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.

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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.

Every Trustee and every Executor owe an absolute duty to account.  And a Trust or probate accounting is a unique animal—it’s unlike any other type of accounting and not every accountant and/or CPA knows how to properly prepare one.

1.   Charges and Credits: What goes in must equal what goes out.

Unlike a typical business accounting, Trusts and estates don’t have a profit and loss statement or a balance sheet. Instead, they use “Credits” and “Charges.”  In the simplest of terms, they keep track of what goes in and what comes out.

For example, the Charges are the items that come into the Trust or estate (the things the fiduciary is “charged” with).  They begin with the value of assets on-hand at the beginning of the accounting period.  So if we were preparing a Trust accounting with a period that starts January 1, 2011, then we would need to provide a list of all the assets and their values as of that date.  You then add in all the receipts that come into the Trust or estate (like income payments, dividends, any positive cash flow), and gains on sale (which only applies if any capital assets are sold).

The Credits, on the other hand, is a list of the things that go out, such as disbursements (a fancy word for bills and expenses that are paid from the Trust or estate), distributions (money paid to beneficiaries), and losses on sale of capital assets (assuming any such assets were sold).  Charges end with the balance of assets on hand at the END of the accounting period.

2.   The Summary Sheet.

Every accounting has a summary sheet that looks like this:

20120611.SummaryOfAcct.pdf

And then there are corresponding schedules where the detailed information is listed.

The trick is that the total Charges (what comes in) must be equal to the total Credits (what goes out + what’s left on hand).  If they are not, then the accounting does not balance—something is missing and has to be tracked down.

3.   The Power of a Calculator: It pays to add.

Whenever I sit down to analyze any Trust or probate accounting the first thing I do is grab my calculator.  It is amazing how much you can learn about the sufficiency of an accounting by doing some simple arithmatic.  This is true even if you prepared the accounting on your own computer.  Since it is relatively easy to have an incorrect formula in a spreadsheet program (such as Excel), a simple little calculator will test the sufficiency of the numbers.

And when put to the test of my simple little calculator, many accountings tell a different tale.  Take a look at this summary sheet, it appears to balance:

20120611.SummaryOfAcctIncorrect.pdf

Yet under the calculator, the numbers don’t jive.  Even though the Total Charges are the same as the Total Credits, the numbers, when added, don’t agree.  There’s obviously a problem with this accounting.

Next, I turn to the actual schedules and start adding up the numbers and totals listed there.  This can be a daunting task, since some of the schedules are multiple pages long.  Don’t be discoraged, it pays to do your homework.  Keep adding and eventually you’ll discover whether the totals are correct or not.

4.  Finding the Accounting Soft Spot.

Using the incorrect summary sheet above, once you add up the numbers on each schedule you can identify where the problem lies.  Once I know where the problem is, I can either fix it (if I am the one preparing the accounting) or attack it (if I am probing the accounting prepared by someone else).

What if all the numbers are correct, but I still think there’s something inaccurate going on behind the scenes?  Well now I know that I have to go outside the accounting document to find it.  That’s valuable information because at least I am not stuck wondering if the problem is evident from the face of the accounting.  Instead, I can get started serving my subpoenas and hunting down the problem elsewhere.

Or sometimes the numbers are correct, I just think the Trustee or Executor spent too much on some expense (such as Trustee fees).  That’s also valuable information because now I know that my entire case exists on the face of the accounting.  The amount of fees is listed, and all I have to do is argue why they are too high.

Without zeroing in on the problem, however, I would have no idea where my point of attack (or revision) would be.  So it pays to simplify the process.  Do the work, and find the soft spot in almost any accounting.

I get calls every week from California Trust, Last Will, and Estate beneficiaries complaining that they can’t get their brother or sister, who is the Trustee and Executor of their parents’ estate plan, to provide copies of the parents’ estate plan after the parents have died.

I usually suggest the following. First, send a letter to the Trustee and Executor politely requesting the entire Trust, including amendments, and Last Will for both parents. Include the following language in the letter: 

A.         Please Provide True Copy of California Will

Under California Probate Code Section 8200, you, as Executor of Mom’s and Dad’s estates, are required to deliver mom’s and dad’s Last Wills to the County Superior Court where mom and dad died within 30 days of mom’s and dad’s respective deaths. Please note, if I am damaged by your failure to deliver moms’ and dad’s Last Wills to the Superior Court you will be liable for my damages. (See Probate Code section 8200(b).)

As you are required to deliver the Wills to the Superior Court, you should have no objection in providing me with true copies at this time. If you do not provide me with a true copy of the Wills I will have no choice but to file a petition in the Probate Court requesting the Court to order you to provide me with true copies of the Wills. Please note, if I’m forced to file a petition, I will request that the Court order you to pay for the attorneys’ fees and costs associated with my petition. I hope I am not required to file a petition and you will simply provide me with true copies of the Wills on or before DATE. 

B.         Please Provide True Copy of California Trust

Under California Probate Code Section 16061.7, you, as Trustee of Mom’s and Dad’s Trust, are required to provide all beneficiaries of the Trust and all of Mom’s and Dad’s heirs with a true copy of the Trust documents, including any amendments, 60 days after Mom’s and Dad’s respective deaths.

As you are required to provide Mom’s and Dad’s Trust after 60 days of their respective deaths you should have no objection in providing me with true copies of the Trust, and any amendments, at this time. If you do not provide me with a true copy of Mom’s and Dad’s Trust, and any amendments, I will have no choice but to file a petition in the Probate Court requesting the Court to order you to provide me with a true copy. Please note, if I’m forced to file a petition, I will request that the Court order you to pay for the attorneys’ fees and costs associated with my petition. I hope I am not required to file a petition and you will simply provide me, as an heir and/or beneficiary of the Trust, a true copy of the Trust, and any amendments, on or before DATE.

If you include the above-referenced language in your letter to the Trustee, more times than not you will be successful in getting the Trustee to turn over the Trust and Will documents.

If the Trustee still refuses to provide the Will and Trust, then you must seek help from the Probate Court to force the Trustee and Executor to hand over these documents. I will explain in a future post how you get the Court’s help for obtaining these documents. 

To hear estate planning attorneys talk, you would think a revocable, living trust cures all ills.  And yet, so many trust cases find their way to Court—the one place the settlor hoped to avoid by making a Trust in the first place.

While all Trusts can potentially wind up in Court—that venue should be avoided.  And the best way to avoid Court is to properly administer the Trust in the first place.

Trust administration is the process that takes place after the settlor (or settlors if it is a jointly created Trust) dies.  Trusts don’t magically transfer assets at death, there is a process that must take place to take the assets from the Trust to the ultimate beneficiaries. 

A Trust administration is nowhere near as difficult as a probate (sometimes called a probate administration) because, in California, all probates must be done in Court—with all the necessary rules and formalities that go along with probate administration.  To administer a Trust, is a whole lot easier, but that’s not to say there is nothing to do. 

1.         Knowing the Trust Document.  A proper Trust administration starts with the Trust documents itself.  The Trust should specify what is to occur after the Settlor’s death.  This includes paying debts, paying taxes, and distributing property to the named beneficiaries.  The Trustee needs to thoroughly read and understand the Trust terms (or have them explained if the terms are difficult to understand—and most are difficult to understand since they are drafted by lawyers).

2.         Gathering AssetsThe Trustee then must “marshall” the assets of the Trust.  This means gathering the assets, finding them, and putting the Trustee’s name as the successor Trustee of the Trust assets.  A bank account, for example, held in the old Trustee’s name must be transferred into the name of the new Trustee.  Same for brokerage accounts, stocks and bonds, and even real property (where you typically use an Affidavit Death of Trustee to put the new Trustee on title).

3.         Administering the Assets.  Once the assets are “marshaled” they must be administered.  This means different things for different assets.  For example, real property may need to be appraised and then sold.  Stock and bonds may need to be liquidated, personal property may need to be sold.  The administration of assets varies greatly from case to case depending on the type of assets involved and depending on what the Trust requires. 

The Trustee is given a “reasonable” time to administer the Trust assets and get them into a condition so that a final distribution to the beneficiaries can be made.  There is no hard deadline by which a Trustee must act—the “reasonable” standard is subjective.  But typically Trust administrations can take from 6 month to 1 year, or more in complex Trust cases. 

During the Trust administration, the Trustee is allowed to make a preliminary distribution to beneficiaries.  This allows beneficiaries to receive at least some of their property before the Trust administration is complete.

4.         Final Distribution and Reserve.  Once the Assets are ready and all creditors have been paid (including all taxes), then the Trust is ready to be distributed.  The Trustee must distribute the Trust assets in a “reasonable” amount of time.  However, the Trustee is allowed to retain a “reasonable” reserve—everything seems so reasonable.  Or at least is should seem reasonable.  Where Trustees get in trouble is when they take too long or try to retain too much at the end of the Trust administration.

In fact, there are many points along the way in which a Trustee can be at odds with his or her beneficiaries.  And it can be difficult to work through because the beneficiaries are the ultimate owners of the Trust property, but they are NOT the current owners.  The Trustee alone has the only say in the what, where, how, why and when of Trust administration. 

Yet if a Trustee acts at all times in a “reasonable” way, then the problems can be minimized and the administration can be handled with minimum dispute.  The problem, of course, is when a Trustee is NOT acting reasonably…but they think they are.  Or when a Trustee is acting reasonably…but the beneficiaries think they aren’t.  Differences of opinion on what is reasonable can fan the flames of litigation. 

So just where do Trust administrations go wrong?  That’s the subject of our next post on Trust Administration.

I happen to represent the best private Trustee in the world.  No offense to professional Trustees—this does not include them.  In the world of private individuals who act as Trustees, not as a professional calling, but by way of happenstance or accident, there aren’t many who do such a good job.  It’s understandable, being a Trustee is hard work, it comes with a mountain of complex obligations and liabilities and very little, if any, appreciation.  As they say, no good deed goes unpunished.

Many private Trustees make the mistake of thinking that they are acting in the shoes of the Settlors (a Settlor is the person or persons who created the Trust).  That is an entirely wrong perspective because the Settlors (being that they created the Trust) have far more leeway and freedom in how they manage the Trust estate and invest the Trust assets—they can be downright reckless if they like.  Whereas a private successor Trustee has no such leeway—they must meet a host of complex duties and obligations under California Trust law, which includes things like (1) prudent investing, (2) treating all the beneficiaries fairly, and (3) avoiding conflicts of interest. 

It is also a mistaken belief that Trustees are like CEOs of companies.  Not true.  Corporate officers operate under the “business judgment rule” that allows them to take risks and make decisions that may or may not be prudent and conservative; provided that they are acting within acceptable business judgment.  Companies are expected to risk capital in order to make money.  Trustees have no such luxury.  Trustees’ duties require them to be far more conservative and risk adverse than a corporation is allowed to be.

One guiding light principle of every Trustee, whether private or professional, should always be that the beneficiaries should be treated with a sense of goodwill and fair play.  Sounds good, but not always easy to do, especially if there is hostility in the Trustee-beneficiary relationship (i.e., sibling rivalry).  But the law does impose a duty on Trustees to treat their beneficiaries fairly—even where the Trustees do not like the beneficiaries for whatever reasons.  Some Trustees do and some most certainly do not.

So how do I know I represent the best private Trustee in the world?  Because the Trustee I am referring to meets all of these requirements.  And this Trustee exudes a constant and consistent sense of goodwill and fair play towards some very difficult beneficiaries.  This does not mean, by the way, that the Trustee is a pushover or does whatever the beneficiaries require.  That would not make for a good Trustee.  Instead, this Trustee makes hard decisions under difficult circumstances and takes all action necessary to keep the Trust administration moving forward and fairly proportioned among all the beneficiaries.  But even after going through a very tough issue, or series of issues, the sense of goodwill and fair play remains ever intact.  This is the way a good Trustee should act.   And yet, it seems to be so rare among private Trustees.  

We spend a good deal of time and effort discussing the mistakes Trustee’s make in administering California Trust’s.  From bad management, to problems investing assets, to misinformed or even bad Trustees.  But not all the blame for ugly Trust administrations lies with Trustees.  Beneficiaries can cause their share of problems too.

That’s what I call “Troubled Trust Administrations.”  When a Trustee who wants to do the right thing runs into problems with wayward beneficiaries some action needs to be taken.  But it may be something short of going to court and starting a Trust litigation case. 

To be clear, during a Trust administration, the Trustee is in charge.  It is the Trustee, and only the Trustee, who decides what to do and when to do it.  This can be a problem when a bad Trustee fails to follow the rules.  But it can also be a good thing when a good Trustee is in office and is properly handling the Trust affairs.

Beneficiaries need to know that they do have rights, but they don’t have legal authority over the Trust.  That’s the Trustee’s job.  And if the Trustee is following the Trust terms, and administering the assets according to California Trust law, then the Trustee should be allowed to do the work they were appointed to do.  This includes things like, selling real property, investing assets, paying taxes, paying creditors, hiring professional advisors, making preliminary distributions and creating any additional sub-trusts that are reuqired under the Trust document.

And a Trustee has a reasonable timeframe in which to take these actions.  Typically, a Trust administration can take from 3 to 18 months to complete, or sometimes even longer for complex Trust estates, depending on the amount and complexity of the Trust assets.   

When a Trustee hits a roadblock, whether it be an outside issue, issues with a Trust asset, or issues with a beneficiary, then some action may be required.  Hopefully, such action can be done outside of Court, but the Court process is available to a Trustee any time an issue cannot be resoovled through other means.

For example, under Probate Code Section 17200, Trustees have the ability to seek instructions from the Court.  This process allows a Trustee to set forth the issues and gives the beneficiaries an opportunity to either consent to, or object to, the proposed actions of a Trustee.  If the petition is granted, then the Trustee can take the action they asked to take without fear of being sued over it at a later date.

Further, communication between Trustees and beneficiaries is cirtically important to keep an administration on track.  Communication can be hard to maintain in some cases, especially where the Trustee and the beneficiary (or beneficiaries) are hostile towards one another.  But even when relations are strained, communication will go a long way towards keeping a Trust administration out of court and moving forward.

Shouldn’t Trust administration be like a game of Simon says?  That’s the old school yard game where one person gives an instruction, but you’re only supposed to follow the instruction if it is preceded by the phrase, “Simon says.”  For example, Simon says, “Touch your nose.” Simon says, “Touch your toes.” Simon says, “Make proper Trust distributions when directed to do so by the Trust terms.”

A client of mine who was in a dispute with a Trustee pointed out that he received money from life insurance without any problem at all.  A claim was made to the insurance company, a death certificate was submitted, and full payment arrived within a week or two.  Shouldn’t the process of receiving assets from a Trust be similar? 

He makes a good point.  While there is a process that must be used to administer a Trust, the Trustee’s duties are simply to do as the Trust says.  Especially with the voluminous amount of instructions left behind for the Trustee to follow.  There are the Trust terms, which can be anywhere from 20 to 60 or so pages of material.  Then there are the directives in the California Probate Code, which specifies everything from investing, allocating assets between income and principal, and a whole host of other duties and responsibilities of the Trustee.  There couldn’t be much that is not written down for the Trustee to follow.

And yet, California Trust administrations drag on.  Setting aside cases where the Trust terms are being contested (that will take a few years on average to resolve), the typical California revocable, living trust set up by any person prior to death names a successor Trustee.  That successor is supposed to, “marshal” the Trust assets (which just means to gather them together—or take possession of the assets), pay the last debts, file tax returns and pay any taxes (this could take some time if an Estate Tax return is required), sell any Trust property that needs to be sold (such as real property and stocks), and then make the required distributions to the beneficiaries—sounds simple enough. 

All too often Trustees, especially individual Trustees, wander off-course and believe that what the Trust says does not apply to them.  It’s no longer a game of, “Simon says,” but one of “Trustee says.”  Having a position of power, which the Trustee has, does not equate to having the ability to do whatever the Trustee wants.  In fact, the Trustees’ powers are very limited by the Trust terms and the voluminous mandates of the California Probate Code. 

So if you want to be a good Trustee, then play along as the Trust requires.  It will keep the Trustee out of trouble and allow the beneficiaries to receive the benefits of the Trust that they are entitled to under the Trust terms.

California Trustees, Executors and Conservators have a legal duty to manage assets conservatively and “prudently.”  The rules are set out in the California Probate Code under the Uniform Prudent Investor Act.  In this video we have a brief discussion of Trust investing.  For those viewing this blog by email subscription, you can click on the title for a link to the video.

Bad trustees always seem to waste trust money defending their improper actions. Once a trust beneficiary challenges a trustee’s improper actions (breaches of trust), the trustee retaliates against the beneficiary. For example, the trustee may choose to suspend current monthly distributions, or in more extreme cases, attempt to have a no contest clause in a trust enforced against the beneficiary for challenging the trustee’s improper actions. But California law does not allow trustees to use trust money to defend themselves for their improper acts.

For example, a trustee may have failed to diversify the trust’s asset holdings resulting in significant losses to a beneficiary’s interest in the trust due to the current economic environment. (Think of what happened to trust portfolios holding primarily real property assets in the fall of 2008.) When these significant losses occur, the beneficiary is upset and wants to hold the trustee accountable for the trustee’s improper actions. The beneficiary files a lawsuit based on the trustee’s failure to diversify the trust assets (something trustees are required to do), and the trustee immediately begins to spend large amounts of trust assets to pay for the litigation (or in reality to pay an attorney to defend the trustee’s improper actions).

But trustees are not supposed to burn through trust money to protect themselves for the mistakes they make. Recently, the California Court of Appeal held that where litigation is necessary for the preservation of the trust, the trustee is entitled to reimbursement for his or her expenditures from the trust; however, if the litigation is specifically for the benefit of the trustee, the trustee must bear his or her own costs incurred, and is not entitled to reimbursement from the trust.

Beneficiaries should be sure to request that the Probate Court closely review all litigation expenditures to make sure trustees are not using trust funds to protect themselves from the mistakes they make.