Trustees & Beneficiaries

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.

The Enforcer

You have no duty to sue, it’s true. If someone owes you money and you don’t want to go to the trouble of collecting it, or suing for it, you have the right to just let it go by the wayside. It ‘s your money and you have the right to give it away.

Not so with Trustees! Trustees are required to enforce all legally enforceable claims a Trust has against any party. If there is money owed and the debtor refuses to pay, the Trustee has to take action. If there is a mortgage on real property and the payments stop, then the Trustee must foreclose.

The Trustee does not have the luxury of allowing a debtor to walk away from a Trust debt. Why? Because the Trustee is in charge of other people’s money. So even though the Trustee personally may not want to sue, there is an affirmative duty under California law for the Trustee to take action.

The duty to enforce claims does not mean, however, that a Trustee must spend more to enforce a claim than it is worth. For example, if someone owes the Trust $100, it makes no sense to spend $20,000 on legal fees to collect it. It may make some sense to write a letter, make some calls, or file a small-claims lawsuit. But that all depends on the amounts involved.

The bottom line: if you are a Trustee you have a duty to stand up for the rights of the Trust beneficiaries.  It is the beneficiaries’ money, so Trustees have a duty to sue.

Identify

Quick piece of advice: if you do not like bookkeeping, don’t be a Trustee. It takes a good deal of time and effort for a Trustee to properly keep Trust assets, separate, and identified. Not only that, but every expense you have, every bill you pay, must be documented with a receipt.

Why all the details? It mainly is required because you are managing someone else’s money. That means at some point you will be called upon to account for your actions as Trustee. And any good Trust accounting will show the beginning assets, the income, the expenses, and the assets on hand at the end of the accounting period. While it is not difficult to keep assets separate and identified, it can be time consuming.

But in the end it is the best way to prepare an accounting. If you start moving Trust assets around and mixing them with your own money, then it can be quite difficult to account for your actions. Not only that, the beneficiaries will demand to see your personal account statements if you have commingled funds into your personal accounts.

If you are crazy enough to take on the thankless job of being a Trustee, then do yourself a favor and make sure your money and the Trust money remain separate and apart.

Putting Assets to work

Trust property must be productive. But what does that mean exactly? Well if you have rental real property in a Trust, it needs to be rented. If you have cash in a bank account, it needs to be invested. If you have a car that no one drives, it needs to be sold. And if you have pink flamingoes, well you get the idea.

The point here is that Trust property cannot simply sit around gathering dust. As a Trustee of a California Trust, you have an affirmative duty to take control of Trust property and put it in a position to produce something. Assets have the potential to produce income, appreciation, or both. And having the assets grow and generate income is one of the basic requirements for any Trustee.

Luckily, the Trustee is not expected to know how to do all of this on his or her own. The Trustee has the right to hire professionals to help advise on decisions as to what to do with Trust assets. For example, if you have rental real estate, the Trustee can hire a property manager to rent it. Or hire a real estate broker to list the property for sale. If you have cash assets that need to be invested, then a certified financial planner can be hired to advise on a proper investment portfolio.

And if the Trust currently has invested assets that are not doing well, then the Trustee has a duty to sell the bad stuff and buy into a better portfolio.

In the end, it is the Trustee’s responsibility to build the Trust assets into something better for the beneficiaries to enjoy in the future.

Preserve

One of the most important financial duties of a Trustee is to take control of all Trust assets and act to preserve those assets from loss. This can mean different things in different situations. For example, if you take over a Trust with a volatile stock portfolio, you may have a duty to sell the risky stuff quickly and preserve what is there for the beneficiaries.

When it comes to real estate, you have a duty to secure the property, purchase insurance, and either make the real property productive by renting it, or sell it for the fair-market-value.

And the list goes on and on depending on the assets involved and the problems encountered. The one consistent in administering Trusts is that nothing is ever consistent. Each Trust presents its own problems and roadblocks. The key, however, to living up to this duty is to take the risk out of the equation. Just because the Settlor invested in risky assets does not mean you are allowed to do so as Trustee. Or just because the Settlor allowed a house to sit vacant with no renters and no insurance does not mean you can do the same.

As Trustee you have an affirmative duty to act to protect and preserve Trust assets. You have to lock up the Trust property and keep it safe until the time comes to give it out to the beneficiaries.

The best approach is to gain control of all Trust assets, and then confer with a financial professional to determine the best way in which to invest or hold the assets until time of distribution. For some Trusts, the time to distribute comes quickly, for others it comes later. Either way, a proper plan is required to ensure the assets are preserved for their ultimate owners—the beneficiaries.

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.

 

 

 

Is Your Trustee-2

  • The duty of impartiality: Is your Trustee treating you equally?

Imagine a world where a Trustee treats each of the Trust beneficiaries equally. That is supposed to be the world we live in for ALL California Trust matters (California Probate Code section 16003), but it does not always work that way. All too often a Trustee will decide to treat some beneficiaries differently than others. For example, a beneficiary who complains may be treated more poorly than the other beneficiaries who keep quiet. If the Trustee is a sibling, then inequality can run rampant based on sibling rivalry alone.

When beneficiaries have disagreements among themselves, the Trustee is supposed to take a neutral stance and not advocate one beneficiary’s position over the others. There are some Trustees, however, who just can’t resist joining the fight.

Treating all of the beneficiaries equally is not always an easy task. This is especially true when you have more than a couple beneficiaries. The more people involved, the more disparate viewpoints you have. That means more chances for disagreements with the Trustee. When family, money, and heirlooms are at stake, things can get out-of-hand quickly.

  • What’s a Trustee to do?

For Trustees, it takes a good deal of patience. You need to slow down and do things the right way. Start with full disclosure and transparency. If you have conflicting viewpoints, then let the beneficiaries know the problem and ask for their input. The Trustee ultimately makes the call, but asking for advice and consent of the beneficiaries never hurts. It makes the beneficiaries feel involved and they just might come up with a workable solution.

If that does not work, then seek the court’s help. Trustees are allowed to petition the court for instructions on what to do. When a Trustee cannot act for fear of disfavoring one of the beneficiaries, the court can intervene and make the decision instead. This process allows each of the beneficiaries to weigh in with their thoughts and arguments on the issue. And the Trustee can remain neutral and allow the process to guide the way.

  • What’s a beneficiary to do?

For beneficiaries, you have no control over a Trustee. The only way to force a Trustee to behave is to seek court assistance. Beneficiaries have the right to petition the court for instructions to the Trustee. This process allows the court to review the issue and then order the Trustee to act, or not act, based on the evidence presented.

In the worst of cases, the Trustee can be removed and a new Trustee appointed who can act with the proper impartiality in mind.

With the court’s help, the duty of impartiality can be successfully navigated in nearly any Trust matter.

The Duty of Loyalty

  • Disloyal Trustees = beneficiary abuse

Every Trustee has a duty of loyalty (California Probate Code section 16002). The duty of loyalty requires the Trustee to administer the Trust solely in the interests of the beneficiaries. That term “solely” really makes the point—there can be no other reason to act when administering a Trust other than what’s good for the beneficiaries. Seems obvious, I know, but not always practiced by Trustees.

Many Trustees think they can do whatever they want with the Trust assets, use whatever professionals they like, charge any amount of Trustee’s fees they like, or delay distributions when it benefits the Trustee to do so. Not so. Under the duty of loyalty, a Trustee must act solely in the interests of the beneficiaries.

A good example of failing the duty of loyalty test is hiring a close friend as a real estate agent to sell real property. Maybe this friend is not the best choice, or is paid an excessive fee, or lacks the experience to sell the real property in question, yet the Trustee uses them anyway. That’s a common example of disloyalty, and it can happen without the Trustee even realizing it is a breach of duty.

  • What can you do about it?

When confronted with a disloyal Trustee, you have to take action to protect your rights as a beneficiary. Disloyalty is not just a breach of trust, its one of the worst forms of beneficiary abuse because it places the interests of the Trustee above the interests of the beneficiary. That’s the exact opposite of what is supposed to occur.

  • The written objection

First, you need to voice your objection to the Trustee’s action in writing. If the Trustee is taking advantage of a situation, say something. It need not be anything formal, a simple email or handwritten letter will do. And it need not be confrontational or accusatory, you can simply tell the Trustee “I understand you are going to take this action, and I object to it because I don’t think it is fair to me for you to do so.” You can send this written objection on your own, no need for a lawyer here.

We are not naïve enough to think that a simple written objection will stop the Trustee in his or her tracks—it won’t. But what it does do is put the Trustee on notice of your objection. And you can use that written notice to your advantage later when you are in court to prove to the judge that you took the initiative to voice your objection and the Trustee acted over your objection.

Remember to help yourself in a Trust dispute you need to show you tried to act reasonably. That’s not a legal requirement, but it goes a long way to convincing a judge to help you because you first tried to help yourself and it failed to work.

  • Seeking help in court

Second, you need to take action in court as soon as possible. When you have an abusive Trustee, things will not get any better (usually) without court intervention. The burden is on you to file in court and stand up for your rights.

For example, if the Trustee is about to sell real property to a friend in a below-market deal, then you have to stop it. And the only way to stop it is to file a petition for instructions in court and ask for an injunction. You have rights, but it is up to you to use those rights to protect yourself.

Many people ask “why is the burden mine to protect myself, isn’t the Trustee supposed to do the right thing anyway?” Yes, the Trustee is supposed to do the right thing, but when the Trustee fails or refuses to act appropriately, it’s up to you to bring those actions to the court’s attention. No one else is going to enforce your rights for you. The rights are there for you to use, but use them you must.

  • Secure your future today

You can resolve your problem. A disloyal Trustee can be stopped and the Trust administered according to its terms. That’s not to say you will get everything you want from your legal case. Every case is different and every resolution is different. You will get some amount of fairness, justice, and resolution even if it’s not everything you wanted. There is an end in sight once you enter our court system.

Your goal should be to obtain the best resolution you can under the circumstances. Stop the Trustee’s disloyalty and reach a resolution that allows you to move on with your life.