.  Sometimes you are entitled to a distribution now, sometime you have to wait.  You must know what your beneficial rights are as soon as possible.

3.  Ask for information in writing, follow-up often.

All beneficiaries are entitled to information.  Ask for as much as you want, such as copies of bank statements, checks, trustee’s fees, costs, etc.  Better yet, ask for the information in writing.  It does not take much to send an email or a letter listing what you want to see.  It does NOT need to be sent by certified mail, just get it to the Trustee in writing as soon as you can.

4.  Ask for an accounting in writing, after six months or one year.

Unlike information described in number three above, not every beneficiary is entitled to an accounting.  In fact, only current income and principal beneficiaries can demand an accounting, unless the Trust specifies otherwise (and they usually don’t).  If you are a current income or principal beneficiary, then you will have to wait at least six month to get an accounting.  But once the time comes, request an accounting in writing.  Again, you need not send anything by certified mail, just get it out in writing as soon as you can.

5.   Know your income tax consequences.

The good news: most of the assets you receive by way of an inheritance are NOT subject to income tax (except for things like 401(k)’s and IRA’s which have a built in income tax when you receive them because the decedent put the money away tax free during life).  The bad news: if the Trust generates income, such as from rental property or investment accounts, you may be on the hook for a portion of the income tax generated by the Trust assets regardless of whether you receive any money from the Trust.  so it pays to learn what income tax consequences you can expect from your beneficial interests.

6.  You have the right to question and challenge your Trustee without fear of the no-contest clause.

If you start questioning the actions of your Trustee, or you need to go to Court to enforce your rights as a beneficiary, you have nothing to fear from a Trust no-contest clause.  But yet, Trustees (especially private individual Trustees) continually threaten disinheritance under a no-contest clause if their actions are challenged.  Well Trustees can say what they want, it simply is not true.

7.  Discretion is not absolute.

Many times a Trust will give the Trustee “discretion” to make distributions to a Trust beneficiary.  While Trustee’s have wide latitude in exercising discretion, it is not absolute.  That means a Trustee must act reasonably under the circumstances and make distributions when they are needed.  A Trustee cannot refuse to make a distribution just for the sake of saying no.

8.  Communicate often.

Wonder what’s going on with your Trust?  Ask about it.  Don’t get a satisfying answer?  Ask again, and then follow-up with the Trustee, and then keep asking.  A lack of communication is a bad thing for a beneficiary.  And your Trustee has a duty under California law to communicate with you.  So ask away, the earlier the better.

9.  Investments matter.

Every California Trustee has a heavy burden to invest Trust assets under the rules of the Prudent Investor Rule.  The rules requires Trustees to act reasonably and responsibly in investing.  Trustees are not allowed to make risky investments.  But not every Trustee knows or implements their duties to invest properly, so know the investment rules and ask your Trustee if he or she is following the rules.

10.  Trustees are not all powerful, they have duties, obligations, and responsibilities. 

The number one problem with private people acting as Trustees is that they think they can do whatever they like.  The common misconception is that the Trustee is “in charge now” and can act as though they are the Trust creator.  Not true.  In fact, Trustee’s have far more duties and obligations than they can even imagine.  But if no one informs them of their duties, then they may continue to act under this misconception, which can do a lot of damage to you as a beneficiary.  Trustee’s are not all powerful, and sometimes they need to be told as much.

One of the biggest benefits of creating a revocable, living Trust is that it allows your successor Trustee to manage your affairs if you lose capacity.  Sounds good, but who decides when your capacity is kaput?

That will be the question for the Court to decide on Monday, July 7th when a Los Angeles County Superior Court judge will decide if Shelly Sterling has the right to act as sole Trustee.

Mr. Sterling’s problem comes from the family Trust he and his wife created to hold their interests in the Los Angeles Clippers Basketball franchise.  The Trust apparently has a provision common to nearly every revocable, living Trust that allows Mrs. Sterling to act as sole Trustee (meaning the sole Trust manager) if Donald Sterling is “incapacitated.”  Most Trusts provisions state that incapacity can be determined by the diagnosis of a single physician.  In Mr. Sterling’s case, he was evaluated by a neurologist who determined that he was suffering from mild cognitive impairment due to mild dementia (as reported in the media).  That was enough for the physician to declare Mr. Sterling incompetent to act as Co-Trustee.

If the physician’s diagnosis controls, then Mrs. Sterling, as sole Trustee, can sell the Clippers to whomever she likes.  If the physician’s diagnosis is refuted by a competing neurologist, then Mr. Sterling may still be able to act as Co-Trustee—and thereby block the Clippers sale.

It’s not everyday that a $2 billion transaction turns on a lowly Trust incapacity clause, but whether your estate is large or small, the issue is important to you.

So why have an incapacity clause in a Trust at all?  It is meant to prevent people from having to go to Court to declare a Trustee incapacitated.  And the only way to “safely” determine incapacity is to have a mental exam completed by a competent physician.  But that procedure has its problems and limitations—especially where the elder refuses to cooperate.  The problem with mild dementia is that people often won’t, or can’t, admit they have a problem.  That results in a dispute as to capacity.

The irony is that the Sterlings are now in Court over a provision designed to keep them out of court.

The California Court of Appeal (Sixth District) has clarified when a Trustee’s compensation can be limited in Thorpe vs. Reed, decided this month.  Thorpe involved a special needs trust that had be created for Danny Reed, who had been the victim of two separate auto accidents.  Danny’s mother, Jolaine Allen, was initially appointed the Trustee of the special needs Trust and everything went along fine for a few years.

No Money.jpg

Then the financial crisis hit in 2008 and Jolaine was concerned that all of the Trust’s cash (about $650,000) held in Washington Mutual would be depleted if Washington Mutual became insolvent, which did in fact happen.  Jolaine went to Court and obtained an order withdrawing the money so that it could be re-deposited at other banks at $100,000 per deposit.  Unfortunately, Jolaine did not have a photo identification and, therefore, could not open any new bank accounts.  A mess ensued, but nothing damaging.

In the meantime, the Court stepped in, removed Jolaine as Trustee and appointed a new temporary Trustee, Thomas Thorpe, to act until things could be sorted out.  The problem is that the Trust document specifically stated that no successor trustee was entitled to compensation.  Since Mr. Thorpe was a professional fiduciary (someone who regularly acts as a trustee for a fee) the no-fee provision in the Trust was a bit of a problem.

Mr. Thorpe filed a petition with the Court asking that the Trust be modified to, among other things, increase the Trustee’s compensation.  But Mr. Thorpe’s appointment as Trustee was not made without a fight, and Danny’s family was prepared to fight to get the Trustee removed and appoint Danny’s sister, Audelith Reed, as successor Trustee—Audelith was willing to serve without compensation.

After a series of hearings, Mr. Thorpe was removed and Audelith was appointed successor Trustee.  Mr. Thorpe then filed a petition asking the Court to pay him and his attorneys the following fees: $65,844.08 for Mr. Thorpe, $31,047.85 for one attorney for Mr. Thorpe, and $11,879.44 for another attorney.  These fees were for four and a half months of services by Mr. Thorpe and his attorneys (it’s good to be a Trustee). 

Audelith objected to the fees on the basis that the Trust specifically restricted Trustee compensation.  The Trial Court disagreed.  The Court cut Mr. Thorpe’s fees, but not to zero.  Mr. Thorpe was awarded $27,006; $19,540.61 to one attorney; and $4,739.02 for the other.

Justice Premo, writing on behalf of the Sixth District Court of Appeals, disagreed with the Trial court.  Citing Probate Code Section 15680, the Appellate Court stated that compensation for a Trustee is set by the Trust document.  If a Trust document states that a Trustee is to receive no compensation, then so be it.  A court can issue an order increasing compensation where appropriate, but such an order only applies prospectively—not to past services that occurred before the order is issued.  If a Trustee does not like the compensation provisions, then they can either (1) not agree to act as Trustee, or (2) have an interested party petition the Court and ask for additional compensation before acting.

Of course, any Trust that prohibits Trustee compensation is not going to attract many Trustees who want to act.  But in Danny’s case, it may have helped to ensure that his family would act as Trustee rather than a professional—which is what Danny wanted. 

The point is, be sure to read the Trustee compensation provisions before agreeing to act as a Trustee.  If you don’t, you may find yourself working for free.